ANNUAL REPORT 2019
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Proof 6
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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Proof 6
Churchill China plc Annual Report for the year ended 31 December 2019
01
Company Profile
Contents
Churchill China plc is a manufacturer of innovative performance ceramic
products serving Hospitality markets worldwide.
Five Year Performance
Financial Highlights
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.
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 2019
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2019
Consolidated Balance Sheet as at 31 December 2019
Company Balance Sheet as at 31 December 2019
Consolidated Statement of Changes in Equity
for the year ended 31 December 2019
Company Statement of Changes in Equity
for the year ended 31 December 2019
Consolidated Cash Flow Statement
for the year ended 31 December 2019
Reconciliation of Operating Profit to Net Cash Inflow
from Operating Activities
Notes to the Financial Statements
for the year ended 31 December 2019
Five Year Financial record
2
4
5
6
14
20
23
25
32
33
34
38
39
40
41
42
43
44
45
46
70
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Proof 6
70
60
50
40
30
20
10
0
12
9
6
3
67.5
57.5
51.1
53.4
46.8
2015
2016
2017
2018
2019
11.2
9.2
7.5
6.4
5.0
70
60
50
40
30
20
10
70
60
50
40
30
20
10
0
12
9
6
3
70
60
50
40
30
20
10
35
30
25
15
5
0
67.5
57.5
51.1
53.4
46.8
70
60
50
40
30
20
16.1
16.7
13.9
12.5
10.6
02
Churchill China plc Annual Report for the year ended 31 December 2019
10
Five Year Performance
0
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
Revenue (£m)
£67.5m
17%
70
60
50
40
30
20
10
0
46.8
2015
67.5
67.5
57.5
53.4
57.5
53.4
51.1
51.1
46.8
2016
2015
2017
2016
2018
2017
2019
2018
2019
*Operating Profit (£m)
12
20
20
£11.2m
22%
9
15
6
10
3
5
0
15
10
5
0
10.6
5.0
2015
2015
9.2
16.1
13.9
13.9
7.5
12.5
12.5
6.4
10.6
11.2
16.7
16.1
16.7
11.2
9.4
7.5
6.4
5.0
2016
2016
2015
2017
2017
2016
2018
2018
2017
2019
2019
2018
2019
2015
2016
2017
2018
2019
Revenue increased by 17% with organic growth of 9% and the acquisition of
Furlong Mills adding a further 8%.
Underlying operating profit rose 17.4% due to improved gross margin
and stable costs.
*Operating Margin (%)
16.7%
0.6%
70
*Profit before Income Tax (£m) £11.2m
12
60
12
19%
11.2
11.2
11.2
16.1
9.2
16.7
9.2
13.9
7.5
7.5
12.5
6.4
6.4
10.6
5.0
50
9
40
30
6
20
9
6
10
5.0
3
3
8
0
0
2
7
0
0
2
9.4
9.4
7.5
6.4
7.5
6.4
5.0
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
12
20
9
15
10
6
5.0
5
3
0
2015
2016
2015
2015
2017
2016
2016
2018
2017
2017
2019
2018
2018
2019
2019
2015
2016
2015
2017
2016
2018
2017
2019
2018
2019
20
15
10
5
0
12
9
6
3
EPS
Export
Export
Home
Home
UK
Europe
ROW
North America
35
30
25
20
15
10
5
11.2
Dividends
Hospitality by Market
2017
2018
56%
44%
60%
40%
Export
Home
0
20
40
60
80
100
Value Added Sales
Standard Sales
44%
44%
2017
2018
45%
33%
11%
11%
40%
36%
11%
13%
Profit before income tax has increased 19% largely as a result of our
improved operating performance, with the acquisition of Furlong Mills
adding £0.4m to Group performance.
35
EPS
30
Hospitality Value Added Series
EPS
Revenue by Market
Dividends
25
Dividends
Hospitality by Market
Hospitality by Market
Underlying operating margin improved to 17.3% in the year due to
the further conversion of sales to innovative, higher margin, added
value products.
70
35
* Excluding exceptional items.
12
Other Highlights
60
50
40
30
• Adjusted EPS* up 17.4% to 81.7p
9
• Basic EPS up 26% to 82.6p
9.4
• Cash generated from operations £11.3m (2018: £8.3m)
7.5
30
11.2
25
20
15
10
5.0
5
5
0
8
0
0
2
9
0
0
2
0
7
1
0
0
0
2
2
1
8
1
0
0
0
2
2
2
9
1
0
0
0
2
2
3
0
1
1
0
0
2
2
4
1
1
1
0
0
2
2
5
2
1
1
0
0
2
2
6
3
1
1
0
0
2
2
7
4
1
1
0
0
2
2
8
5
1
1
0
0
2
2
6
1
0
2
7
1
0
2
8
1
0
2
3
7
0
0
2
* Adjusted earnings per share and diluted adjusted earnings per share are calculated after deduction of the post tax effect of exceptional items.
2018
56%
56%
56%
44%
6.4
2017
2017
10
6
10
20
2017
20
15
40%
60%
20
2018
40
60
2018
60%
80
100
60%
40%
40%
0
C u
0
20
40
20
60
40
80
60
100
80
100
t o m e rs & Distribution
s
Revenue by Market
Revenue by Market
Identify
2017
45%
2017
P
e
o
p
l
e
UK
UK
Review
Assess
45%
33%
11%
33%
11%
11%
11%
e
rvic
e
S
Hospitality Value Added Series
Hospitality Value Added Series
EPS
Dividends
Hospitality by Market
2017
20
2017
40%
40%
60%
60%
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
2018
10
2018
44%
44%
2017
56%
56%
56%
44%
Standard Sales
Standard Sales
2018
2018
40%
40%
36%
11%
36%
13%
11%
13%
Value Added Sales
Value Added Sales
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Proof 6
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Sustainable
Advantage
Europe
Europe
North America
North America
ROW
ROW
20
0
40
20
2018
60
40
80
60
60%
100
80
100
40%
0
20
40
60
80
100
Export
Home
M
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In n o vatio
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0
2
8
0
0
2
9
0
0
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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
Controls
Document
t o m e rs & Distribution
t o m e rs & Distribution
s
s
C u
C u
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Identify
Hospitality Value Added Series
40%
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2017
2018
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20
40
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2017
2018
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Standard Sales
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Sustainable
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Document
Churchill China plc Annual Report for the year ended 31 December 2019
03
“
Our performance in 2019
maintained the strong
record of progress we have
established in recent years.”
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Proof 6
04
Churchill China plc Annual Report for the year ended 31 December 2019
Financial
Highlights
Revenue
Operating profit before exceptional items
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
Operating margin before exceptional items
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
2019
£’000
67,502
11,242
117
11,359
(22)
(44)
11,176
117
11,293
3,356
2018
£’000
57,479
9,237
(541)
8,696
185
(34)
9,388
(541)
8,847
2,840
16.7%
16.1%
13,594
81.7p
82.6p
80.9p
81.8p
30.6p
10,941
69.6p
65.6p
69.0p
65.0p
25.9p
* 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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Proof 6
Churchill China plc Annual Report for the year ended 31 December 2019
05
Directors, Secretary and
Advisers
Executive Directors
D J S Taylor
D M O’Connor
J A Roper
Non-Executive Directors
A J McWalter (Chairman) *•+
A D Roper *•+
B M Hynes *•+
A C Bromfield *•+
Company Secretary and Registered Office
D J S Taylor ACA
No.1 Marlborough Way
Sandyford
Stoke-on-Trent
Staffordshire
ST6 5NZ
Independent Auditors
PricewaterhouseCoopers LLP
Chartered Accountants and
Statutory Auditors
One Chamberlain Square
Birmingham
B3 3AX
Solicitors
Addleshaw Goddard
One St. Peters Sq.
Manchester
M2 3DE
Stockbrokers and Advisers
Investec Bank plc
30 Gresham St
London
EC2V 7QP
* 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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Proof 6
06
Churchill China plc Annual Report for the year ended 31 December 2019
Chairman’s
Statement
“
Our business strategy, emphasising innovation, differentiation and service,
has continued to deliver value.”
Introduction
I am pleased to report that our performance in 2019 maintained the
strong record of progress we have established in recent years. Our
business strategy, emphasising innovation, differentiation and service, has
continued to deliver value to all our stakeholders and to demonstrate
long term resilience and sustainability.
We have acted quickly to face the challenges presented by COVID-19
and the rapidly changing business environment. Churchill has prioritised
the safety of its employees and other stakeholders and has acted quickly
to ensure this. Our contingency planning process is underway based on
the assessment of a number of business scenarios and we have begun to
adjust our plans accordingly. Our exposure to the hospitality industry will
undoubtedly impact our performance in the immediate future, but we
have implemented appropriate actions to substantially reduce the cash
cost of our operations in the short term.
Churchill has a strong, ungeared balance sheet including high levels of
liquid cash. We have further undrawn facilities and the opportunity to
utilise our substantial asset base to secure additional facilities if required.
The current business climate is as uncertain as it has been for many
years. Whilst the medium and long term effects of the present crisis are
as yet unclear, Churchill is a well invested, resilient and highly responsive
business led by an experienced management team. We are well
positioned to meet the current challenges and we have a considerable
ability to adjust our forward strategy to ensure that we continue to deliver
value to our stakeholders.
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Proof 6
Churchill China plc Annual Report for the year ended 31 December 2019
07
“
Churchill is a well invested,
resilient and highly
responsive business.”
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Proof 6
08
Churchill China plc Annual Report for the year ended 31 December 2019
Chairman’s
Statement
Financial Review
Total revenues increased by 17% to £67.5m (2018: £57.5m) with further
strong growth in Hospitality ceramics export sales and the inclusion of
revenue of £4.8m from Furlong Mills for ten months of the period.
Ceramic revenue growth, excluding the effects of the acquisition of
Furlong Mills, was 9% (2018: 7%) with sales rising to £62.7m (2018: £57.5m).
UK revenues increased by 3% to £23.6m (2018: £23.0m). Export revenues
were £4.6m higher (+13%) at £39.1m (2018: £34.5m).
Within these figures there was, mainly in the second half year, a
contribution from the purchase of products and IP from Dudson. Sales
from Dudson products were marginally above our initial targets at £1.2m
(2018: £0.0m). Retail sales, as forecast, were lower than in 2018.
Gross margins grew within our Ceramics business as we continued to
increase sales of added value product.
Operating profit before exceptional items increased by 22% to £11.2m
(2018: £9.2m) with Furlong Mills contributing £0.4m (4%) of this increase.
On a like-for-like basis operating profit increased by 18%. Operating
profit margins increased to 16.7% (2018: 16.0%). Growth in operating
profit arose mainly from improved revenues and a further increase in
the proportion of our business represented by added value products.
We have continued to invest in the extension of distribution in our export
markets, in product development and in improved customer service.
Profit before exceptional items and income tax rose by 19% to £11.2m
(2018: £9.4m), largely as a result of the increase in operating profit. This
strong performance maintains our record of profit growth. In the five
years to the end of 2019 we have increased profit before income tax at
a compound rate of 21% per annum.
Adjusted earnings per share improved by 17% to 81.7p (2018: 69.6p).
During the year we purchased, in two stages, the remaining equity in our
associate company, Furlong Mills Ltd, at a net cash cost of £2.9m. As a
result of this we now consolidate Furlong Mills as a subsidiary of Churchill.
As we acquired a higher value of assets than the overall consideration
paid, negative goodwill of £0.1m was generated. In accordance with
accounting standards, this has been credited to the Income Statement
and treated as an exceptional item.
in place a number of actions to preserve its operational position. We plan
to retain cash within the business to provide forward flexibility at present.
The Board will review its dividend policy at the earliest opportunity once
the overall impact of COVID-19 is more certain.
Business
Ceramics
We have continued to make good progress within our Ceramics business
in line with the strategies that we have articulated. As 2019 demonstrates,
we now enjoy a much wider spread of revenue from a number of
different markets.
Export revenues increased by 13% and now represent 62% of Ceramics
sales (2018: 60%). The business’ progress in overseas markets has been
maintained, with Europe and the USA both contributing strongly to
growth. Our established market positions have further developed and we
have continued to invest in regional operations. This export growth is the
outfall of consistent investment in new product development and in the
building of appropriate distribution channels.
Our UK sales have also increased after a period of consolidation.
The actions implemented in the last eighteen months to improve our
competitive position have worked well and revenues in the UK increased
by 3%. We benefit from wide distribution across a range of sectors and
have a deep and long established presence in what is a replacement
orientated market.
In April 2019 we purchased product and brand intellectual property
from Dudson in order to accelerate two key elements of our strategic
development; growing sales of added value product and the extension
of our distribution channels overseas. The Dudson range has now been
integrated into our Hospitality offering and we have established a
number of separate distribution arrangements in key market sectors. Total
sales under the Dudson brand in the period following acquisition were
£1.2m, slightly ahead of our original estimates.
The translation of sales from standard to added value product remains
an important part of our long term strategy and we have achieved a
further increase in the proportion of our revenue attributable to added
value product which now represents over 47% of our Hospitality sales.
This increase reflects the substantial investment in innovation, product
and market research and new product development made in recent
years. Stonecast continues to grow strongly and our Studio Prints range
has made further progress. The purchase of intellectual property in
the Dudson Evo and Harvest products, which use distinctive glaze
technology, will provide additional opportunities to continue to grow
added value product revenues.
Reported profit before income tax rose to £11.3m from £8.8m in 2018.
Basic earnings per share, including the above exceptional items,
improved by 26% to 82.6p (2018: 65.6p)
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 is of great value to
the business.
We have continued to generate a good operating cash flow of £11.3m
in the year (2018: £8.3m). Working capital requirements were slightly
higher reflecting an increased level of inventory attributable to the
establishment of a stock holding in our new European warehouse and a
higher level of sales.
Capital expenditure rose to support the increased level of activity
within our business. In addition to the £2.1m spent on the purchase of
equipment and intellectual property from Dudson, we have invested
a further £3.7m (2018: £2.1m) in developing our operations. This
expenditure includes projects to extend our manufacturing space and to
provide additional kiln capacity for added value production which we
expect will be completed in the first half of 2020. All our operations are
well invested.
We continue to enjoy a strong, ungeared, balance sheet with net assets
of £41.8m. Despite the significant level of investment during the year net
cash and deposits remained high at £15.6m (2018: £17.4m). Churchill’s
business model emphasises the generation of cash and this provides
flexibility in adverse conditions. Our assets are largely tangible and also
give us a high degree of short term liquidity. We retain significant forward
capacity to manage our cash flow and to raise additional finance
if necessary.
Dividend
The Board is aware of the importance of dividend income to shareholders
and our long term policy remains that the owners of the business
should receive an appropriate return. However, given the current
levels of uncertainty in relation to COVID-19, the Board believes the
most appropriate position at this time is not to propose a final dividend
in respect of 2019 (2018: 20.3p per ordinary share). Whilst the Group
continues to maintain high levels of cash and deposit balances, it has put
Materials
The acquisition of control of Furlong Mills in February 2019 has secured an
important part of our supply chain. Furlong Mills is a ceramic materials
manufacturer based in Stoke on Trent and provides processed clay body
and glaze to Churchill and other major manufacturers. Longer term
we wish to maintain our position of producing a high quality technical
performance ceramic and continuing to innovate and differentiate our
product and we believe our increased investment in Furlong Mills and its
leading position in applied material science will support this.
Furlong Mills has traded in line with our expectations during the ten
months of our ownership, total revenues were £7.8m, of which £3.0m was
sold to Churchill. Operating profit for the period was £0.4m.
Operations
We have continued to make substantial progress in the evolution of our
manufacturing and logistics operations, again in line with our established
strategies and business plan.
The growth of our business in 2019 and continued orientation towards
differentiated product provided several challenges for our operational
team. Activity levels remained high and the acceleration of our capital
investment programme also brought additional demands. We have
also prioritised initiatives aimed at improving the sustainability of our
operations. New product development has continued. We expect
to complete two major projects in the first half of 2020 which will
provide additional production space and first stage kiln firing capacity.
Both of these projects represent important long term investments
and will improve our efficiency and flexibility as well as increasing
overall capacity.
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Proof 6
Churchill China plc Annual Report for the year ended 31 December 2019
09
The integration of Dudson product manufacture into our operations,
including new technologies and processes, has been completed
successfully.
improvement programmes. We have a high level of engagement
with our workforce and it is encouraging to see the result of this in their
performance.
During the year we established a third party logistics facility in Rotterdam.
This investment allows us to provide further service improvements to our
European customer base and to mitigate the potential impact of Brexit
on our delivery security. Long term we continue to expect that Europe
will provide further growth opportunities and the ability to supply within
market will support this development.
Brexit
We have reviewed our exposure to the ongoing Brexit process. 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. We believe we have identified, developed and implemented,
where appropriate, plans to mitigate the effect of potential disruption on
our business where possible.
People
As I commented on earlier in this statement, 2019 was a record year
for our business. This performance reflects the knowledge, strength and
commitment of our team at all levels of our operations. We have built a
strong business with a sound, long term, business plan. I once again thank
all our employees for their contribution to Churchill’s success. The qualities
inherent within the Churchill team will stand the business in good stead in
the coming months.
We have continued to invest in the development of all our staff and have
maintained our commitment to increased training and to continuous
COVID-19
The short and long term impact of COVID-19 is not yet clear. The
Company has acted quickly to assess the impact on its business and to
develop and implement a set of immediate responses to the impact
upon our operations in the short term. Our first priority was to ensure the
safety of our employees. To that end we commenced a programme of
distancing within certain operations on 19 March and on 25 March we
suspended production at our Sandyford site and furloughed the majority
of our workforce. We retain the ability to meet short term demand
from inventories held in our logistics operations in the UK, Rotterdam
and Chicago.
Given that the majority of our costs are represented by production
materials, labour and energy, the suspension of manufacturing
operations, supported by the Government’s Coronavirus Job Retention
Scheme has, in the short term, substantially lowered the cash cost of our
operations to below £1m per month. We anticipate that our current cash
reserves, which are highly liquid, will provide a significant level of forward
cover during and beyond the present lock down period.
We are continually reviewing medium and longer term business scenarios
as part of our contingency planning process. As a business we enjoy a
wide spread of revenue both in terms of geography, distribution channels
and product range and we are developing forward plans to provide
flexibility should future market performance change from that previously
experienced. Whilst we expect that Hospitality revenues may be lower in
the short term and may take several months to recover to normal levels
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12 May 2020 8:29 am
Proof 6
10
Churchill China plc Annual Report for the year ended 31 December 2019
Chairman’s
Statement
we retain the ability to optimise our UK manufacturing operations through
a renewed focus on other sectors within the tableware market and other
alternative measures.
Our record of consistent cash generation, regular investment and strong
balance sheet gives us a significant level of flexibility in the medium
term. We believe that, if necessary, we may reduce the ongoing level
of expenditure on revenue and capital projects without significantly
impacting our ability to re-focus or grow our business.
Outlook
2019 was a very successful year, reinforcing the substantial progress
made in developing and implementing long term growth strategies.
Churchill has been repositioned as a business and offers innovative
and differentiated products across a wide spread of markets. 2020
had started well with performance ahead of our expectations and in
other circumstances this would be the basis of a further improvement in
performance. However, the as yet unknown impact of COVID-19 on our
markets will undoubtedly have an impact on current year performance,
particularly in the first half year.
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Churchill China plc Annual Report for the year ended 31 December 2019
11
“ Our workforce is skilled,
loyal and well motivated
and they create and
embody the core values
that serve us well”
“
Churchill offers innovative and
differentiated products across
a wide spread of markets.”
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12
Churchill China plc Annual Report for the year ended 31 December 2019
Chairman’s
Statement
Churchill has in the past proved itself to be a well run and resilient business
capable of dealing with significant external shocks. This reflects our
strong, well resourced operations, our experienced management team
and our long term approach to business. We enjoy a high degree of
operational and financial flexibility in the short and medium term. We
have already adjusted our forward plans both to manage our cash and
reduce costs where appropriate, but also to prepare for changes in
our market environment longer term. Whilst our immediate actions are
focused on the short term, we believe that our core strategies remain
sound and that we are well positioned to continue to prosper in the
longer term.
As a result of the evolving COVID-19 position and consequent lack of
forward visibility, no formal guidance will be given on future financial
performance at the present time. We intend to reinstate guidance as
soon as practicable and, in the meantime, will continue to update
investors as appropriate.
Alan McWalter
Chairman
7 April 2020
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Churchill China plc Annual Report for the year ended 31 December 2019
13
“ Our core strategies
remain sound
and that we are
well positioned to
continue to prosper in
the longer term.”
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14
Churchill China plc Annual Report for the year ended 31 December 2019
Strategic
Report
The Directors present their Strategic Report for the Group for the year
ended 31 December 2019.
A review of the operations of the Group during the year and its future
prospects are given in the Chairman’s Statement on page 6 and in the
following pages.
Business purpose
Churchill’s business purpose is to provide ceramic tableware, principally
to hospitality markets, on a long term and sustainable basis. Within this
purpose we aim to deliver value to all our stakeholders through the
supply of high quality performance products, beneficial partnerships and
secure employment.
Values
We have a long established business and have developed a core set
of values over time. Churchill aims to deliver outstanding performance
in terms of product innovation, quality and service anticipating and
responding to market requirements. We aim to build strong relationships
with our stakeholders and operate in a systematic, trustworthy and
professional manner.
Culture
Churchill has developed a business culture emphasising continuous
improvement, a high level of service to customers and strong relationships
with all our stakeholders. This culture has formed an important part of
the Company’s long term success and development. Our culture is
led by the Board, but is driven by our employees. Whilst the Board has
established standards, policies and procedures to frame our culture
we see its development and implementation as a product of regular
communication between all our employees and other stakeholders.
Our continuous improvement programme ‘Masterclass’ has been an
important part of this process. We believe we have an open and sharing
culture with a strong level of engagement with our stakeholders.
Principal activity and business environment
The Group serves customers in many different geographic areas around
the world, supplying a range of tabletop products, principally ceramic
tableware. The majority of our revenues are generated from production
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.
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.
Revenue by market
2018
2019
40%
37%
11%
12%
42%
36%
11%
11%
UK
Europe
North America
ROW
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 increase
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 remained steady,
reflecting economic and political uncertainty and lower levels of new
investment in pubs, restaurants and hotels.
We have continued our programme of investment in product innovation,
market development and expansion of our manufacturing operations.
The effect of the COVID-19 pandemic on economic growth within
our UK and export markets is not yet certain. It is likely that, in the short
term at least, demand levels will be reduced. The business has initiated
contingency planning measures and has implemented several actions,
as noted in the Chairman’s Statement earlier in this report, to manage
the effect of these revised conditions upon the Group.
Promoting the success of the Company
It is the duty of the Directors under s172 of the Companies Act 2006
to promote the long term success of the Company to the benefit
of members as a whole and having regard for the interests of other
stakeholders in the business.
Other stakeholders include employees, customers, suppliers, our pension
fund members, our local and the wider community, government and
other regulatory bodies.
Churchill has been in existence since 1795 and always taken a long
term approach to business, particularly in relation to investment and in
understanding the opportunities open to us and the risks to which we
are exposed. To operate a successful and sustainable business model it
is necessary to ensure that all the contributors to that model understand
their place within it and feel that the Company operates ethically and
fairly in its dealings with them.
The Board has regard to the interests of all stakeholders in its discussions
and reaches balanced decisions with the sustainability of the business
uppermost in its considerations. Churchill maintains a financial model
that is aligned with this objective such that capital allocation decisions,
where possible, do not unfairly prioritise the interests of one group of
stakeholders over others. The Board is aware of the need to support
regular revenue and capital investment in the development of our
business and we orientate our operations accordingly.
We aim to deliver well designed, performance products and outstanding
service at appropriate price levels to our customers. At the same time
we acknowledge that to meet these levels of customer service we are
reliant upon good relationships with a well motivated workforce and fair
and balanced relationships with a range of suppliers. We understand
that we have a responsibility to pay appropriate levels of taxation and
to support the future pensions of our scheme members. We consider our
dividend policy carefully in the light of the overall needs of the business
and the interests of other stakeholders. Our policy is formulated to ensure
that dividend payments are not excessive in relation to profits and do
not introduce excessive levels of risk in relation to the sustainability of
the business.
Churchill aims to manage its effect on our local community and the
environment. We have engaged with the community on an ongoing
basis through charitable and educational support. The business operates
several initiatives aimed at minimising our waste products, recycling
waste where possible and in the reduction of our energy usage and
carbon footprint. We have made several investments and process
changes to reduce our use of energy. Further information in these areas
may be found later in the Directors’ Report.
The business has regular contact with our workforce through both
formal and informal mechanisms. The scale of our business and our
open culture allows the Board and management to engage with our
employees on a day to day basis and employees are encouraged
to raise issues. We have a recognised trade union representing the
majority of our weekly paid employees and meet regularly with their
representatives. However we believe that other initiatives, including
briefings, communication boards and the Masterclass process provide
the most important means of engaging with our workforce. We believe
that our workforce is engaged and motivated and that this is reflected
in our staff retention performance. Again further information in relation to
this area may be found in the Directors’ Report
We meet with suppliers on a regular basis to provide information in
relation to our forward plans and review performance. As in other
elements of our business we enjoy long standing relationships with the
majority of our suppliers. On average we pay suppliers within 39 days
(2018: 38 days) of invoice. We believe our suppliers regard Churchill as a
good customer.
The Board consults regularly with shareholders through formal meetings,
company visits and informal discussions. Voting on Annual General
Meeting resolutions is largely positive with over 99% of votes cast being
in favour of the resolutions put to the meeting. The Board reviews voting
carefully after each Annual General Meeting.
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.
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Churchill China plc Annual Report for the year ended 31 December 2019
15
People
Customers
Innovation
Sustainable
Advantage
Service
Manufacturing
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 and design new products to satisfy
these trends.
Churchill, along with other UK manufacturers, has a significant technical
advantage in the nature of the product we offer to our markets. Our
product 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 from two sites 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 main
manufacturing plant and logistics facilities have benefited from
significant and regular long term investment to improve our business’s
efficiency and effectiveness. We also operate from a number of smaller
locations and representative offices around the world.
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 for our staff and improve
the effectiveness and productivity of our workforce.
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.
Churchill has long enjoyed a market leading reputation for service. Our
operational plans are geared towards meeting high levels of on time
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.
Strategy
The Group’s objective is to generate long term benefits to all stakeholders
in the business by the provision of value to customers through excellence
in design, quality and service. We aim to increase value we provide
to our stakeholders 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. For several years this has led us towards
development of our position in hospitality markets worldwide.
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. 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.
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.
Business model
Our business model is designed to allow us to identify markets where we
may profitably grow our revenues on a long term basis. We research
customer product requirements and distribution structures in new
markets and, if they offer profit opportunities, invest to generate revenue,
margin and ultimately a return for the business and our stakeholders. We
continue to expect short to medium term growth to be weighted towards
export markets.
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 facilities.
As our business develops we need different skills and a core part of our
model is to train, develop and recruit staff to meet these requirements.
Performance
A more detailed report on our performance is contained in the
Chairman’s Statement on page 6.
Ceramic 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 long term 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.
COVID-19 will undoubtedly impact levels of dining out in the short term,
but we anticipate that it will continue to remain popular over a longer
time horizon.
Material and labour costs have again risen at slightly higher rates than
underlying inflation and 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.
In line with our long term performance we have continued to generate
cash strongly through the year given increased profitability and a
continued control of working capital.
We have substantially increased the level of investment in our business
both in terms of capital expenditure, in the purchase of intellectual
property and plant and equipment from Dudson Holdings Limited (in
Administration) and a controlling shareholding in Furlong Mills, previously
an associate company. Despite these investments, cash and deposit
balances remain at good levels.
Acquisitions
The core of our strategy is based around steady growth in our target
business areas. We do not normally use acquisition as a means of
achieving this. However, where we have opportunities to accelerate our
organic growth at an acceptable cost we will evaluate acquisition. The
acquisitions made this year meet these criteria and have accelerated
two key themes of our strategy, the growth of added value products
within our range and extension of our technical expertise and
differentiation.
Hospitality Ceramic Value Added Sales
Assets purchased from Dudson have performed well and in accordance
with our plans at the date of acquisition.
2018
2019
44%
47%
56%
53%
Value Added Sales
Standard Sales
Our rationale for this purchase was to increase the proportion of our
revenue represented by added value products, to introduce a new
decorating technology to our range and to provide the opportunity to
extend our international distribution. We have made substantial progress
in respect of all the above targets.
0
20
40
60
80
100
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.
During the year we acquired, in two stages, the remaining shares in our
associate company, Furlong Mills Ltd. The acquisition of Furlong Mills is
intended to further secure our access to our key raw material, clay, and
to allow us to further develop our technical expertise in the longer term,
an important competitive advantage. Furlong Mills is performing well in
relation to these targets.
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16
Churchill China plc Annual Report for the year ended 31 December 2019
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
Business
Environment
Change
Brexit
=
Risk Description
The Group operates in dynamic markets where there have been significant recent changes to economic and
trading 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
and respond to market trends and risks.
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 Brexit in early 2020 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 regulations 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.
COVID-19 –
Coronavirus
The spread of COVID-19, Coronavirus, will have an impact upon the performance of the business through
reduced revenues, particularly given the Group’s exposure to hospitality markets.
Currency
Exposure
Manufacturing
and Supply Chain
=
=
As yet it has not been possible to scale the extent to which the Group’s business will be affected or the period
over which this impact will be felt.
The management team has responded to this issue using our risk analysis processes. A number of possible
scenarios have been reviewed and revised actions developed and implemented. These actions emphasise
the maintenance of the safety of our employees and the management of cost and working capital levels.
The impact of the virus on the financial position of the Group is unknown, but the Group holds significant liquid
cash balances and a number of assets that may be used to raise additional finance if required. This should
support the resilience of the Group.
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 Euro 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 largely 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 seek to control and mitigate this risk through management of our overall
energy consumption, small scale investment in sustainable energy generation 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.
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Churchill China plc Annual Report for the year ended 31 December 2019
17
Risk
People
Risk
Change
=
Risk Description
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.
Cyber Security
Regulation,
Compliance and
Taxation
=
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.
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18
Churchill China plc Annual Report for the year ended 31 December 2019
Key performance indicators
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.
Operating cash generation
The Group believes that over an extended time period it is important
to generate cash at an operating level at least equivalent to declared
operating profit. This measure identifies the effectiveness of our control
over working capital demands and ensures that cash is available for
further investment in the business, to meet taxation payments and to
ensure that our shareholders receive an appropriate return.
Revenue
Group
Ceramics
Materials
UK
Export
2019
£m
67.5
62.7
4.8
28.4
39.1
2018
£m
57.5
57.5
0.0
23.0
34.5
Growth
%
17.4%
9.0%
23.7%
13.3%
Sales to Ceramics customers performed well, recording growth against a
strong comparative.
Group export sales rose by 13.3%, largely as our European and Rest of
the World markets again delivered returns on the investments we have
made. UK revenues increased principally as a result of the acquisition of
Materials sales through Furlong Mills Ltd. Underlying UK sales rose steadily.
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
2019
£m
11.2
16.7%
11.2
0.1
11.3
2018
£m
9.2
16.1%
9.4
(0.6)
8.8
Growth
%
21.7%
19.0%
27.6%
Group operating profit before exceptional items increased by 21.7%.
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. The acquisition of Furlong Mills contributed £0.4m to
Operating Profit before exceptional items.
Operating margins before exceptional items increased satisfactorily to
16.7% (2018: 16.1%) reflecting an increased mix of added value product
within Materials offset by the lower operating profit margins available
in Materials.
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 19.0% mainly as
a result of the strong increase in operating profits.
Exceptional items, where they are recognised, are reviewed as part of
the regular assessment of profit performance.
Exceptional credit: Negative goodwill on the acquisition of Furlong
Mills Ltd £0.1m (2018: Exceptional cost: Pensions past service charge
and the release of prior year provisions against the disposal of property
totalling £0.6m).
Operating cash generation
Percentage of operating
profit
Percentage of operating
profit (3 year average)
Growth
%
37.1
2019
£m
11.3
101%
97%
2018
£m
8.3
89%
97%
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
inventory holdings. Employer contribution 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
2019
£m
11.6
2018
£m
9.9
The rise in inventory holding levels reflects increased holdings of Ceramic
stocks to allow better service to export customers and the addition of
inventory held at Furlong Mills Ltd following its acquisition.
Future outlook
The Board believes that the strong position we hold in a number of
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. 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 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.
In the short term, the impact of the COVID-19 virus on hospitality markets
is currently uncertain both in terms of the degree and the length of effect
it may have. The Board is monitoring the position and is implementing
a number of risk mitigation initiatives. Churchill remains focused on long
term development and retains strong market and financial positions.
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
7 April 2020
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Churchill China plc Annual Report for the year ended 31 December 2019
19
“
Churchill remains focused
on long term development”
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20
Churchill China plc Annual Report for the year ended 31 December 2019
Directors’
Report
The Directors present their annual report and the audited consolidated
financial statements of the Group for the year ended 31 December 2019.
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 6 and in the Strategic Report on
page 14.
The principal activity of the Group is the manufacture and sale of
ceramic and related products for hospitality and household markets
around the world.
Dividends
The Directors have paid the following dividends in respect of the years
ended 31 December 2019 and 31 December 2018:
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 28 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 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.
2019
£’000
2018
£’000
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.
Ordinary dividend:
Final dividend 2018: 20.3p (Final
dividend 2017: 17.2p) per 10p ordinary
share
Interim dividend 2019: 10.3p (2018:
8.7p) per 10p ordinary share
2,224
1,132
3,356
1,886
954
2,840
The Directors now recommend payment of the following dividend:
Ordinary dividend:
Final dividend 2019: nil (2018: 20.3p)
per 10p ordinary share
–
2,224
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.
Given the present uncertainty regarding the impact of COVID-19 on
the general business environment and the Company’s operations,
the Directors have resolved not to propose a final dividend for 2019 at
present. The Directors will review the payment of a final dividend for 2019
and future dividend policy once the forward position can be assessed
with more clarity.
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 M O’Connor, A J McWalter and
A C Bromfield who being eligible, offer themselves for re-election. The
unexpired terms of the service contracts of D M O’Connor is 12 months,
A J McWalter 3 months and A C Bromfield 4 months.
The biographical details of the Directors are as follows:
David O’Connor, Chief Executive Officer has worked for Churchill
for 29 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
Brendan Hynes, Non Executive Director and Senior Independent
Director, is currently Chairman of Brand Architekts 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, Harworth Group plc and Marshalls plc. She has
had a broad based international career in manufacturing, distribution
and construction and 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 recognise that well trained, engaged and motivated
employees are central to the current and future success of our business.
We involve our workforce through open communication including
briefings and communication boards to encourage engagement with
the strategy and goals of the business. The financial performance and
forward plans of the business are shared on a bi annual basis. We work
closely with the union representing our employee’s 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 and we have further invested in reviewing
and identifying development needs and opportunities. 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 long-term commitment to the training and development of all
our employees has helped morale, motivation and labour retention.
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21
We remain committed to our graduate training programme helping
local graduates into our industry. In the sixteen 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. This process also helps to communicate important business
issues to our workforce and helps to align their efforts with the overall
business strategy.
The Board has clearly considered the interests of employees in relation
to key decisions during the year. Important decisions are taken within a
framework giving appropriate reference to the long term sustainability of
the business, the delivery of steady growth, investment and job security.
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 employees efforts, to
encourage performance in line with 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.
Our approach to health and safety is embedded in our working
practices. We aim to identify and to reduce health and safety risks
associated with our operations to the lowest practical levels. Training
programmes are regularly offered to update safety skills for all our
employees. Considerable progress has been made in the engagement
of our workforce in relation to health and safety matters during the year.
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 over the long term 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 processes. In 2019 we commenced a
programme of assessing and investing in small scale energy generation.
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 and recycling of waste products.
Where possible we source our materials and services locally. A strong
support industry is important to the long term future of the Group. We
also take an active role in supporting both the local ceramic industry
and wider initiative within the hospitality sector and support a number of
training programmes.
We understand that we have an impact on our local community and
consider the effect of our actions on our local area. Where possible we
work to reduce any adverse effects of our operations, consistent with
the needs of other stakeholders within our business. We actively engage
within our community through contact with our neighbours and local
schools and particularly through local charity initiatives. We encourage
and support our employees to become involved in community and
charitable work. We run a number of events each year in support of
charitable causes.
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.
During the year the Group generated £11.3m of cash flow from
operating activities and after payment of corporate taxation of £1.8m,
invested £5.6m in capital projects and a net £2.9m to buy the remaining
shares in Furlong Mills Ltd. £3.4m was returned to shareholders by way of
dividend. Net cash and deposits before lease liabilities at 31 December
2019 were £15.6m (2018: £17.4m).
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.
If additional financing is needed in the short term the Group has access
to short term variable rate financing arrangements totalling £2.5m on
an unsecured basis to provide finance for working capital requirements
should they be required. Additionally, forward capital expenditure
may be supported using alternative sources of finance including
lease purchase.
The Group currently has no net debt and holds substantial levels of
unpledged assets including freehold property. These assets form an
alternative source of secured medium or long term funding if this is
required. Larger long term funding requirements may be met from
debt and equity sources if necessary. There are no covenants in place
relating to the Group’s banking arrangements. In response to the impact
of COVID-19 the UK government has also announced a facility for
businesses to obtain loan financing. It is believed that if necessary, the
Group could seek support from this facility.
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.
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.
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.
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22
Churchill China plc Annual Report for the year ended 31 December 2019
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.
Statement of Directors’ responsibilities in
respect of the financial statements
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulation.
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 19 March 2020 exceeded 3% of the Company’s
issued share capital:
Shareholder
Investec Wealth and Investment
S Roper
Hargreave Hale Limited
Rathbone Nominees Limited
E S & S J Roper
Aberdeen Standard Investments
Number of
ordinary
shares
1,313,629
936,500
823,060
756,365
417,765
415,379
Percentage
12.0%
8.5%
7.5%
6.9%
3.8%
3.8%
Share repurchase
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 no (2018: 38,000) 10p ordinary shares at a total cost of £nil
(2018: £388,000) in order to improve overall shareholder return. 30,984
(2018: 30,927) shares were reissued in respect of employee share option
schemes for a total consideration of £3,000 (2018: £3,000). The Company
retains a power, subject to the fulfilment of certain conditions and as
approved at the 2019 Annual General Meeting, for the further purchase
of its own shares.
Political contributions
The Group made no political contributions (2018: £nil) during the year.
Events occurring after the reporting period
Since the end of the year to 31 December 2019, the negative effect
of COVID-19 on the worldwide business environment and the Group’s
operations has increased. The full impact of COVID-19 on the Group’s
performance is not yet clear but is likely to be material. The Chairman’s
Statement earlier in this Annual Report gives more details of the impact
on the Group, the business’ response and the resources that the business
will use to address the issues raised.
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). 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.
Independent auditors
The auditors, PricewaterhouseCoopers LLP, have indicated their
willingness to continue in office and a resolution that they be re-
appointed will be proposed at the Annual General Meeting.
By order of the Board
D J S Taylor
Company Secretary
7 April 2020
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Churchill China plc Annual Report for the year ended 31 December 2019
23
Corporate
Governance
This statement is not audited.
The Company is quoted on the Alternative Investment Market of the
London Stock Exchange and uses the Quoted Companies Alliances
‘Corporate Governance’ (‘the Code’) as a benchmark to define
and review its governance procedures. The Company complies with
the Code
The Code establishes ten principles of Corporate Governance grouped
into three areas; the encouragement to deliver sustainable growth, the
responsibility to maintain a dynamic management framework and an
aim to build trust with shareholders and other stakeholders.
The Board supports the aims of the Code and seeks to exceed rather
than simply meet the requirements it sets out. Many of the requirements
of the Code are addressed through this Annual Report and further
information may be found on the Investor pages of the Company’s
website, www.churchill1795.com.
The Board of Directors
The Board is currently composed of three Executive and four Non
Executive Directors and meets at least eleven times per year. The
Board is led by the Chairman, Alan McWalter. It is felt that the current
composition and operation of the Board is adequate to provide the
necessary skills and experience to lead and manage the business and to
ensure a balance of power and authority. A review of the effectiveness
of the Board is carried out on a regular basis. The Non Executive
members of the Board take an active and influential part in Board
procedures. A senior independent Non Executive Director, B M Hynes,
has been appointed.
The Board acknowledges its role in defining and promoting the culture of
the business. This culture is defined within the Company’s brand values.
It encourages all our employees, including Board members, to bring
innovation, commitment and integrity to their roles.
The Code recommends that the Boards of quoted companies include
at least two independent Non Executive Directors. The Board has fully
reviewed the independence of Non Executive Directors and all Non
Executive Directors are considered to be independent under the terms
of the Code with the exception of A D Roper. As Chairman A J McWalter
is considered to be independent as he was independent at the time
of his appointment. A D Roper is not considered to be independent
given his previous service as an Executive Director and his substantial
shareholding. As the Board contains three independent Non Executive
Directors this is not believed to be of major significance.
In addition to a formal agenda covering financial control, management
and business development, there is appropriate debate addressing
areas outside the regular agenda to ensure that all Directors are able
to take an informed view of the progress of the business. The nature of
the organisational structure of the Group allows Executive Directors to
maintain a close involvement in all aspects of the Group’s operations.
A schedule of matters reserved for Board decision is maintained and a
procedure exists to allow Directors access to independent professional
advice if required.
The following table shows the attendance of Directors at Board meetings
through the year.
A D Roper
D J S Taylor
D M O’Connor
A J McWalter
B M Hynes
J A Roper
A C Bromfield
Meetings
held
Meetings
attended
12
12
12
12
12
12
12
10
12
12
12
12
12
11
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.
D J S 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 economic and legislative environment
in which the Company operates. Potential new risk areas have been
identified and control procedures documented.
The Board and the Audit Committee have reviewed the effectiveness of
the system of internal control during the year.
Internal 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.
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Churchill China plc Annual Report for the year ended 31 December 2019
Corporate
Governance
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 the preparation of the financial statements.
The Board has considered several scenarios in relation to the potential
scale and impact of COVID-19. This review has included consideration
of the impact of different levels of reduction in revenue, different periods
of effect, alternative operational responses and cost reduction plans,
the high level of cash and deposits held by the Group and additional
available financing. The range of scenarios examined included the
analysis of the effect of extended periods with no or little revenue.
These reviews indicate that it is reasonable for the business to expect to
continue in operational existence for at least the next twelve months.
By order of the Board
D J S Taylor
Company Secretary
7 April 2020
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Churchill China plc Annual Report for the year ended 31 December 2019
25
Remuneration Report
Annual Statement
This section of the Remuneration Report is not audited.
The Remuneration Committee considered a number of matters during the year including the following:
• The review of the Company’s Remuneration Policy to ensure that it remains appropriate. As 2020 is the third year since the Policy was last
considered in detail further work was undertaken to benchmark the Policy against best practice;
• 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 2019 were considered.
In each case the Committee was conscious of the need to clearly align Executive Directors’ remuneration packages with shareholders interests and
with consideration of wider workforce remuneration.
Details of the outcome of this work are set out below and later in the Annual Report on Remuneration.
The Group has continued to make solid progress against its performance and strategic targets. Profit performance in 2019 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.
We completed the two acquisitions during the year which accelerated our progress against our strategic plans.
In financial terms we grew operating profit before exceptional costs by 22% and pre tax profit before exceptional costs by 19%. Cash and deposit
balances have remained strong at £15.6m despite a significant increase in investment in the business. Our compound return over the last five years at
30% is well ahead of the corresponding figure for AIM as a whole (8%).
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 rose by 28%, principally as a result of
an increase in the value of LTIP shares vesting following the increase in share price during the year.
The review of the Remuneration Policy during the year resulted in the following changes:
• Additional triggers reflecting insolvency and serious reputational damage have been introduced in the operation of malus and clawback
arrangements in relation to future bonus schemes and LTIP awards
• The Remuneration Committee will be given a discretion, acting fairly and reasonably, in relation to future LTIP awards to override (downwards)
vesting outcomes
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. This section sets out the Company’s
Directors’ Remuneration policy, which will apply from the date of the 2020 Annual General Meeting. It has not changed significantly from that
adopted in 2017.
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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Churchill China plc Annual Report for the year ended 31 December 2019
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.
Operation
Maximum potential value
Performance metrics
Purpose and link to
strategy
Basic pay
Core element of fixed
remuneration to help
recruit and retain
employees of the
appropriate calibre
and experience
Basic pay for Executive Directors
is normally reviewed annually (but
may be reviewed more frequently
if required).
Consideration is given to the following
when determining basic pay levels:
• Market conditions including
typical pay levels for comparator
companies taking into account the
relative scale and complexity of the
role and business
• Scale and scope of the role,
experience and performance of
the individual
• Average change in salary for the
workforce as a whole
Annual Bonus
Rewards the achievement
of annual financial and
strategic business targets
as well as the delivery of
personal objectives
Clawback and malus
applies to enable the
Company to mitigate risk
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.
The Remuneration Committee has
the right to operate both clawback
and malus provisions in respect of
bonus scheme awards in relation to
circumstances of corporate failure
which may have occurred at any time
before claw back is operated.
Bonus payments are non-pensionable.
There is no prescribed maximum
annual increase. However,
consideration is normally given to
the average change in salary for the
workforce as a whole.
The Remuneration Committee
considers any salary increases above
the workforce average carefully.
The Remuneration Committee
may award salary increases above
the workforce average in certain
circumstances including, but not
limited to:
• An Executive Director assuming
additional responsibilities
• Significant improvement in
individual performance
• Significant change in the
size or scope of an Executive
Directors’ 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.
Not applicable, although
overall performance of
the individual and the
Company is considered
by the Remuneration
Committee when setting and
reviewing salaries.
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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Proof 6
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 2019
27
Operation
Maximum potential value
Performance metrics
Up to 10% of basic pay under the
defined contribution scheme.
Not applicable.
Executive Directors are entitled to
membership of Company pension
schemes in operation from time
to time.
The Company currently operates a
defined contribution scheme.
The Company previously operated
a defined benefit scheme, which
was closed for future accrual in 2006.
Two Executive Directors are deferred
members of this scheme.
Executive Directors may choose to
receive a salary supplement in lieu of
pensions up to the value of the normal
contribution level at no extra cost to
the Company.
Bonus and other benefits received
by Executive Directors do not count
towards pensionable pay.
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.
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.
There were no significant changes to Remuneration Policy during the year. The updated policy will operate from 2020 forwards.
Non-Executive Directors
The table below sets out an overview of the remuneration of Non-Executive Directors.
Purpose and link to
strategy
Operation
Chairman and Non-
Executive Director fees
Provide an appropriate
reward to help recruit
and retain Non-
Executive Directors of the
appropriate calibre and
experience
Fees for Non-Executive Directors are normally reviewed annually (but may be reviewed more frequently if required).
Consideration is given to the following when determining fee levels:
• Market conditions including typical fee levels for comparator companies
• A Non-Executive Director’s role and responsibilities
Non-Executive Directors do not participate in any incentive scheme.
There were no significant changes to Remuneration Policy during the year.
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28
Churchill China plc Annual Report for the year ended 31 December 2019
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
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:
2019
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
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
Salary
£
Benefits
£
Pension
and pay
in lieu
of pension
£
Annual
bonus
£
Long term
incentive
plan
£
Total
remuneration
£
216,827
281,663
218,333
77,917
88,899
43,365
43,365
817
566
566
–
–
–
–
19,053
24,750
12,507
154,230
200,348
155,400
234,952
303,172
194,403
–
–
–
–
–
–
–
–
–
–
–
–
625,879
810,499
581,209
77,917
88,899
43,365
43,365
970,369
1,949
56,310
509,978
732,527
2,271,133
211,159
274,300
195,713
75,000
86,575
42,232
42,232
817
566
566
–
–
–
–
18,555
24,103
11,116
150,029
194,891
133,000
98,126
123,481
89,560
–
–
–
–
–
–
–
–
–
–
–
–
478,686
617,341
429,955
75,000
86,575
42,232
42,232
927,211
1,949
53,774
477,920
311,167
1,772,021
The value of gains under long term incentive plans shown above is calculated using average shares prices in the period from 1 October to
31 December of the year to 31 December 2019. The actual value of gains will be adjusted to reflect actual share prices at the date of exercise.
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Churchill China plc Annual Report for the year ended 31 December 2019
29
This section of the Remuneration Report is not audited.
On 1 August 2019, the salaries of all Directors, with the exception of J A Roper and A J McWalter, rose by 2.8% in line with the general inflationary rise
given to employees. J A Roper’s salary increased by 16.8% to reflect his increased responsibilities within the business on the same date. A J McWalter’s
salary, which is reviewed triennially, the last increase being in 2016, was increased by 6.7% on 1 May 2019.
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 2018 and 2019. 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 substantially above target levels and also successful
performance against personal objectives.
During 2019 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 2019 threshold profit bonus levels were payable on the achievement of an operating profit before exceptional items of £9,340,000, on target profit
levels were payable on the achievement of operating profits before exceptional items of £9,820,000 and maximum target profit levels were operating
profits before exceptional items of £10,300,000.
Profit based awards during the year were 56% of base salary and personal objectives represented 14% of base salary.
No significant change has been made in the operation of the annual profit bonus scheme for 2020.
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 (2016 grant)
Long Term Incentive Plan (2017 grant)
Long Term Incentive Plan (2018 grant)
Long Term Incentive Plan (2019 grant)
D M O’Connor
Long Term Incentive Plan (2016 grant)
Long Term Incentive Plan (2017 grant)
Long Term Incentive Plan (2018 grant)
Long Term Incentive Plan (2019 grant)
J A Roper
Long Term Incentive Plan (2016 grant)
Long Term Incentive Plan (2017 grant)
Long Term Incentive Plan (2018 grant)
Long Term Incentive Plan (2019 grant)
Number of
options
31 December
2018
Number
of options
granted
Number
of options
exercised
Number of
options
31 December
2019
Date from
which
exercisable
10,159
11,685
11,216
–
12,698
15,179
14,570
–
8,127
9,737
9,347
–
–
–
–
10,015
–
–
–
13,010
–
–
–
8,879
(10,159)
–
–
–
(12,698)
–
–
–
(8,127)
–
–
–
–
11,685
11,216
10,015
12,698
15,179
14,570
13,010
–
9,737
9,347
8,879
May 2019
May 2020
May 2021
May 2022
May 2019
May 2020
May 2021
May 2022
May 2019
May 2020
May 2021
May 2022
Expiry
date
May 2026
May 2027
May 2028
May 2029
May 2026
May 2027
May 2028
May 2029
May 2026
May 2027
May 2028
May 2029
Exercise of the above options is subject to the achievement of performance conditions as specified by the Remuneration Committee and they are
also subject to clawback and malus provisions which may be enacted in certain circumstances. The above number of options represent the amount
that will vest based on the achievement of maximum performance targets. A lower percentage of the above options will vest given the achievement
of lower than maximum performance. At target performance levels 40% of the above options would be expected to vest. Below threshold
performance no options will vest.
On 9 May 2019 31,904 options were granted to executive Directors, at a level representing 75% of base salary. The market price of the Company’s
shares at the date of grant was 1,605p.
For the options granted on 9 May 2019, 100% of the shares will vest given an increase of 40% in adjusted EPS* (‘maximum performance’) in the year to
31 December 2021 over the base year of 31 December 2019, 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 27% 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 1,820p (2018: 940p). The range of prices for the year to 31 December
2019 was 940p to 1,825p (2018: 811p to 1,290p) per ordinary share.
Pensions
This section of the Remuneration Report is audited.
D J S Taylor, D M O’Connor and J A Roper were members of the Churchill China 2006 Group Personal Pension Plan during the year. 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.
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30
Churchill China plc Annual Report for the year ended 31 December 2019
Remuneration
Report
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.
Non Executive Directors are generally appointed on fixed term contracts for a period of twelve months but may normally be terminated with a notice
period of three months.
There are no defined contractual payments in the event of termination of a Directors’ service contract.
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
Date of signature
Unexpired term at
31 December 2019
6 October 2009
15 May 2012
3 November 2015
16 May 2019
12 March 2020
12 March 2020
12 March 2020
1 year
1 year
1 year
6 months
8 months
9 months
7 months
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 2019 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
2019
378,430
55,555
36,113
5,000
4,000
2018
637,430
59,555
49,020
5,000
4,000
1,000,835
1,000,835
983
983
1,480,916
1,756,823
A D Roper’s interest in the 10p ordinary shares of the Company at 31 December 2019 represented 3.4% (2018: 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 2019 represented 9.1% (2018: 9.1%) of the Company’s issued
share capital.
There has been no change in the interests set out above between 31 December 2019 and 25 March 2020.
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.
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 2019 Annual General Meeting, the standard resolution in relation to the approval of the Report of the Remuneration Committee contained in
the Annual Report for 2018 was passed. 99.8% of votes were cast in favour of the resolution, 0.0% against, with abstentions of 0.2%.
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Proof 6
Performance Graph
This section of the Remuneration Report is not audited.
Churchill China plc Annual Report for the year ended 31 December 2019
31
Total Shareholder Return
400
350
300
250
200
150
100
50
0
2014
2015
2016
2017
2018
2019
Churchill
FTSE AIM All Share
(Source: Investec Bank plc)
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 risen. The Group has increased its dividends to shareholders and there has been a substantial re-rating of the price at
which the Company’s shares are traded. Our overall five year return has remained positive at an average compound rate of 30% (AIM: 8%). Over
the five year period total shareholder return from the Group has been 269% whilst that achieved by the AIM index as a whole was 46%. In the year to
31 December 2019 the overall return from the Group was 97% (AIM: 13%).
In the opinion of the Directors the above index is the most appropriate against which to measure the total shareholder return of Churchill China plc.
Over the same period the Chief Executive Officer’s remuneration has been as follows:
Single figure of remuneration (£’000)
Bonus payout (of base salary)
LTIP vesting (of maximum)
Profit before exceptional items and income tax (£’000)
2014*
664
70%
100%
4,317
2015
600
70%
100%
5,014
2016
637
69%
100%
6,515
2017
686
70%
100%
7,460
2018
617
70%
100%
9,388
2019
810
70%
100%
11,176
* D M O’Connor from August 2014
On behalf of the Board
A C Bromfield
Chair of the Remuneration Committee
7 April 2020
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32
Churchill China plc Annual Report for the year ended 31 December 2019
Nomination Committee
Report
Annual Statement
The Nomination Committee has considered a number of matters 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 planning process covering the Company’s Board and the Board of its principal subsidiary Churchill China
(UK) Limited;
• Agreement of a plan for Executive succession; 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
7 April 2020
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Churchill China plc Annual Report for the year ended 31 December 2019
33
Audit Committee
Report
Annual Statement
The Audit Committee has considered a number of matters since the beginning of 2019 including:
• Review of the annual and interim financial results and the Annual Report;
• Agreement of the Audit Plan for the year to 31 December 2019 including the scope of work to be carried out;
• Consideration of the Report of the External Auditors, PricewaterhouseCoopers LLP, to the Audit Committee;
• Review of the independence, effectiveness and level of fees to be paid to the External Auditors.
• 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 acquisition accounting methodology and disclosures in relation to the acquisition of Furlong Mills Ltd and purchase of tangible and
intangible assets from Dudson Holdings Limited (in Administration); and
− the impact of changes to accounting standards in respect of leased assets on the Group’s financial statements.
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 Group’s accounting policies and procedures in relation to the valuation of inventory, a key area of focus for the business, have been assessed.
The value of inventory at 31 December 2019 was £11.6m (2018: £9.9m). The Committee is satisfied that the Group’s policies and procedures are
appropriate and have been consistently applied.
The Committee has reviewed the accounting methodology used in relation to the acquisition of further shares in Furlong Mills Ltd in February
2019, which gave Churchill China plc control of Furlong Mills with a shareholding of 55%, and again in September 2019, which raised the Group’s
shareholding to 100% of the issued share capital. The Committee is satisfied that the assets acquired have been appropriately valued.
The purchase of certain intellectual property and assets from Dudson Holdings Limited (in Administration) has also been reviewed. The Committee is
satisfied that the assets purchased, in particular the intellectual property assets secured, have been appropriately valued.
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
7 April 2020
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34
Churchill China plc Annual Report for the year ended 31 December 2019
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 2019 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 2019 (the “Annual Report”), which comprise: the consolidated and
company balance sheets as at 31 December 2019; the consolidated income statement and consolidated statement of comprehensive income,
the consolidated cash flow statement, the reconciliation of operating profit to net cash inflow from operating activities, 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: £564,000 (2018: £438,000), based on 5% of profit before income tax.
Materiality
• Overall Company materiality: £116,000 (2018: £114,000), 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 99%
of consolidated revenue, 100% of profit before income tax and 96% of total assets.
Audit scope
• The consolidation adjustments used to formulate the consolidated results of the group, as presented in the Annual Report
have been audited to Group materiality.
Key audit
matters
•
Inventory Valuation - Group.
• Business Combinations- Group.
• Consideration of the impact of Covid-19 - Group and Company.
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 2019
35
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements
of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors,
including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the
engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit
of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a
complete list of all risks identified by our audit.
Key audit matter
Business Combinations - Group
Refer to the Audit Committee Report on page 33, the critical accounting
estimates and judgements in note 1 on page 52 and note 13 (Acquisition
of Subsidiary) on page 58.
On 25 February 2019, Churchill China acquired an additional 9.5% of the
issued share capital of Furlong Mills Ltd for cash consideration of £454,000
from Dudson (Holdings) Limited, taking the Group’s total shareholding to
55.6%.
On 30 September 2019, Churchill China acquired the remaining
shareholding of Furlong Mills Ltd (44.4%) from Portmeirion Group plc for
cash consideration of £3.3m.
We focused on this area because the accounting for business
combinations including the valuation of the acquired balance sheet is
inherently judgemental.
There is a risk that acquisitions are inappropriately accounted for and
the fair values associated with these transactions do not lead to an
appropriate valuation of the acquired interests.
How our audit addressed the key audit matter
We read the purchase agreements in order to understand the nature
of the transaction and to ensure that relevant clauses that impact the
accounting had been considered by the Directors. Additionally, we
agreed the consideration paid to the terms of the purchase agreement
and also audited the fair value ascribed to the pre-acquisition
investment in the associate.
We audited and challenged management’s assessment of the
acquired assets and liabilities to ensure that the identification process
was complete and accurate.
Fair value adjustments to assets and liabilities acquired were immaterial,
however we challenged the appropriateness of these and also their
completeness with reference to where a fellow market participant
would be expected to determine value in the business.
Additionally, we audited the disclosure note associated with the
acquisition transactions to ensure this met the disclosure requirements
of IFRS 3 and captured all of the key elements included within the
purchase agreements.
We found the accounting for business combinations and related
disclosures to be appropriate and consistent with the audit evidence
obtained.
Inventory Valuation - Group
Refer to the Audit Committee Report on page 33, the critical accounting
estimates and judgements in note 1 on page 52, and note 16 (Inventories)
on page 60.
We tested the inputs to the provision calculation, including historical
sales data, agreed stock levels, scrap values and also the underlying
cost of each inventory line item agreeing a sample of inputs to
supporting information.
Inventory represents a significant asset on the group’s balance sheet and
is carried at the lower of cost and net realisable value (“NRV”). The group’s
accounting policy is to determine a provision based upon obsolete,
slow moving or defective inventories, taking into account historical sales
volumes, agreed stock levels and expected scrap values.
We considered inventory write-offs in the financial year to ensure they
are consistent with the key assumptions used in the inventory provision
model at year end and that the methodology used for calculating the
provision is appropriate.
We tested the integrity of the provision calculation model to ensure
that it was using the underlying data correctly and calculating provision
amounts accurately.
We found the accounting for inventory valuation to be appropriate
and consistent with the audit evidence obtained.
Consideration of the impact of Covid-19 – Group and Company
Refer to the Future outlook section within the Strategic Report on page 18
and note 1 (Summary of significant accounting policies) on page 46.
In addressing this key audit matter, we have performed the following
procedures:
The emergence of Coronavirus (“Covid-19”) during Q1 2020 has impacted
all businesses, both financially and operationally. With the Group primarily
operating within the Hospitality sector, management have performed
a detailed assessment of the potential impact of Covid-19, specifically
in respect of the preparation of the financial statements on a Going
Concern basis.
• evaluated management’s downside scenarios, including
challenging key assumptions being the profile of forecast revenue
and variability of the cost base. We further sensitised management’s
forecasts to understand the impact of extended revenue
depression and whether this would impact the conclusion drawn by
management.
In performing their assessment, management have modelled potential
downside scenarios, including severe downside scenarios, and have also
considered possible mitigating actions which could be taken to provide
either short term cost and cash savings or inflows.
The outcome of management’s assessment is that, in their view, it remains
appropriate to prepare the Group and Company financial statements on
a going concern basis.
Management believe that Covid-19 is a non-adjusting post balance
sheet event.
• checked the integrity of management’s model, as well as agreeing
underlying data to source documents.
• assessed whether management’s mitigating actions are reasonably
achievable based on our understanding of the business, including
the nature of its cost base.
• obtained evidence to support disclosures within the financial
statements and checked that the disclosures within the annual
report are consistent with the financial statements and knowledge
gained on the audit.
Our conclusion in respect of going concern is included in the
“Conclusions relating to going concern” section below.
We have assessed management’s view that Covid-19 represents a non-
adjusting post balance sheet event and agree with this view. We are
satisfied that the related disclosures are appropriate.
27353
12 May 2020 8:29 am
Proof 6
36
Churchill China plc Annual Report for the year ended 31 December 2019
Independent auditors’ report
to the members of Churchill China plc
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. The Group financial statements are predominantly a consolidation of three
UK statutory entities, comprising the group’s main trading entity Churchill China (UK) Limited, the parent Company, Churchill China plc and Furlong Mills
Ltd. Each of these are subject to their own statutory financial statements audit.
In establishing the overall approach to the Group audit we have allocated materiality across the components with reference to their statutory
materiality 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.
Based on the detailed audit work performed across the group, we have gained coverage of 99% of consolidated revenue, 100% of profit before
income tax, and 96% of total assets.
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
£564,000 (2018: £438,000).
£116,000 (2018: £114,000).
How we determined it
5% of profit before income tax.
1% of total assets.
Rationale for
benchmark applied
Based on the benchmarks used in the Annual Report, profit
before income 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 £38,000 and £495,000.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £27,000 (Group audit) (2018:
£20,000) and £5,800 (Company audit) (2018: £5,000) as well as misstatements below those amounts that, in our view, warranted reporting for
qualitative reasons.
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.
27353
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Proof 6
Churchill China plc Annual Report for the year ended 31 December 2019
37
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 2019 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 in respect of the financial statements, 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.
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
7 April 2020
27353
12 May 2020 8:29 am
Proof 6
38
Churchill China plc Annual Report for the year ended 31 December 2019
Consolidated income statement
for the year ended 31 December 2019
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
Profit for the year is attributable to:
Owners of the Company
Non-Controlling Interests
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.
The notes on pages 46 to 69 are an integral part of these consolidated financial statements.
Note
2
3
3
3
14
6
6
3
8
9
9
9
9
2019
£’000
67,502
11,242
117
11,359
(22)
124
(168)
11,176
117
11,293
(2,136)
9,157
9,063
94
9,157
81.7p
80.9p
82.6p
81.8p
2018
£’000
57,479
9,237
(541)
8,696
185
110
(144)
9,388
(541)
8,847
(1,649)
7,198
7,198
–
7,198
69.6p
69.0p
65.6p
65.0p
27353
12 May 2020 8:29 am
Proof 6
Churchill China plc Annual Report for the year ended 31 December 2019
39
Consolidated statement of comprehensive income
for the year ended 31 December 2019
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:
Owners of the Company
Non Controlling Interest
2019
£’000
2018
£’000
(996)
(175)
(16)
(1,012)
9,157
8,145
8,051
94
8,145
23
(152)
7,198
7,046
7,046
–
7,046
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 8.
The Company has no recognised comprehensive income other than as included in its profit and loss account and therefore no separate Statement of
Comprehensive Income has been presented for the Company.
27353
12 May 2020 8:29 am
Proof 6
40
Churchill China plc Annual Report for the year ended 31 December 2019
Consolidated balance sheet
as at 31 December 2019
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
Lease 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
2019
£’000
2018
£’000
11
12
14
21
16
17
18
19
20
21
22
23
24
19,769
1,571
–
1,103
22,443
11,647
10,951
3,007
12,572
38,177
60,620
(11,105)
(1,022)
(12,127)
(269)
(1,040)
(5,343)
(6,652)
(18,779)
41,841
1,103
2,348
(446)
1,802
37,034
41,841
14,847
91
1,732
1,107
17,777
9,911
9,719
3,001
14,380
37,011
54,788
(9,561)
(1,063)
(10,624)
–
(754)
(5,443)
(6,197)
(16,821)
37,967
1,103
2,348
(729)
1,703
33,542
37,967
The notes on pages 46 to 69 are an integral part of these consolidated financial statements.
The financial statements on pages 38 to 69 were approved by the Board of Directors on 7 April 2020 and were signed on its behalf by:
D M O’Connor
Director
D J S Taylor
Director
Company number 02709505
27353
12 May 2020 8:29 am
Proof 6
Churchill China plc Annual Report for the year ended 31 December 2019
41
Company balance sheet
as at 31 December 2019
Assets
Non current assets
Intangible 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
12
14
15
21
17
17
19
23
24
2019
£’000
1,347
–
6,999
181
8,527
2,592
223
303
3,118
(179)
2,939
11,466
11,466
1,103
2,348
(446)
541
7,920
11,466
2018
£’000
–
1,106
2,198
88
3,392
7,718
220
80
8,018
(120)
7,898
11,290
11,290
1,103
2,348
(729)
416
8,152
11,290
The notes on pages 46 to 69 are an integral part of these financial statements.
The financial statements on page 38 to 69 were approved by the Board of Directors on 7 April 2020 and were signed on its behalf by:
D M O’Connor
Director
D J S Taylor
Director
The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the Company profit and loss account.
The profit of the Company for the year was £3,087,000 (2018: £4,693,000).
27353
12 May 2020 8:29 am
Proof 6
42
Churchill China plc Annual Report for the year ended 31 December 2019
Consolidated statement of changes in equity
for the year ended 31 December 2019
Retained
earnings
£’000
Issued
share
capital
£’000
Share
premium
account
£’000
Treasury
shares
£’000
Other
reserves
£’000
Non
controlling
interest
£’000
Total
£’000
29,456
1,103
2,348
(579)
1,565
33,893
Balance at 1 January 2018
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
7,198
12
(2)
(175)
–
7,033
Dividends relating to 2017 and 2018 (note 10)
(2,840)
Proceeds of share issue
Share based payment
Deferred tax – share based payment
Treasury shares (note 24)
Total transactions with owners
–
137
(9)
(235)
(2,947)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3
–
–
(153)
(150)
–
7,198
(12)
2
–
23
13
–
–
125
–
–
–
–
(175)
23
7,046
(2,840)
3
262
(9)
(388)
125
(2,972)
Total
equity
£’000
33,893
7,198
–
–
(175)
23
7,046
(2,840)
3
262
(9)
(388)
(2,972)
37,967
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Balance at 31 December 2018
33,542
1,103
2,348
(729)
1,703
37,967
Comprehensive Income:
Profit for the year
Other comprehensive (expense)/income:
Depreciation transfer – gross
Depreciation transfer – tax
Re-measurement of post employment benefit
obligations – net of tax
Currency translation
Total comprehensive income
Transactions with owners
9,063
12
(2)
(996)
–
8,077
Dividends relating to 2018 and 2019 (note 10)
(3,356)
Proceeds of share issue
Share based payment
Deferred tax – share based payment
Treasury shares (note 24)
Non controlling interest on acquisition
Purchase of non controlling interest
Write off of premium on purchase of
non controlling interest
Total transactions with owners
Balance at 31 December 2019
–
199
118
(280)
–
–
(1,266)
(4,585)
37,034
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,103
2,348
–
–
–
–
–
–
–
3
–
–
280
–
–
–
283
(446)
–
9,063
94
9,157
(12)
2
–
(16)
–
–
(996)
(16)
–
–
–
–
–
–
(996)
(16)
(26)
8,051
94
8,145
–
–
125
–
–
–
–
–
125
1,802
(3,356)
3
324
118
–
–
–
(1,266)
(4,177)
41,841
–
–
–
–
–
(3,356)
3
324
118
–
1,902
1,902
(1,996)
(1,996)
–
(94)
–
(1,266)
(4,271)
41,841
27353
12 May 2020 8:29 am
Proof 6
Churchill China plc Annual Report for the year ended 31 December 2019
43
Company statement of changes in equity
for the year ended 31 December 2019
Balance at 1 January 2018
Comprehensive Income:
Profit for the year
Total comprehensive income
Transactions with owners
Dividends relating to 2017 and 2018 (note 10)
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
Comprehensive Income:
Profit for the year
Total comprehensive income
Transactions with owners
Dividends relating to 2018 and 2019 (note 10)
Proceeds of share issue
Share based payment
Deferred tax – share based payment
Treasury shares (note 24)
Total transactions with owners
Balance at 31 December 2019
Retained
earnings
£’000
Issued
share
capital
£’000
Share
premium
account
£’000
Treasury
shares
£’000
Other
reserves
£’000
Total
equity
£’000
6,406
1,103
2,348
(579)
291
9,569
4,693
4,693
(2,840)
–
137
(9)
(235)
(2,947)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3
–
–
(153)
(150)
8,152
1,103
2,348
(729)
3,087
3,087
(3,356)
–
199
118
(280)
(3,319)
7,920
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,103
2,348
–
–
3
–
–
280
283
(446)
–
–
–
–
125
–
–
125
416
–
–
–
125
–
–
125
541
4,693
4,693
(2,840)
3
262
(9)
(388)
(2,972)
11,290
3,087
3,087
(3,356)
3
324
118
–
(2,911)
11,466
27353
12 May 2020 8:29 am
Proof 6
44
Churchill China plc Annual Report for the year ended 31 December 2019
Consolidated cash flow statement
for the year ended 31 December 2019
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 investing activities
Purchases of property, plant and equipment
Proceeds on disposal of property, plant and equipment
Purchases of intangible assets
Purchase of subsidiary, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities
Issue of ordinary shares
Purchase of treasury shares
Dividends paid
Purchase of Non Controlling Interest
New leases acquired
Payment of principal under finance leases
Net purchase of other financial assets
Net cash used in financing activities
Net (decrease)/ increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Exchange (loss) / gain on cash and cash equivalents
Cash and cash equivalents at the end of the year
2019
£’000
11,327
124
(38)
(1,845)
9,568
(3,914)
96
(1,721)
370
(5,169)
3
–
(3,356)
(3,263)
576
(161)
(5)
(6,206)
(1,807)
14,380
(1)
12,572
2018
£’000
8,260
110
(1)
(1,321)
7,048
(2,042)
80
(58)
–
(2,020)
3
(388)
(2,840)
–
–
–
(1)
(3,226)
1,802
12,577
1
14,380
27353
12 May 2020 8:29 am
Proof 6
Churchill China plc Annual Report for the year ended 31 December 2019
45
Reconciliation of operating profit to net cash
inflow from operating activities
Continuing operating activities
Operating profit
Adjustments for:
Depreciation and amortisation
Negative goodwill - exceptional
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
2019
£’000
2018
£’000
11,359
8,696
2,375
(117)
(22)
324
(1,430)
–
(906)
304
(560)
11,327
1,725
–
(91)
262
(1,430)
611
(95)
(1,039)
(379)
8,260
27353
12 May 2020 8:29 am
Proof 6
46
Churchill China plc Annual Report for the year ended 31 December 2019
Notes to the financial statements
for the year ended 31 December 2019
1. Summary of significant accounting policies
Churchill China plc is a public limited company that is incorporated, domiciled and has its registered office in England and Wales. The
Company’s ordinary shares are publicly traded on AIM and it is not under the control of any single shareholder.
Basis of Preparation
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
IFRS 16,‘Leases’, replaces IAS 17 ‘Leases’ and became 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.
The weighted average lessee’s cost of capital applied to the lease liabilities on 1 January 2019 was 9.5%. In applying the IFRS16 for the first time,
the Group has used the following practical expedients permitted by the standard:
• Applying a single discount rate to a portfolio of leases with reasonably similar characteristics.
• Relying on previous assessments on whether leases are onerous as an alternative to performing an impairment review – there were no onerous
leases as at 1 January 2019
• Accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short term leases.
• Excluding initial direct costs for the measurement of the right to use asset at the date of initial application
The Group has applied the modified retrospective approach to the application of IFRS 16 and so there has been no restatement of prior year
financial statements.
Operating lease commitments disclosed at 31 December 2018
Discounted at the incremental borrowing rate at date of application
Less short term contracts recognised on a straight line basis
Lease Liability recognised at 1 January 2019
The recognised right of use Assets associated with these liabilities relates to the following type of assets:
Land and Buildings
Plant and Equipment
Motor Vehicles
Total Right of Use Assets
2019
319
272
(38)
234
31 December
2019
1 January
2019
241
75
104
420
234
–
–
234
Right of use assets of £198,000 were acquired in the acquisition of Furlong Mills Ltd during the year. Further information regarding leases is set out
in Note 25 ‘Leases’.
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Churchill China plc Annual Report for the year ended 31 December 2019
47
1. Summary of significant accounting policies continued
(b) New standards and interpretations not yet adopted
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.
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 or FRS 102. 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 Company’s right to receive payment has been established.
Leases
New leases are reviewed and classify in accordance with IFRS 16 based on their length and value. Right of use assets are recognised within
Property, Plant and Equipment, with corresponding liabilities recognised in Other Payables.
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48
Churchill China plc Annual Report for the year ended 31 December 2019
Notes to the financial statements
continued
1. Summary of significant accounting policies continued
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.
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).
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Churchill China plc Annual Report for the year ended 31 December 2019
49
1. Summary of significant accounting policies continued
Derivative financial instruments
The Group’s operations expose it to the financial risks of changes in exchange rates. The Group uses forward currency contracts to mitigate
this exposure. The Group does not use derivative financial instruments for speculative purposes. Changes in the fair value of derivative financial
instruments are recognised immediately in the income statement as soon as they arise. Contracts are initially recognised at fair value, gains and
losses on all derivatives held at fair value outstanding at a balance sheet date are recognised in the income statement.
Hedge accounting is not considered to be appropriate to the above currency risk management techniques and has not been applied.
Taxation
Income tax expense represents the sum of the current tax and deferred tax.
Current tax is based on the taxable profit for the year. The Group’s liability for current tax is calculated using tax rates that have been enacted or
substantively enacted by the balance sheet date.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities
and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for, if it arises from the
initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction there is no effect
on either accounting or taxable profit or loss. The Group’s liability for deferred tax is calculated using tax rates that have been enacted or
substantively enacted by the balance sheet date or are expected to apply when the related deferred income tax asset is realised or deferred
income tax liability is settled.
Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the
temporary differences can be utilised.
Deferred tax assets and liabilities may be set off against each other provided there is a legal right to do so and it is 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
Plant
Motor vehicles
Fixtures and fittings
Freehold land is not depreciated.
%
2 on cost or valuation
10-25 on cost
25 on reducing net book value
25-33 on cost
Right of use assets are depreciated on a straight line basis over the remaining life of the lease in accordance with IFRS 16.
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
Trademarks acquired
%
33 on cost
10-20 on cost
Neither the Group nor the 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.
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50
Churchill China plc Annual Report for the year ended 31 December 2019
Notes to the financial statements
continued
1. Summary of significant accounting policies continued
Fair value through profit and loss account financial assets
Fair value through profit and loss account financial assets are non derivatives that are either designated in this category or not classified to any
of the other financial asset categories. They are included in non-current assets unless the Directors intend to dispose of the investment within
twelve months of the balance sheet date.
At each reporting date the Directors assess whether there is an indication an asset may be impaired. If any such indicator exists the Group tests
for impairment by estimating the recoverable amount of the asset. If the recoverable amount is less than the carrying value of an asset an
impairment loss is required.
Trade receivables
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less
provision for impairment. A 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.
Disclosure exemptions
The Company has adopted the disclosure exemptions covering the following standards as permissible by FRS101:
(a) The requirements of paragraphs 45(b) and 46 to 52 of IFRS 2 Share-based Payment
(b) The requirements of IFRS 3 Business Combinations
(c) The requirements of paragraph 33(c) of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
(d) The requirements of IFRS 7 Financial Instruments: Disclosures
(e) The requirements of paragraphs 91 to 99 of IFRS 13 Fair Value Measurement
(f) The requirement in paragraph 38 of IAS 1 Presentation of Financial Statements to present comparative information
(g) The requirements of IAS 7 Statement of Cash Flows
(h) The requirements of paragraphs 30 and 31 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
(i) The requirements of paragraphs 17 and 18A of IAS 24 Related Party Disclosures
(j) The requirements in IAS 24 Related Party Disclosures to disclose related party transactions entered into between two or more members of a
group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member
Other
Policies in relation to dividends and share based payments are the same as the Group accounting policies.
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Churchill China plc Annual Report for the year ended 31 December 2019
51
1. Summary of significant accounting policies continued
Financial risk management
Financial risk factors
The Group’s activities expose it to a variety of financial risks; market risk (including currency risk, fair value interest rate risk, cash flow interest
rate risk), credit risk, price risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial
markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to
manage certain risk exposures.
Financial risk management is carried out by the finance department under policies approved by the Board of Directors.
(a) Market risk
(i) Currency risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily in relation to the US
dollar and Euro. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign
operations.
The Group’s treasury risk management policy is to secure all of the contractually certain cash flows (mainly export sales and the purchase
of inventory) and to review likely forward exposures in each major currency. Contractual certainty is considered to be where the Group has
received a firm sales order or placed a firm purchase order.
At 31 December 2019, 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 £179,000 (2018: £97,000) 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 (2018: £22,000) 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 £717,000 (2018: £642,000) 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 2019, had the interest rates achieved been 10% higher with all other variables held constant then post tax profit for the year
would have been £11,000 (2018: £10,000) 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. Cash and cash equivalents are as follows:
Lloyds Bank plc
HSBC Bank plc
Santander UK plc
Other
Other financial assets are as follows:
Santander UK plc
National Westminster Bank plc
Credit
rating
Aa3
Aa3
Baa1
Min A
Credit
rating
Baa1
A3
2019
£’000
11,213
1,030
–
329
12,572
2019
£’000
2,253
754
3,007
2018
£’000
11,295
–
3,039
46
14,380
2018
£’000
2,750
251
3,001
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 17).
(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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52
Churchill China plc Annual Report for the year ended 31 December 2019
Notes to the financial statements
continued
1. Summary of significant accounting policies 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 three months.
Capital risk management
The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, to provide finance for the
long term development of the business and to generate returns for shareholders and benefits for other stakeholders in the business.
In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to
shareholders, issue new shares or sell assets to reduce debt.
The Group currently has no debt.
Fair value estimation
The carrying value less impairment provision of trade and other receivables and trade and other payables are assumed to approximate their fair
values.
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 £246,000. 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 £242,000.
(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.
(c) Going Concern
The Group has considered several scenarios in relation to the potential scale and impact of COVID-19. This review has included the analysis of
the impact of different levels of reduction in revenue, different periods of effect, alternative operational responses and cost reduction plans, the
high level of cash and deposits held by the Group and additional available financing. These reviews indicate that it is reasonable for the business
to expect to continue in operational existence. Please also refer to the Chairman’s Statement on page 9 and 10 and Corporate Governance
section on page 24 of the Strategic Report.
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Churchill China plc Annual Report for the year ended 31 December 2019
53
2. Segmental analysis
The Group has previously reported on Hospitality and Retail segments. However, due to the acquisition of Furlong Mills Ltd. during the year ended
31 December 2019 and the size of Retail sales in the Group, the Group now reports to the Chief Operating Decision Maker, the Board, on two
distinct segments of revenue.
The Group’s reportable segments are as follows; Ceramics, the sale of ceramic tableware and complementary items; and Materials, the sale of
materials for the production of ceramics, predominantly to the tableware industry.
2019
£’000
62,681
7,787
70,468
(2,966)
67,502
2019
£’000
28,460
24,477
7,232
7,333
67,502
2019
£’000
10,840
402
11,242
–
117
117
10,840
519
11,359
(22)
124
(168)
11,293
2019
£’000
54,592
6,028
60,620
17,379
1,400
18,779
2018
£’000
57,479
–
57,479
–
57,479
2018
£’000
23,008
21,306
6,054
7,111
57,479
2018
£’000
9,237
–
9,237
(541)
–
(541)
8,696
–
8,696
185
110
(144)
8,847
2018
£’000
54,788
–
9,237
16,821
–
16,821
Market segment – Revenue
Ceramics
Materials
Intra Group revenue
Group Revenue
Geographical segment – Revenue
United Kingdom
Rest of Europe
USA
Rest of the World
The profits of the business are allocated as follows:
Operating profit before exceptional items
Ceramics
Materials
Exceptional items
Ceramics
Materials
Operating Profit after exceptional items
Ceramics
Materials
Unallocated items
Share of results of associate
Finance Income
Finance costs
Profit before income tax
Segmental Assets
Ceramics
Materials
Segmental Liabilities
Ceramics
Materials
Capital expenditure was made as follows:
Ceramics £5,379,000 (2018: £2,079,000), Materials £294,000 (2018: £nil)
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54
Churchill China plc Annual Report for the year ended 31 December 2019
Notes to the financial statements
continued
3. 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 5)
Pension equalisation charges - exceptional
Other external charges
Depreciation and amortisation charges
Negative goodwill on acquisition - exceptional
Profit on disposal of property, plant and equipment
Profit on disposal of property, plant and equipment - exceptional
Foreign exchange gain
Total cost of sales, distribution costs and administrative expenses
2019
£’000
(575)
6,531
4,286
23,850
–
20,230
2,375
(117)
(22)
–
(415)
56,143
2018
£’000
(107)
4,736
4,744
21,146
611
16,131
1,725
–
(21)
(70)
(112)
48,783
In February 2019, the Group acquired control of Furlong Mills Limited which had previously been accounted for as an associate. As set out in
Note 13, the fair value of assets acquired was in excess of the consideration and so in accordance with IFRS 3, the negative goodwill of £117,000
has been credited to the Income statement as an exceptional credit.
During 2018,changes to the law in relation to the calculation of Guaranteed Minimum Pensions (GMP’s) 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 exceptional charge of £611,000was provided for in 2018 reflecting the cumulative effect of these changes. A related deferred
tax credit of £104,000 was also treated as exceptional. Additionally sums previously provided for costs relating to the disposal of property which
were no longer required were released, generating an exceptional credit to profit of £70,000. A related £20,000 deferred tax charge was also
treated as exceptional.
4. 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 (2018: none).
5. Employee benefit expense
Staff costs (for the employees shown in note 4)
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)
2019
Number
2018
Number
501
221
722
2019
£’000
20,774
2,000
619
133
324
23,850
–
23,850
430
201
631
2018
£’000
18,367
1,717
563
237
262
21,146
611
21,757
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 (2018: nil).
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Proof 6
Churchill China plc Annual Report for the year ended 31 December 2019
55
6. 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
7. Auditor’s 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 £4,000, 2018: £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
8.
Income tax expense
Group
Current tax – current year
– adjustment in respect of prior periods
Deferred tax (note 21)
Current year
Income tax expense
2019
£’000
124
124
(130)
(38)
(168)
(44)
2019
£’000
40
124
164
2019
£’000
1,754
(25)
1,729
407
2,136
2018
£’000
110
110
(143)
(1)
(144)
(34)
2018
£’000
10
82
92
2018
£’000
1,609
(57)
1,552
97
1,649
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.
The tax on the Group’s profit before income 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
Other
Tax charge
The weighted average applicable tax rate was 19.0% (2018: 19.0%).
2019
£’000
11,291
2,145
20
(25)
12
(16)
2018
£’000
8,847
1,680
16
(57)
(35)
45
2,136
1,649
During the year a credit of £204,000 (2018: credit of £37,000) in relation to deferred tax arising from actuarial gains and losses on the Group’s
defined benefit pension obligation and a credit of £118,000 (2018: charge of £9,000) in relation to deferred taxation on share based payments
were adjusted directly within equity.
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Proof 6
56
Churchill China plc Annual Report for the year ended 31 December 2019
Notes to the financial statements
continued
9. Earnings per ordinary share
Basic earnings per ordinary share is based on the profit after income tax and on 10,974,010 (2018: 10,966,996) 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 3)
Basic earnings per share (Based on earnings £9,063,000 (2018: £7,198,000))
(Less)/add: Exceptional Items: £117,000 (2018: (£437,000))
Adjusted earnings per share (based on adjusted earnings £8,966,000 (2018: £7,635,000))
2019
Pence
per share
2018
Pence
per share
82.6
(0.9)
81.7
65.6
4.0
69.6
Diluted earnings per ordinary share is based on the profit after income tax and on 11,076,990(2018: 11,069,061) ordinary shares, being the
weighted average number of ordinary shares in issue during the year of 10,974,010 (2018: 10,966,996) increased by 102,980 (2018:102,065) 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 3)
Diluted basic earnings per share (Based on earnings £9,063,000 (2018: £7,198,000))
(Less)/add: Exceptional Items: £117,000 (2018: £437,000))
Diluted adjusted earnings per share (based on adjusted earnings £8,966,000 (2018: £7,635,000))
10. Dividends
The dividends paid in the year were as follows:
Ordinary
Final dividend 2018 20.3p (Final dividend 2017: 17.2p) per 10p ordinary share
Interim 2019 10.3p per 10p ordinary share paid (Interim 2018: 8.7p)
The Directors now recommend payment of the following dividend:
Ordinary dividend:
2019
Pence
per share
2018
Pence
per share
81.8
(0.9)
80.9
2019
£’000
2,224
1,132
3,356
65.0
4.0
69.0
2018
£’000
1,886
954
2,840
Final dividend 2019 nil (2018: 20.3p) per 10p ordinary share
–
2,224
Dividends on treasury shares held by the Company are waived.
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Proof 6
Churchill China plc Annual Report for the year ended 31 December 2019
57
11. Property, plant and equipment
The Company has no property, plant and equipment (2018: none). Details of property, plant and equipment relating to the Group are as follows:
Group
At 1 January 2018
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
Year ended 31 December 2019
Opening net book amount
Additions of assets acquired through acquisition
Additions
Disposals
Depreciation charge
Closing net book amount
At 31 December 2019
Cost
Accumulated depreciation
Net book amount
Freehold
land and
buildings
£’000
Plant
and
Machinery
£’000
Motor
vehicles
£’000
Fixtures
and fittings
£’000
12,898
(3,173)
9,725
9,725
–
–
(249)
9,476
12,898
(3,423)
9,475
9,475
1,046
930
–
(316)
11,135
17,004
5,869
11,135
23,600
(19,376)
4,224
4,224
1,429
–
(1,176)
4,478
25,030
(20,552)
4,478
4,478
2,130
2,665
(1)
(1,532)
7,740
33,097
25,357
7,740
818
(425)
393
393
179
(59)
(118)
395
795
(400)
395
395
–
199
(71)
(117)
406
739
333
406
1,718
(1,518)
200
200
413
–
(114)
499
2,131
(1,632)
499
499
–
163
–
(174)
488
2,293
1,805
488
Total
£’000
40,229
(25,687)
14,542
14,542
2,021
(59)
(1,657)
14,847
40,854
(26,007)
14,847
14,847
3,176
3,957
(72)
(2,139)
19,769
53,133
33,364
19,769
Additions include the impact of £234,000 of Right of use assets on 1 January 2019 now included within the Statement of Financial Position
following the implementation of IFRS 16. See Note 25 Leases for further information.
Included within Property, Plant and Equipment is £1,739,000 classified in Plant and Machinery and £670,000 classified in Land and Buildings which
meet the classification of Assets In the Course of Construction.
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Proof 6
58
Churchill China plc Annual Report for the year ended 31 December 2019
Notes to the financial statements
continued
12. Intangible assets
The Company acquired intangible assets of £1,500,000 relating to Dudson trademarks acquired during the year. The net book value of
Intangibles held by the Company is £1,347,000 (2018: £nil).
Details of intangible assets relating to the Group are as follows:
Group
At 1 January 2018
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
Year ended 31 December 2018
Opening net book amount
Additions
Amortisation charge
Closing net book amount
At 31 December 2019
Cost
Accumulated amortisation
Net book amount
Computer
software
£’000
Trademarks
£’000
925
(824)
101
101
58
(68)
91
159
(68)
91
91
216
(83)
224
375
(151)
224
–
–
–
–
–
–
–
–
–
–
–
1,500
(153)
1,347
1,500
(153)
1,347
Total
£’000
925
(824)
101
101
58
(68)
91
159
(68)
91
91
1,716
(236)
1,571
1,875
(304)
1,571
13. Acquisition of Subsidiary
On 25 February 2019 the Group acquired a further 9.5% of the issued ordinary share capital of Furlong Mills Ltd. for a total consideration of
£454,000. Churchill’s shareholding in Furlong Mills prior to the purchase was 46.1% and it had previously been accounted for as an associate
company. As the February purchase increased Churchill’s overall holding to 55.6% of the issued ordinary share capital and the power to control
the company it has been accounted for as a subsidiary from that date. The acquisition of the additional shareholding was from a financially
distressed company which when compared to the fair value of identifiable assets disclosed below, resulted in a bargain purchase. The negative
goodwill arising has been recognised within the consolidated income statement as an exceptional item.
Furlong Mills is a ceramic materials manufacturer based in Stoke on Trent, providing processed clay body and glazes to Churchill and to other
ceramic manufacturers. The acquisition supports the Group’s long term strategy of innovation and technical performance in Hospitality markets,
whilst also securing a key part of the supply chain for the future.
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Proof 6
Churchill China plc Annual Report for the year ended 31 December 2019
59
13. Acquisition of Subsidiary continued
The amounts recognised at fair value on acquisition in respect of the identifiable assets acquired and liabilities assumed are as follows:
Property, Plant and Equipment
Inventory
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Current income tax liabilities
Deferred Income tax liabilities
Total identifiable assets
Negative goodwill
Non controlling Interest at acquisition
Total consideration
Satisfied by:
Cash and cash equivalents
Fair value of associate at acquisition
Total Consideration
£’000
3,176
830
1,891
824
(2,258)
(75)
(205)
4,183
(117)
(1,902)
2,164
454
1,710
2,164
On 30 September 2019, the Group acquired the remaining 44.4% of the issued share capital of Furlong Mills Ltd from Portmeirion Group plc
for a total consideration of £3,263,000. In accordance with IFRS 10 Consolidated Financial Statements, the further increase in shareholding
resulted in no changes to the recognised negative goodwill and no new information has subsequently arisen that has been deemed to cause
a measurement period adjustment. The Non Controlling Interest created in the 25 February 2019 acquisition was removed by the second
acquisition of the remaining stake in Furlong Mills Ltd. on 30 September 2019.
Furlong Mills contributed £4,821,000 of revenue and £519,000 of profit for the period between the date of acquisition and the balance sheet
date. If the acquisition had been completed on the first date of the financial year, the contribution to Group revenues for the period would have
been £6,117,000 and the contribution to Group profit would have been £651,000.
14. Investment in associate
Cost
At 1 January
Share of (loss)/profit
Acquisition of subsidiary
At 31 December
Impairment
At 1 January and 31 December
Acquisition of subsidiary
At 31 December
Net book value
Closing net book amount
Group
2019
£’000
2,159
(22)
(2,137)
–
427
(427)
–
–
Group
2018
£’000
Company
2019
£’000
Company
2018
£’000
1,974
185
–
2,159
427
–
427
1,732
1,106
(22)
(1,084)
–
–
–
–
–
921
185
–
1,106
–
–
–
1,106
During 2018, the Group’s shareholding in Furlong Mills Ltd. was accounted for as an investment in an associate as at the prior year reporting
date, the Group held 46.1% of the share capital. In February 2019, the shareholding was further increased to 55.6% and was accounted for as a
subsidiary from this date due to this then being controlled by the Group. For further information on the acquisition of Furlong Mills Ltd., please see
Note 13.
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Proof 6
60
Churchill China plc Annual Report for the year ended 31 December 2019
Notes to the financial statements
continued
15. Investment in subsidiaries
Company
Cost or valuation
At 1 January
Acquisition of subsidiary
At 31 December
Impairment
At 1 January and 31 December
Net book value
At 31 December
2019
£’000
2,630
4,801
7,431
2018
£’000
2,630
–
2,630
432
432
6,999
2,198
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
Description
of shares
held
Ordinary
Furlong Mills Ltd*
England and Wales
Ordinary
Churchill China, Inc**
Churchill Ceramica Iberia, S.L.***
USA
Spain
Churchill Housewares Limited*
England and Wales
Churchill Ceramics (UK) Ltd.*
England and Wales
James Broadhurst & Sons Ltd.*
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
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Proportion of
nominal value
of issued shares
held
Principal activity
100%
Manufacture and sale of ceramic and
related products
100% Manufacture and sales of raw material for
the ceramics industry
100%
100%
100%
100%
100%
100%
100%
100%
100%
Sale of ceramic and related products
Provision of sales and management
services within the Group
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
The Directors believe the carrying value of subsidiaries is supported by their recoverable amounts. All subsidiaries are directly held with exception
of Churchill Tableware Limited, Churchill Fine Bone China Limited and Elizabethan Fine Bone China Limited.
* 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
16. Inventories
The Company has no inventory (2018: none). Details of inventory relating to the Group are as follows:
Raw materials
Work in progress
Finished goods
2019
£’000
993
1,569
9,085
11,647
2018
£’000
53
1,532
8,326
9,911
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 £37,813,630 (2018: £29,841,000). The
movement in impairment provisions against the value of inventory in relation to slow moving and obsolete items during the year was an increase
for the Group of £158,000 (2018: increase of £872,000).
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Proof 6
Churchill China plc Annual Report for the year ended 31 December 2019
61
17. Trade and other receivables
Trade receivables
Less: provision for impairment of trade receivables
Trade receivables – net
Prepayments
Derivative financial instruments
Receivables from related parties (note 27)
Less non-current portion: loans to related parties
Current portion
Group
2019
£’000
10,370
(454)
9,916
547
488
–
10,951
–
10,951
2018
£’000
9,718
(308)
9,410
309
–
–
9,719
–
9,719
Company
2019
£’000
2018
£’000
–
–
–
–
–
7,938
7,938
7,718
220
–
2,815
2,815
2,592
223
All non current receivables are due within five years from the balance sheet date.
Derivative financial instruments represent the fair value of gains on foreign exchange contracts.
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 2019, trade receivables of £8,187,000 (2018: £7,564,000) were fully performing.
As of 31 December 2019, trade receivables of £651,000 (2018: £558,000) 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
2019
£’000
645
2
4
651
2018
£’000
543
8
7
558
As of 31 December 2019 trade receivables with a gross value of £1,532,000 (2018: £1,596,000) were impaired and provided for. The amount
of provision for 31 December 2019 was £454,000 (2018: £308,000). 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.
Movements on the Group provision for impairment of trade receivables are as follows:
At 1 January
Increasein provision for receivables impairment
Written off during the year
At 31 December
2019
£’000
1,440
92
–
2018
£’000
1,589
–
7
1,532
1,596
2019
£’000
308
144
2
454
2018
£’000
269
28
11
308
The creation and release of provision for impaired receivables have been included in ‘other external charges’ in the income statement (note 3).
Amounts charged to the allowance account are generally written off, when there is no expectation of recovering additional cash.
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Proof 6
62
Churchill China plc Annual Report for the year ended 31 December 2019
Notes to the financial statements
continued
17. Trade and other receivables continued
The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies:
Pounds
Euros
US dollars
2019
£’000
7,180
3,020
751
10,951
2018
£’000
5,811
3,012
896
9,719
During the year the Group realised gains of £144,000 (2018: gains of £29,000) on settled forward option contracts that have been recognised in
the Income Statement and as at 31 December held foreign currency exchange contracts for the sale of Euro of £10,528,000 (2018: £8,875,000)
and the sale of US dollars of £1,138,000 (2018: £500,000). These contracts are held at their fair value as financial instruments classified as fair value
through profit and loss with a gain of £488,000 (2018: loss of £42,000) recognised in relation to the contracts outstanding at the year end.
Company
As of 31 December 2019, Company trade receivables of £nil (2018: £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
2019
£’000
2,701
114
2,815
2018
£’000
7,827
111
7,938
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.
18. Other financial assets
Other financial assets
Group
Company
2019
£’000
3,007
2018
£’000
3,001
2019
£’000
–
2018
£’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.
19. Trade and other payables
Trade payables
Amounts due to related parties
Social security and other taxes
Accrued expenses
Lease liabilities
All the above liabilities mature within twelve months from the year end.
20. Lease liabilities
Lease liabilities
Further analysis relating to the Right of use liabilities acquired is included in Note 25.
Group
Company
2019
£’000
4,140
–
921
5,898
146
11,105
2018
£’000
3,823
114
635
4,989
–
9,561
2019
£’000
–
13
–
166
–
179
2019
£’000
269
269
Group
2018
£’000
–
13
91
16
–
120
2018
£’000
–
–
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Proof 6
Churchill China plc Annual Report for the year ended 31 December 2019
63
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
The net movement on the deferred income tax account is as follows:
At 1 January
Income statement charge (note 9)
Tax credits relating to components of comprehensive income
Amounts acquired
Tax credited / (charged) directly to equity (note 23)
At 31 December
2019
£’000
766
337
1,103
(875)
(165)
(1,040)
63
2019
£’000
353
(407)
204
(205)
118
63
2018
£’000
777
330
1,107
(715)
(39)
(754)
353
2018
£’000
422
(97)
37
–
(9)
353
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 2018
Credited to the income statement
At 31 December 2018
Amounts acquired
Charged / (credited) to the income statement
At 31 December 2019
Deferred tax assets
At 1 January 2018
(Credited)/charged to the income statement
Tax credits relating to components of comprehensive income
Charged directly to equity
At 31 December 2018
Charged to the income statement
Tax credits relating to components of comprehensive income
Credited directly to equity
At 31 December 2019
Accelerated
tax
depreciation
£’000
Land and
buildings
revaluation
£’000
581
(19)
562
205
60
827
Accelerated
tax
depreciation
(85)
(1)
–
–
(86)
86
–
–
194
(2)
192
–
(2)
190
Retirement
benefit
obligation
(1,004)
115
(37)
–
(926)
222
(204)
(908)
Other
£’000
–
–
–
–
23
23
Other
(108)
4
–
9
(95)
18
–
(118)
(195)
Total
£’000
775
(21)
754
205
81
1,040
Total
(1,197)
118
(37)
(28)
(1,107)
326
(204)
(118)
(1,103)
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Proof 6
64
Churchill China plc Annual Report for the year ended 31 December 2019
Notes to the financial statements
continued
21. Deferred income tax continued
The deferred income tax charged to/(credited 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
2019
£’000
(204)
(118)
(322)
2018
£’000
(37)
9
(28)
Deferred income tax of £2,000 (2018: £2,000) was transferred from other reserves to retained earnings. 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 (2018: £866,000) in respect of capital
losses amounting to £5,092,000 (2018: £5,092,000) that can be carried forward against future capital gains.
Company
Deferred tax assets of £181,000 (2018: £88,000) are recognised relating to short term timing differences and timing differences on share
based payments.
22. Retirement benefit obligations
Balance sheet obligations
Pension benefits
Income statement charge
Pension benefits
Pension benefits: Past service charge - exceptional
Finance costs
2019
£’000
2018
£’000
5,343
5,443
751
–
130
800
611
143
The Group has operated seven principal pension schemes during the year. The cost of these schemes is as follows;
Scheme
Churchill Group Retirement Benefit Scheme
Churchill China 1999 Pension Scheme
Churchill China 2006 Group Personal Pension Plan
Churchill China 2019 Pension Scheme
Furlong Mills Ltd. Pension Plan
Churchill China section of the Peoples Pension
Furlong Mills Ltd. section of the Now Pension scheme
2019
Nil
£307,000
£187,000
£25,000
£27,000
£99,000
£14,000
2018 Nature
£611,000 Defined benefit plan. Closed to new entrants in 1999 and
to which the accrual of future benefits ceased in 2006
£312,000 Defined contribution plan
£184,000 Defined contribution plan
– Defined contribution (Master Trust)
Nil Defined contribution plan
£67,000 Defined contribution auto enrolment scheme
Nil Defined contribution auto enrolment scheme
The assets of the schemes are held separately from those of the Group. The total pension cost for the Group was £739,000 (2018: £1,411,000
including an exceptional charge of £611,000).
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 £66,000 (2018: £28,000).During the year, the Group consolidated the Churchill China 1999
Pension scheme, the Churchill Group Personal Pension Plan and the Churchill section of the Peoples Pension into the Churchill China 2019
Pension Scheme.
During 2018, changes to the law in relation to the calculation of Guaranteed Minimum Pensions (GMP’s) 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 exceptional charge of £611,000 was provided for in 2018 reflecting the cumulative effect of these changes. There have been
no such changes in the current year.
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 (2018: £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 until 2027 in respect of the amortisation of past service deficits.
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12 May 2020 8:29 am
Proof 6
Churchill China plc Annual Report for the year ended 31 December 2019
65
22. Retirement benefit obligations continued
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 dependant 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
2018 dividends paid increased by 17% and have increased by 17% in 2019
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 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
2019
£’000
21,594
6,070
2,110
16,032
2,190
47,996
45%
13%
4%
33%
5%
2019
£’000
53,339
2018
£’000
47,998
(47,996)
(42,555)
5,343
5,443
2019
£’000
47,998
1,408
–
66
5,193
(1,326)
53,339
2019
£’000
42,555
1,278
4,059
1,430
(1,326)
47,996
2018
£’000
19,043
5,616
1,876
13,998
2,022
42,555
2018
£’000
51,125
1,321
611
70
(3,871)
(1,258)
47,998
2018
£’000
45,218
1,178
(4,013)
1,430
(1,258)
42,555
45%
13%
4%
33%
5%
The expected return on plan assets under IAS 19 (revised) is calculated at the same rate used to discount scheme liabilities.
The amounts recognised in the income statement are as follows:
Interest cost on defined benefit plans
The actual return on plan assets was a gain of £5,337,000 (2018: gain of £2,835,000).
2019
£’000
130
2018
£’000
143
Re-measurement losses of £1,200,000 (2018: losses of £212,000) gross of tax were recognised in the Statement of Other Comprehensive Income
during the year. The cumulative amount of actuarial losses recognised in the Statement of Other Comprehensive Income is £18,037,000
(2018: £16,837,000).
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12 May 2020 8:29 am
Proof 6
66
Churchill China plc Annual Report for the year ended 31 December 2019
Notes to the financial statements
continued
22. Retirement benefit obligations continued
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
2019
% per
annum
2.1%
3.0%
2.0%
2.0%
2.1%
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
2019
Years
20.4
22.3
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
2019
Years
21.7
23.8
2018
% per
annum
2.95%
3.2%
2.2%
2.2%
2.2%
2018
Years
20.9
22.9
2018
Years
22.6
24.8
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 which impact discount rate
A decrease in corporate bond yields will decrease the discount rate, which in turn will increase plan liabilities, although this will be partially offset
by an increase in the value of the plan’s bond holdings.
Inflation risk
The Group’s pension obligations are linked to inflation, and higher inflation will lead to higher liabilities (although, in most cases, caps on the level
of inflationary increases are in place to protect the plan against extreme inflation).The majority of the plan’s assets are either unaffected by
(fixed interest bonds) or loosely correlated with (equities) inflation, meaning that an increase in inflation will also increase the deficit.
Life expectancy
The plan’s obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the plan’s
liabilities. This is particularly significant where inflationary increases result in higher sensitivity to changes in life expectancy.
Sensitivity
A sensitivity analysis has been carried out on effects of varying certain assumptions within the calculation of retirement benefit obligations.
The effect of a 0.25% decrease in the discount rate to 1.85% would be to increase scheme liabilities by £2,347,000 (4.4%).
The effect of a 0.25% increase in CPI inflation to 3.0% would increase scheme liabilities by £1,920,000 (3.6%).
The effect of a 1 year increase to life expectancy would increase scheme liabilities by £1,707,000 (3.2%).
The amount of net deficit on retirement benefit schemes is also dependant on the valuation and investment performance of scheme assets.
27353
12 May 2020 8:29 am
Proof 6
Churchill China plc Annual Report for the year ended 31 December 2019
67
23. Issued share capital and share premium account
Group and Company
At 1 January 2019 and 31 December 2019
Number
of shares
000s
11,030
Ordinary
shares
£’000
Share
premium
£’000
1,103
2,348
The total authorised number of ordinary shares is 14,300,000 (2018: 14,300,000) with a par value of 10p (2018: 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
2019
1,605p
10p
3
4 May
2018
5 May
2017
16 May
2016
1,117.5p
1047.5p
10p
3
10p
3
780p
10p
3
31,904
35,133
36,601
30,984
3
15%
10
3
0.9%
1.8%
1,325p
3
10%
10
3
1.4%
2.4%
901p
3
15%
10
3
1.4%
2.5%
847p
3
15%
10
3
1.4%
2.5%
643p
The following options exercisable over ordinary shares were outstanding at 31 December 2019 under the Long Term Incentive Plan:
Number of shares
May 2016 Grant
May 2017 Grant
May 2018 Grant
May 2019 Grant
2019
–
36,601
35,133
31,904
2018
30,984
36,601
35,133
–
103,638
102,718
Exercise
price
Date from
which
exercisable
Expiry date
10p
10p
10p
10p
May 2019
May 2026
May 2020
May 2027
May 2021
May 2028
May 2022
May 2029
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 2019 is set out below.
Outstanding at 1 January
Granted
Exercised
Outstanding at 31 December
Exercisable at 31 December
2019
Number
’000
102,718
31,904
(30,984)
103,638
–
2019
Weighted
average
exercise
price
10.0p
10.0p
10.0p
10.0p
–
2018
Number
’000
98,512
35,133
(30,927)
102,718
–
2018
Weighted
average
exercise
price
10.0p
10.0p
10.0p
10.0p
–
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12 May 2020 8:29 am
Proof 6
68
Churchill China plc Annual Report for the year ended 31 December 2019
Notes to the financial statements
continued
23. Issued share capital and share premium account continued
There were 31,904 share options granted during the year (2018: 35,133).
2019
2019
2019
2019
2018
2018
2018
2018
Weighted
average
exercise
price
10p
Number
’000
103,638
Weighted
average
remaining
life
Weighted
average
remaining
life
(contractual)
Weighted
average
exercise
price
1.3
8.3
10p
Weighted
average
remaining
life
Weighted
average
remaining
life
(contractual)
1.5
8.5
Number
’000
102,718
0 – 50p
The weighted average price for options exercised in the period was 10p (2018: 10p). The total charge during the year for employee share based
payment plans was £324,000 (2018: £263,000) before tax, all of which related to equity settled share based payment transactions.
24. Treasury shares
Group and Company
As at 31 December 2018
Reissue of shares
Transfer to retained earnings
As at 31 December 2019
£’000
729
(3)
(280)
446
During the year the Group re-purchased nil (2018: 38,000) 10p ordinary shares and re-issued 30,984 (2018: 30,927) under employee share option
schemes. The Group currently holds 43,938 (2018: 74,922) shares in Treasury.
25. Leases
As set out in Note 1, IFRS 16 replaces IAS ‘Leases’, updating the definition, recognition and measurement of Leases, resulting in the majority of
leases being accounted for within Property, Plant and Equipment and a connected liability included with Other Payables. Due to the modified
retrospective approach being applied, there has no restatement of prior year financial statements.
The Group has recognised assets and financial commitments in respect of non cancellable leases for Buildings, Plant and Machinery and Motor
Vehicles as below:
Right of Use assets
Land and Buildings
Plant & Equipment
Motor Vehicles
Total
Lease Liabilities
Land and Buildings
Plant & Equipment
Motor Vehicles
Total
The Group has recognised amounts in the Income Statement for Right of Use Assets included within Fixed Assets
Depreciation charge on Right of Use Assets
Land and Buildings
Plant & Equipment
Motor Vehicles
Total
The total cash outflow for Leases in the year was £199,000.
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12 May 2020 8:29 am
Proof 6
2019
£’000
241
75
104
420
2019
£’000
251
78
86
415
2019
£’000
89
37
10
135
Churchill China plc Annual Report for the year ended 31 December 2019
69
26. Commitments
Capital commitments
Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows:
Property, plant and equipment
Intangible assets: Computer software
27. Related party transactions
Group
Company
2019
£’000
1,605
24
1,629
2018
£’000
729
95
824
2019
£’000
–
–
–
2018
£’000
–
–
–
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.
Details of related party transactions involving the Company were as follows:
Subsidiaries
Management charge to Churchill China, Inc
Dividend received from Churchill China (UK) Limited
Loans repaid by Churchill China (UK) Limited
Loans outstanding (mainly from Churchill China (UK) Limited)
28. Financial instruments by category
2019
£’000
10
3,750
(3,195)
4,731
2018
£’000
10
3,750
(2,147)
7,926
The accounting policies for financial instruments have been applied to the line items in the accounts. All financial assets including cash and cash
equivalents, other financial assets and trade and related party receivables are classified as amortised cost, with the exception of derivative
financial instruments classified as fair value through profit and loss, in both 2019 and 2018, as disclosed in note 17.
All amounts shown in notes 19 and 20 are financial liabilities measured at amortised cost.
27353
12 May 2020 8:29 am
Proof 6
70
Churchill China plc Annual Report for the year ended 31 December 2019
Five year financial record
Revenue
Operating profit before exceptional item
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 exceptional item and 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
2015
£’000
46,829
4,959
–
4,959
135
(80)
5,014
–
5,014
(928)
4,086
1,816
30,925
10.6%
6,454
37.3
37.3
2016
£’000
51,102
6,398
–
6,398
157
(40)
6,515
–
6,515
(1,230)
5,285
2,085
28,625
12.5%
8,114
48.2
48.2
2017
£’000
53,530
7,460
315
7,775
159
(159)
7,460
315
7,775
(1,361)
6,414
2,433
33,893
13.9%
9,081
58.4
55.3
2018
£’000
57,479
9,237
(541)
8,696
185
(34)
9,388
(541)
8,847
(1,649)
7,198
2,840
37,967
16.1%
10,941
65.6
69.6
2019
£’000
67,502
11,242
117
11,359
(22)
(44)
11,176
117
11,293
(2,136)
9,157
3,356
41,841
16.7%
13,594
82.6
81.7
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Proof 6
Shareholder Notes
Churchill China plc Annual Report for the year ended 31 December 2019
71
27353
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Proof 6
72
Churchill China plc Annual Report for the year ended 31 December 2019
Shareholder Notes
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Proof 6
Churchill China plc Annual Report for the year ended 31 December 2019
27353
12 May 2020 8:29 am
Proof 6
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27353
12 May 2020 8:29 am
Proof 6