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Manufacturer
Distributor
Recycler
EUROCELL PLC
Annual Report and Accounts 2017
CONTENTS
OVERVIEW
1
2
2017 Highlights
At a Glance
STRATEGIC REPORT
Chairman’s Statement
Chief Executive’s Review
4
6 Market Overview
8
12 Our Business Model
14 Business Model in Action – Manufacturer
16 Business Model in Action – Distributor
18 Business Model in Action – Recycler
20 Our Strategy
22 Divisional Reviews
26 Group Financial Review
30 Corporate Social Responsibility
34 Principal Risks and Uncertainties
38 Viability Statement
CORPORATE GOVERNANCE
40 Board of Directors
42 Chairman’s Introduction
43 Corporate Governance Statement
46 Nomination Committee
47 Audit and Risk Committee
50 Directors’ Remuneration Report
65 Directors’ Report
68 Statement of Directors’ Responsibilities
FINANCIAL STATEMENTS
Independent Auditors’ Report
69
76 Consolidated Statement of Comprehensive Income
77 Consolidated Statement of Financial Position
78 Consolidated Cash Flow Statement
79 Consolidated Statement of Changes in Equity
80 Notes to the Financial Statements
103 Company Statement of Financial Position
104 Company Statement of Changes in Equity
105 Notes to the Company Financial Statements
110 Company Information
INTRODUCTION
We are a market leading,
vertically integrated UK
manufacturer, distributor and
recycler of innovative window, door
and roofline PVC building products.
Manufacturer
Read about our manufacturing activity
on page 14
Distributor
Find out more about our distribution
network on page 16
Recycler
Find out more about our recycling capability
on page 18
OvERvIEw
2017 Highlights
Revenue
Gross Margin
Adjusted EBITDA1
£224.9m
10%
51.0%
1%
(8% excluding acquisitions)
(2016: 52.0%)
£31.7m
1%
(2016: £31.3m)
Adjusted Profit Before Tax1
Profit Before Tax
Adjusted EPS1
£24.5m
1%
(2016: £24.3m)
£23.7m
0.7%
(2016: £23.8m)
20.4p
2%
(2016: 20.0p)
EPS
Total Dividends (per share)
Net Debt
19.6p
(2016: 19.6p)
9.0p
6%
(2016: 8.5p)
£14.5m
£5.8m
(2016: £20.3m)
PROGRESS WITH STRATEGIC PRIORITIES
• Gaining market share – Organic sales growth of 6% for Profiles and 9% for Building Plastics.
• Expanding the branch network – 190 branches, with 31 new sites in 2017.
• Increasing use of recycled PVC in manufactured products – 17% in 2017 (2016: 14%).
• Completed acquisition – Security Hardware in February 2017.
(1) Adjusted measures are before non-underlying costs and the related tax effect. Adjusted profit measures are used by management to assess
business performance and are provided here in addition to statutory measures to help describe the underlying results on the Group.
View the latest results online at
investors.eurocell.co.uk
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OvERvIEw
At a Glance
We operate our business through two divisions that reflect the principal routes
to market for our products: Profiles and Building Plastics.
PROFILES DIVISION
The Profiles division manufactures extruded rigid PVC
profiles and foam PVC products. We make rigid and foam
products using virgin PVC compound, the largest
component of which is resin. Our rigid products also
include recycled PVC compound, produced at our market
leading recycling facility.
Rigid PVC profiles are sold to third-party fabricators,
who produce windows, trims, cavity closer systems, patio
doors and conservatories for their customers.
There are broadly four types of fabricator. Trade frame
fabricators supply finished products to tradesmen or small
retail outlets. New build fabricators supply and install the
products they make for house builders. Commercial
fabricators supply and install products used in applications
such as office space and education facilities. Finally, retail
fabricators make products for sale via their own retail
operation, which may be a large national business, or a
small company servicing the local community. Most of
Eurocell’s customers are trade frame fabricators, although
new build is becoming increasingly important.
Fabricators have production facilities which are customised to
the window or door system they make. As a result, fabricators
predominately buy profiles from a single supplier, which in turn
creates a stable and loyal customer base.
Foam PVC products are used for roofline and are
supplied to customers through our nationwide branch
network in the Building Plastics division (see opposite).
As such, all of our manufacturing margin is recorded within
the Profiles division, which therefore also benefits from
expansion of the branch network.
The Profiles division also includes S&S Plastics and Vista;
businesses acquired in 2015 and 2016 respectively. S&S
supplies plastic injection moulding products and services
for use in windows and certain other markets. Vista
manufactures composite and PVC entrance doors, which
are sold to third parties either direct or via the Building
Plastics division.
OUR ROUTE TO MARKET
Our sales and distribution strategy is implemented through
our cross functional sales and business development teams,
which target the key decision makers in the supply chain. The
key decision makers include fabricators, installers,
developers, architects and local authorities. By influencing
the influencers we earn the loyalty of our customers by
helping them grow their businesses.
Third-party suppliers
35,000 tonnes3 of virgin compound consumed1
plus 6,000 tonnes3 of other raw materials2
MANUFACTURING
Eurocell Profiles
44k tonnes3
of profile produced
RECYCLING
Merritt Plastics
8.3k tonnes3
of recycled compound consumed
(17% of profile raw material consumed)
DISTRIBUTION
Eurocell Building Plastics
14k tonnes3
of foam profile
2 EUROCELL PLC
Annual Report and Accounts 2017
Third-party suppliers – e.g. Rainwater · Sealants · Tools
Average number of employees in 2017
1,496
190 Branches
BUILDING PLASTICS DIVISION
The Building Plastics division distributes a range of
Eurocell manufactured and branded foam PVC roofline
products and Vista doors, as well as third-party
manufactured ancillary products. These include
sealants, tools and rainwater products, as well as
windows fabricated by third parties using products
manufactured by the Profiles division.
Distribution is through our national network of 190
branches to installers, small and independent builders,
house builders and nationwide maintenance
companies. The branches also sell roofline products to
independent wholesalers.
The Building Plastics division also includes Security
Hardware, acquired in February 2017. Security
Hardware is a supplier of locks and hardware, primarily
to the Repair, Maintenance and Improvements
(‘RMI’) market.
Owner managed
businesses and
contractors
Profile customers
350+
fabricators
30k tonnes3 of rigid profile
See our Market Overview
on page 6
(1) Virgin Resin: stabiliser, titanium dioxide, impact modifier, filler.
(2) Other raw materials: e.g. skin and rubber flex.
(3) Tonnages shown are approximate based on 2017 volumes.
(4) Repairs, Maintenance and Improvements.
Where we operate
Eurocell locations
Head office, Alfreton
New locations for 2017
Revenue total £224.9m
EBITDA total £31.7m
Profiles
Building Plastics
£94.2m
£130.7m
Profiles
Building Plastics
£23.1m
£8.6m
RMI4
Proportion of revenue
in RMI market
> 80%
NEW BUILD
Proportion of revenue
in new build
housing market
> 10%
PUBLIC SECTOR
Proportion of revenue
in public new build
housing market
< 5%
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Investment Case
STRaTEgIC REPORT
Chairman’s Statement
Against a more challenging economic
backdrop, we have reported robust
financial results and delivered another
consistent operational performance.
I am pleased to report we have made
good progress with our strategic
priorities in 2017 and that the business
continues to outperform its markets.”
Bob Lawson
Chairman
CLEAR STRATEGY:
Five clear strategic priorities
Target growth in market share
Expand our branch network
Increase the use of recycled materials
Develop innovative new products
Explore potential bolt-on acquisitions
We made good progress with all our strategic
priorities during 2017.
See Our Strategy on page 20
VERTICALLY INTEGRATED
BUSINESS MODEL:
Recycling, manufacturing and own
distribution network
We are a leading manufacturer of rigid and foam
PVC profiles. Our recycling operation helps to
lower material costs and improve production
stability. Our branches are conveniently located,
offering a wide range of products and providing
excellent service to local customers and
nationwide groups alike.
See Our Business Model on page 12
SUSTAINABLE OPERATION:
In-house, closed loop
recycling facility
We recycle both customer factory offcuts
(‘post-industrial’ waste) and old windows (‘post-
consumer’ waste). The recycled material is used
to generate brand new extruded plastic products.
See Corporate Social Responsibility on page 30
LEADERSHIP:
Strong and experienced team
We have an effective Board and strong senior
management team with the requisite and
complementary skills, knowledge and experience
to secure the future success of the business.
See Board of Directors on page 40
4 EUROCELL PLC
Annual Report and Accounts 2017
Adjusted EPS
EPS
Total Dividends
(per share)
20.4p
2% (2016: 20.0p)
19.6p
(2016: 19.6p)
9.0p 6% (2016: 8.5p)
Looking forward, we will continue to develop each of these
areas. We expect the significant investments now made in
our specifications teams and in expanding the branch
network will deliver further gains in market share. In addition,
in response to continued raw material cost inflation, we
intend to place more emphasis on increasing the use of
recycled materials in our manufacturing processes.
Governance
As a Board, we are committed to promoting the highest
standards of corporate governance and ensuring effective
communication with Shareholders. We continue to comply
with the UK Corporate Governance Code as outlined in
our Corporate Governance Statement on pages 43 to 45.
Dividends
We paid an interim dividend of 3.0 pence per share.
The Board proposes a final dividend of 6.0 pence
per share, resulting in total dividends for the year of
9.0 pence, representing growth of 6%.
People
The good progress and robust financial results we reported
in 2017 are a direct result of the hard work and dedication of
our teams in every part of our business. On your behalf
and on behalf of the Board, I offer our sincere thanks.
Bob Lawson
Chairman
8 March 2018
Financial and Operating Performance
Our sales growth was good at +10% (+8% excluding
acquisitions), with market share gains across the business.
Profitability was solid, having been impacted by a subdued
RMI market, especially in the second half, and higher raw
material cost inflation.
As a result, we reported adjusted profit before tax of
£24.5 million, up 1% on last year. Reported profit before
tax of £23.7 million is down 0.7% on last year.
Cash conversion remains solid, with underlying operating
cash flow of £28.8 million (2016: £32.2 million) driving a
reduction in net debt to £14.5 million (31 December 2016:
£20.3 million). We have a strong balance sheet which
provides flexibility and options for the future.
In February 2017, we completed the acquisition of Security
Hardware Limited, a supplier of locks and hardware primarily
to the RMI market, with annual sales of approximately
£3 million. The integration is now substantially complete.
Strategy
In January 2018, building on the work done in 2017, we
conducted a review of the Company’s strategy and the
fundamental elements of our markets and activities. At the
conclusion of this process, we reaffirmed that our overall
objective remains to deliver sustainable growth in
Shareholder value by increasing sales and profits at above
our market level growth rates.
We have five clear strategic priorities to help us achieve our
overall objective:
• Target growth in market share.
• Expand our branch network.
•
• Develop innovative new products.
• Explore potential bolt-on acquisitions.
Increase the use of recycled materials.
We made good progress with each of these priorities
during 2017, with the key aspects of our performance
described in the Chief Executive’s Review and in Our
Strategy.
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STRaTEgIC REPORT
Market Overview
The level of UK economic activity, in particular the state of the repair,
maintenance and improvement (‘RMI’) and new build housing markets,
are important drivers of our performance.
Eurocell Revenue by Market (%)
Further commentary on these markets is set out
opposite. Whilst private home improvement and,
increasingly, new build housing are the most
important market segments for Eurocell, social
housing improvement and public new build are
also covered.
Markets For Eurocell Products
On average, markets for the product groups
specific to Eurocell are also currently expected
to be broadly flat over the next two years.
Roofline (Tonnes 000s)
2019
2018
2017
2016
2015
Window Profile (Tonnes 000s)
2019
2018
2017
2016
2015
Source: D&G Consulting September 2017
77.3
75.3
73.8
72.4
74.6
247
245
243
241
229
RMI
New Build
Public Sector (RMI & New Build)
> 80%
> 10%
< 5%
External Market Drivers
Potential Impact
on Eurocell
Driver
GDP
Description
UK GDP has slowed and is currently forecast to grow by 1.5% in 2018 (2017: 1.8%).
Consumer confidence
Negative sentiment, with a backdrop of rising inflation and economic uncertainty.
Interest rates
Construction
First increase to UK interest rates in 10 years in November 2017, with further
increases expected in 2018.
Housing construction activity remains below pre-recession peak, but is forecast to rise
by 3% in 2018 and 2% in 2019.
Private housing starts are forecast to increase by 2% in 2018 and 2% in 2019.
Housing market
Private housing RMI(1) market CAGR(2) forecast 2016-2019 is broadly flat.
(1) RMI is Repair, Maintenance and Improvement market.
(2) CAGR is Compound Annual Growth Rate.
Sources: CPA: Construction Industry Forecasts 2016-19 (published Autumn 2017)
Oxford Economic Data (via FactSet) (published in February 2018)
Key to potential impact on demand
for Eurocell products:
Positive
Neutral
Negative
6 EUROCELL PLC
Annual Report and Accounts 2017
Despite a subdued RMI market and the prevailing economic
uncertainty, we are confident that our strategic initiatives (described
in Our Strategy on pages 20 and 21), including increasing market
share, continued expansion of the branch network and further
expanding our use of recycled material, will deliver above our
market level growth rates for Eurocell.
Private New Build Housing
New build growth has been strong in recent
years and the large house builders continue to
report good performance.
Macro-economic environment – uncertainty
suggests affordability will likely remain a key
issue.
Help to Buy scheme – continues to support
demand.
Housing shortage – on-going positive
government intervention remains a possibility.
Social Housing Improvement
Decent Homes Programme and the Energy
Company Obligation (‘ECO’) scheme both
ended in 2017 – under these schemes the
support typically came in the form of heating
packages, insulation and energy efficient
windows.
Eurocell Markets and Drivers
Private Home Improvement (‘RMI’)
The RMI market is subdued, reflecting
(inter alia): political uncertainty, the unknown
impact of Brexit, the potential for further
increases in interest rates and the relatively
weak growth in real wages.
Demand is influenced by the state of the
economy – as spend is often significant,
the state of the economy and the resulting
impact on the housing market and consumer
confidence influence demand.
Housing market – if the housing market is
weak, home owners may choose to improve
or extend their existing property rather than
move house, which can be positive for Eurocell.
Retirement housing – planned improvements
to retirement housing and increased availability
of funds following changes to pension scheme
rules may provide support to the RMI market
in the future.
Public New Build Housing
This sector represents a very small proportion of
the UK housing market, as government policies
are targeted towards increasing private sector
affordable housing rather than public sector
social housing.
Right to Buy scheme – enables council and
housing association tenants to buy their
homes at a discount, therefore a reduction in
public sector housing stock is expected as
result of the scheme.
Rent caps – may reduce the financing
available for new development.
Rental property development – housing
associations have relied on market sales to
raise capital, weaker house price growth and
few transactions will likely hamper this.
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STRaTEgIC REPORT
Chief Executive’s Review
Market Context
I am pleased to report a strong performance for the Group.
The Repair, Maintenance and Improvement (‘RMI') market
has been subdued during 2017, particularly during the
second half, reflecting low consumer confidence. We have
experienced an almost perfect storm of macro factors,
including increasing political and economic risk, the first
interest rate rise in ten years, worsening house price data,
low real wage growth and a weak pound driving material
cost inflation.
Against this more challenging backdrop, we have made
excellent progress with our strategic priorities, continued to
invest significantly in the growth of our business and made
further gains in market share.
Operational Performance
Health and safety
The safety and well-being of our employees and
contractors is our first operational priority. We continue
to maintain good health and safety performance.
We recorded one major injury in 2017 (cut to an employee’s
hand) under the Reporting of Injuries, Diseases and
Dangerous Occurrences Regulations 2013 (‘RIDDOR’).
We noted in our 2017 Half-Year Report that the Health and
Safety Executive (‘HSE’) intended to take action against the
Company, following a minor accident to an employee in
August 2016. The matter has now been concluded,
resulting in a fine of £68,000 under the Health and Safety
at Work Act.
Financial Performance
We have reported robust financial results for 2017 and
delivered higher revenues and profits.
Overall, sales growth was good at 8% (excluding
acquisitions). Growth was driven by our specifications
teams, which have continued to be successful in
generating demand for our products with architects and
planning authorities in the private new build sector, and by
the continued expansion of our branch network.
Further details of our safety performance are included in
Corporate and Social Responsibility.
Production
We delivered another consistent production performance
in 2017. We manufactured approximately 44.4k tonnes of
rigid and foam PVC profiles at our primary extrusion
facilities, up from 40.9k tonnes in 2016, an increase of 9%.
Profitability was solid, having been impacted by
the weaker second-half markets and increasing
cost inflation we have seen for resin, other
raw materials and traded goods. We are
implementing selling price increases to
mitigate pricing pressure where possible,
but the market does lag supplier price
increases, so there is a delay in capturing
the benefit. We continue to manage our
underlying operating costs tightly, whilst
progressing further our strategic priorities
and investing in business expansion.
As a result, adjusted profit before tax was
£24.5 million (2016: £24.3 million) and
reported profit before tax was £23.7 million
(2016: £23.8 million). Further information
on financial performance is provided in
the Divisional and Group Financial Reviews.
We believe that our proven
strategy and capabilities
will enable Eurocell to deliver
value to our customers
and Shareholders.”
Mark Kelly
Chief Executive Officer
8 EUROCELL PLC
Annual Report and Accounts 2017
Scrap Levels(1)
15
10
5
0
2013
2014
2015
2016
2017
(1) Scrap = 100% – (good product produced/consumption)
Overall Equipment Effectiveness (‘OEE’)(2)
71%
76%
67%
82%
77%
100
80
60
40
20
0
2013
2014
2015
2016
2017
(2) OEE is a measure which takes into account machine availability, performance
and yield
Planned initiatives aimed at mitigating raw material cost
inflation lead to increased scrap and lower OEE levels.
These include increased trials of alternative materials,
including resin from potential new suppliers and other
materials used in the extrusion process (e.g. compound
stabilisers), as well as tests of new technologies
(e.g. tooling) to support increasing the use of recycled
material in the extrusion process.
Recycling
In 2017 we used 8.3k tonnes of recycled compound
alongside virgin resin in the manufacture of many of our
rigid PVC products in our primary extrusion processes.
This represents 17% of material consumption, up from
14% in 2016, an increase of approximately 2k tonnes.
Recycled Material Usage as a % of Consumption
17%
14%
9%
6%
4%
20
15
10
5
0
2013
2014
2015
2016
2017
Our efforts to secure increased supplies of in-feed stock for
the recycling plant are proving successful, with collections
up 15% in 2017. Initiatives include back-hauling material from
our fabricator, installer and branch networks.
Information on our recent investments in recycling and
objective to increase further the use of recycled materials is
described in Strategic Priorities below.
Warehouse logistics
We reported last year that, following a period of outsourcing,
the operation of our main warehouse facility was brought
back in-house with effect from February 2017.
We have worked to understand how the arrangements
could be better structured to deliver a more efficient
operation and improved customer service levels. We have
made good progress, with on-time in-full deliveries
increasing to 96%, compared to 91% in 2016. Initiatives
include shorter production run times and revised warehouse
shift patterns, with picking and relationship teams assigned
to specific key accounts.
Whilst we have incurred some incremental cost as a result
of these changes, we believe that the primary benefit of
improved customer service has been a critical factor in
maintaining the loyalty of our existing customer base and
in supporting the winning of new accounts.
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STRaTEgIC REPORT
Chief Executive’s Review continued
Strategic Priorities
As described in Our Strategy on page 20, our overall objective
is to deliver sustainable growth in Shareholder value by
increasing sales and profits at above our market level
growth rates.
We have five clear strategic priorities to help us achieve our
overall objective. We are making good progress with all of
our strategic priorities, with the key aspects detailed below.
Target growth in market share
Our aim is to increase our share of the PVC profiles market
to utilise the spare manufacturing capacity in our extrusion
facilities. The effect of this is such that, whilst new volume
could be dilutive to gross margin in the short term, the net
margin on these sales should be attractive.
In order to deliver the incremental volume, we have been
targeting the new build, commercial and public sectors,
as well as a number of larger trade fabricators. In doing so,
we emphasise why Eurocell is different: we have a strong single
brand, good customer service and a leading recycling
capability, all of which are attractive to customers. In addition,
expanding the branch network pulls through demand for our
manufactured products, thereby exploiting the spare capacity.
After a slow start in the first half of 2017, we have made
good progress winning accounts since the summer. Sales
have started to come through from customers who have
recently moved onto our product systems, with more new
accounts contracted for 2018.
Expand our branch network
Expanding the branch network secures sales growth and
delivers good returns in the medium term, as new branches
begin to mature. It also provides an increasing opportunity
for sales of windows and other high-value products through
the branch network, and (as noted above) pulls through
demand for our manufactured products.
I am very pleased to report that we opened 31 branches in
2017, which is a record number of new sites introduced by
Eurocell in a 12-month period (2016: 18 new branches).
This represents a significant investment in the expansion
of our business, taking the total estate to 190 branches at
the year end. We also launched a new and improved
branch format with more products on display, and added
new product lines to the range, to help meet our objective
of becoming a one-stop shop for customers.
The cost of investing in new branches does create
downward pressure on profitability in the near term as the
new sites work towards a break-even position. Historically
it has taken more than two years for a new branch to reach
a break-even run-rate. We have been running trials to
reduce start-up costs and shorten the time to break-even
for the branches opened in 2017, with initiatives based on
more focused direct marketing campaigns and sharing
resources with established sites in the same region. The
trials have gone well and there have been some key
learnings. There is more work to do in this area, particularly
with respect to the branches opened in 2016, but we are
confident that, in future, new branches should reach a
break-even run-rate before their two-year anniversary.
Our intention remains to develop an estate of approximately
250 branches in the medium term. Subject to the success of
the current programme, consideration of the sites available,
potential branch maturity and sales saturation rates, we
continue to believe that an estate of around 350 sites is a
realistic long-term aspiration for Eurocell.
However, in order to allow the team to consolidate the
existing estate, complete the work on reducing break-even
times and maximise the sales of high value items through
the whole branch network, we have revised down our short
term target for new sites and plan to open up to 15
branches in 2018.
Increase the use of recycled materials
The work to increase the use of recycled materials in our
primary extrusion manufacturing processes is becoming
even more important in the face of continued raw material
cost inflation, particularly for PVC resin.
Average resin prices increased by 13% in 2017 and by
approximately £150 per tonne over the last two years,
driven by a combination of currency movements (largely
weak Sterling) and underlying commodity price changes
(rising oil and ethylene). This has resulted in a widening gap
between the cost of virgin PVC compound and our
recycled compound, making the case for further
investment in recycling more compelling.
During the course of 2016 and 2017 we invested
approximately £1.8 million in a project to increase our
recycling capacity, which has boosted usage in primary
extrusion from 9% (4.1k tonnes) of material consumption
in 2015 to 17% (8.3k tonnes) in 2017.
Looking forward, we intend to invest to expand again
our recycling capacity. As a result, we expect usage in
primary extrusion to increase to around 20% in 2018
(approximately 10k tonnes), driving a substantial saving
compared to the cost of using virgin material.
Beyond that we will continue to evaluate opportunities to
increase further our recycling capacity in the years ahead.
10 EUROCELL PLC
Annual Report and Accounts 2017
Develop innovative new products
We are committed to maintaining market
leadership by offering the very latest in product
improvement, both through development of
existing products and the introduction of new
ones. Some of the products launched during
2017 include:
•
InSite window solution
A window solution which includes a special
hinge for off-site construction applications,
which allows timber frame and modular
home manufacturers to install fully glazed
windows into wall panels in the factory
production process.
• StudioGlide bi-fold door
A new alluminium bi-fold door with improved
opening and closing mechanism which
complements our existing product designs
and is now in production with several of our
trade frame fabricators.
• SlateSkin
A new sheet tile roof system designed to save
installation time when fitted in conjunction
with our Equinox products.
• Modus and Skypod continued improvement
Range extension for these excellent products.
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Explore potential bolt-on acquisitions
In February 2017, we completed the acquisition of
Security Hardware, a supplier of locks and hardware
primarily to the RMI market. Annual sales at acquisition
were approximately £3 million.
The integration of Security Hardware is now substantially
complete. The extensive product range (over 3,000 stock
keeping units (‘SKUs'), covering the major hardware brands
and an own label offering, Schlosser Technik) is now
available through our branch network, supporting our
objective to be a one-stop shop for anything window related
for our customers. This also allows us to better engage with
facilities management companies and other large
maintenance contractors.
We are developing a range of hardware to complement our
window profile. This will enable our fabricator customers to
offer a fully certified common specification of window
(including hardware), giving Eurocell the opportunity to
target a greater share of the new build market and grow
sales of windows through branches. We expect the
hardware range to be available later in 2018.
We will continue to assess and consider bolt-on acquisition
opportunities in the markets in which we operate. Our
focus is principally on businesses that add value through
range extension, operational efficiencies or added value
products, or to satisfy a make-or-buy decision.
Outlook
We have made excellent progress with our strategic
priorities in 2017, continued to invest significantly in the
growth of our business and made further gains in
market share.
Profit was impacted by raw material cost inflation and a
subdued RMI market, especially in the second half.
However, the benefits of our differentiated business model
are becoming increasingly evident. I expect the significant
investments we are making in the Group to deliver further
gains in market share and allow Eurocell to take more
control of material costs in the future.
Looking ahead, our focus for 2018 will be on optimising our
existing branch network and expanding further our
recycling capability. Whilst our markets remain challenging
and raw material price inflation continues, we are in a
strong financial position and sales in the first two months
are in line with our expectations.
In summary, we believe that our proven strategy and
capabilities will enable Eurocell to deliver value to our
customers and Shareholders throughout 2018 and beyond.
Mark Kelly
Chief Executive Officer
8 March 2018
STRaTEgIC REPORT
Our Business Model
WHAT WE DO
HOW WE CREATE VALUE
WE MANUFACTURE
We are a leading manufacturer of rigid and foam PVC profiles,
composite and PVC entrance doors for the window and building home
improvement sectors. Our manufacturing process uses raw materials
including PVC resin and our own produced recycled material.
44.4k tonnes
produced in 2017
See Business Model in Action
on page 14
WE DISTRIBUTE
The Profiles division supplies our manufactured profile to a network
of fabricators, who in turn supply end products to installers, retail
outlets and house builders.
The Building Plastics division sells, through its network of branches,
our manufactured foam products and entrance doors, along with a
range of third-party related products, as well as windows fabricated
by third parties using products manufactured by the Profiles
division. Customers are mainly installers, small builders, roofing
contractors and independent stockists.
> 350,000 products
delivered in 2017
See Business Model in Action
on page 16
WE RECYCLE
We recycle both customer factory offcuts (‘post-industrial’ waste)
and old windows that have been replaced with new (‘post-consumer’
waste). The recycled material is used to generate
brand new extruded plastic products.
> 1 million old windows
recycled in 2017
See Business Model in Action
on page 18
Vertically integrated model
The coordination of our procurement, manufacturing
and distribution processes enables us to capture margin
throughout all stages of our value chain.
Our recycling activities help lower material costs and improve
production stability.
Scale
We operate well-invested and modern extrusion facilities, with
spare manufacturing capacity that can be exploited with little
incremental cost.
We are the UK’s largest window recycling operator.
Our extensive branch network is a driver of sales growth and
market share. It also helps improve manufacturing efficiency,
with pull-through demand driving higher factory utilisation.
Innovative products
We are committed to a strategy of continually developing new
and existing products.
We support the use of Building Information Modelling (‘BIM’)
software, giving architects and contractors access to a library
of Eurocell products, making it easier to specify them.
Brand
We have a strong brand image and our marketing activities
seek to maximise our brand awareness.
People and culture
Our experienced management team have a proven track
record of achieving profitable growth.
Our corporate culture is one of openness, trust, encouragement
and clarity of purpose. We train and empower our people to
help our customers grow their businesses.
Local footprint
Our branches are conveniently located and have readily
available inventory, thereby providing excellent service to local
customers and national groups alike.
We also strive to help our customers through the provision of
technical, business development and marketing support services.
See our Chief Executive’s Review
on page 8
12 EUROCELL PLC
Annual Report and Accounts 2017
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OUTPUTS
KEY BENEFICIARIES
SHAREHOLDERS
Our overall strategic objective is to deliver sustainable
growth in Shareholder value.
FABRICATORS
Through high-quality products and a strong focus on
customer service, we have developed a very loyal
customer base.
SMALL BUILDERS AND INSTALLERS
The independent sole traders that visit our branches
benefit from the one-stop shop offering we provide.
HOME BUILDERS
Home builders appreciate the quality of our products
and benefit from Eurocell coordinating our fabricators’
offering to meet their requirements.
INSTALLERS
We aim to make our products as easy as possible
to work with, which is very attractive to our direct or
indirect installer base.
EMPLOYEES
We work hard to train and develop our people, and
provide rewards commensurate with our goal to be an
employer of choice.
See Corporate Social Responsibility
on page 30
Sales growth
Our initiatives to support sales and deliver high levels
of customer service differentiate Eurocell from our
competitors. We expect this to drive good sales growth.
8% sales growth (excluding
acquisitions)
Solid profitability
Utilisation of our spare manufacturing capacity can
drive profit growth.
Expanding the branch network, whilst dilutive until new
branches become established, should deliver strong
medium-term returns.
Increased use of recycled materials can help mitigate
raw material pricing pressure.
£23.7 million profit before tax
Good cash generation
Our operating cash flow conversion is good, particularly
in the Building Plastics division, where a high proportion
of customers pay at point of sale or shortly thereafter.
£23.7 million net cash
generated from operating activities
Good return on sales
Our strong brand, well-invested facilities and capital-
light branch expansion programme ensure a good
return on sales.
14% return on sales(1)
(1) Return on sales is Adjusted EBITDA/revenue.
See Group Financial Review
on page 26
STRaTEgIC REPORT
BUSINESS mODEL IN aCTION
Manufacturer
Optimise the
manufacturing
process
We manufacture both rigid and foam PVC profiles at our purpose-built extrusion
facilities in Alfreton, which comprise three separate manufacturing sites with a
combined footprint of 140,000 square feet.
Today we operate with 49 active extrusion machines. Recent production volumes
have averaged over 40k tonnes per annum and we believe that production of at least
50k tonnes per annum can be achieved with limited additional capital investment or
incremental labour costs.
Across our various sites around the Group we are working to standardise processes
and share best practice wherever possible. This, together with judicious capital
investment, on-going work on lean manufacturing techniques and continuous
improvement driven by our Kaizen team, supports the delivery of on-going
manufacturing efficiencies.
By increasing market share of PVC rigid and foam profiles we can utilise the spare
manufacturing capacity and drive profit growth. The expansion of our branch network
remains an ideal platform to promote our manufactured products as well as creating
pull through demand for both rigid and foam products.
14 EUROCELL PLC
Annual Report and Accounts 2017
MIXING PLANT
MANUFACTURING
PVC resin
Other raw material
(e.g. stabiliser,
titanium dioxide)
Recycled post-consumer
pellets (see Recycler)
Foam and rigid
compound
Raw material – skin
White rigid profile
finished goods
Post industrial
waste (see Recycler)
White foam profile
finished goods
SECONDARY
OPERATIONS
Manufacture –
conservatory roof,
patio doors
Woodgrain – rigid
and foam profile
Eurocell Profiles
stock
Building Plastics
stock
The chart above illustrates our principal manufacturing process.
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STRaTEgIC REPORT
BUSINESS mODEL IN aCTION
Distributor
Leverage our nationwide
distribution
network
Eurocell Profiles supplies manufactured profile direct to fabricators, who in turn
supply end products to installers, retail outlets and house builders.
Eurocell Building Plastics sells through its nationwide network of 190 branches.
Each branch offers a wide range of Eurocell manufactured foam PVC products,
Vista doors and windows which have been fabricated by third parties using products
made by the Profiles division. The branches also sell a wide range of third-party
products, such as sealants, tools and rainwater products. The main customers
are installers, small builders, roofing contractors and independent stockists.
Overall, our aim is to provide a one-stop shop for builders and installers which,
together with excellent customer service will drive increased customer spend and
expand our market share.
16 EUROCELL PLC
Annual Report and Accounts 2017
Manufactured products
(profile, conservatory roofs
and patio doors)
Third-party traded goods
(e.g. sealants, rainwater,
aluminium, steel)
Central warehouse
Building Plastics
Branch network
(190 locations)
Trade
Fabricators
Repairs, Maintenance
and Improvements
(‘RMI')
New Build
Public Sector
(RMI & New Build)
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STRaTEgIC REPORT
BUSINESS mODEL IN aCTION
Recycler
Increase the use of
recycled
materials
We recycle both old windows (‘post-consumer’ waste) and customer factory offcuts
(‘post-industrial’ waste) at our 75k square foot recycling and extrusion facility in Ilkeston.
Post-consumer and post-industrial waste is collected from a variety of our customers
and other providers. In general, around two-thirds of the input feedstock for recycling
is post-consumer and one-third is post-industrial waste.
The Ilkeston plant produces recycled PVC compound in pellet form from this waste,
for use in our other manufacturing processes. This provides a substantial saving in
cost compared to virgin resin compound and therefore helps to mitigate raw material
price increases. Using recycled material also enhances product stability and lowers
the carbon footprint of our manufactured goods.
When we develop new products, we look to include as much recycled content as
possible. For example, most Modus and Eurologik systems comprise on average
45% recycled materials. In addition, the continued expansion in the use of recycled
material remains attractive to the new build market.
The chart opposite illustrates our recycling process.
18 EUROCELL PLC
Annual Report and Accounts 2017
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Collection of old
windows (‘post-
consumer’ waste)
New windows and
doors are installed
Recycling process
PVC products are
fabricated into new
windows and doors
Used in the
manufacture of
new PVC products
External collection
of factory offcuts
(‘post-industrial’ waste)
Collection of
factory offcuts
(‘post-industrial’ waste)
Shred
Metal separation
Granulate
Colour sort
Wash
Micronise or
Pelletise
In 2017 we produced approximately 13.2k tonnes of
recycled PVC compound for use in our extrusion
processes. Of the recycled compound produced,
8.3k tonnes (being almost exclusively derived from
post-consumer waste) was used alongside virgin resin
in the manufacture of many of our rigid PVC products in
our primary extrusion processes. This represents 17%
of material consumption, up from 14% in 2016.
Most of the remaining 4.9k tonnes of recycled PVC
compound produced (being almost exclusively derived
from post-industrial waste) was used in products which
are manufactured at the Ilkeston plant from 100%
recycled material, including thermal inserts and cavity
closer systems.
As described in the Chief Executive’s Review, we plan to
invest to increase further our recycling production capability.
These investments are comprised of new equipment at the
Ilkeston recycling plant to remove bottlenecks and increase
efficiencies, as well as tooling and other extrusion equipment
required to make the rigid profile. As a result, we expect
recycled material usage to increase to around 20% in 2018.
STRaTEgIC REPORT
Our Strategy
Our overall objective is to deliver sustainable growth in Shareholder value by
increasing sales and profits at above our market level growth rates through
leadership in products, operations, sales, marketing and distribution.
STRATEGIC PRIORITIES
PROGRESS IN 2017
TARGET GROWTH IN MARKET SHARE
Increase market share of PVC rigid and foam
profiles to utilise spare manufacturing capacity.
• Organic sales growth of 8%.
• Specifications team successful in generating demand for
our products, particularly in the private new build sector.
• Sales now started from customers moved on to our systems in H2,
with more new accounts contracted for 2018.
EXPAND OUR BRANCH NETWORK
Investment in new branches to drive sales
and medium-term profit growth.
• 31 new branches opened.
• New and improved branch format, with more products on display.
• Significant investment in supporting infrastructure and management teams.
• Growth in sales of windows through branches.
DEVELOP INNOVATIVE
NEW PRODUCTS
Maintain market leadership by offering
the latest in product innovation.
• StudioGlide bi-fold door, aluminium bi-fold door.
• InSite construction hinge.
• Slateskin.
• Modus and Skypod continuous development.
INCREASE THE USE OF
RECYCLED PRODUCTS
Increased use of recycled material will help to
mitigate raw material pricing pressure, enhance
product stability and reduces the carbon footprint
of our manufactured goods.
• Increased use of recycled material to 17% (2016: 14%).
• Waste collections increased by 15%.
EXPLORE POTENTIAL
BOLT-ON ACQUISITIONS
Consider acquisition opportunities
when they arise.
• Integration of Security Hardware now substantially complete
(acquired in February 2017).
• Several bolt-on opportunities reviewed and developing pipeline.
20 EUROCELL PLC
Annual Report and Accounts 2017
PROGRESS IN 2017
We intend to leverage the Eurocell brand, and the advantages that our vertically
integrated business model with local distribution offers over our competitors,
in order to grow our market share. We have five key strategic priorities:
14% Profiles
20% Building Plastics
estimated market shares
£7.0m
growth in revenue from new
branches opened in 2016/17
13
new product ranges launched
20.5k
tonnes processed in the
recycling plant
FOCUS IN 2018
• Continue to build and exploit prospect pipeline.
• Seamless new account on-boarding process.
• Expect approximately 15 new branches in 2018.
• Consolidate existing estate:
– Implement measures to reduce time to break-even
for new branches.
– Maximise sales of value added products.
• Further development of complementary
product offerings.
• Further investment to deliver step change in
use of recycled material to > 20%.
2,000
Security Hardware product codes introduced
into the Building Plastics branch network
• Continue to develop acquisition pipeline and consider
acquisition opportunities that arise.
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STRaTEgIC REPORT
Divisional Reviews
Profiles
The Profiles division manufactures extruded rigid and foam PVC profiles.
We make rigid and foam products using virgin PVC compound, the largest
component of which is resin. Our rigid products also include recycled PVC
compound, produced at our market-leading recycling facility.
Rigid PVC profiles are sold to third-party fabricators, who produce windows, trims, cavity closer systems, patio doors
and conservatories for installers, retail outlets and house builders. Foam products are used for roofline and are supplied
to customers through our nationwide branch network in the Building Plastics division.
As such, all of our manufacturing margin is recorded within the Profiles division, which therefore also benefits from
expansion of the branch network.
The Profiles division also includes Vista Panels and S&S Plastics.
Revenue
Profiles third-party revenue was up 8% in 2017 to
£94.2 million (2016: £87.4 million), which includes an
like-for-like sales increase of 6%. The remaining growth was
driven by the acquisition of Vista Panels in March 2016.
We have continued to gain share, despite the RMI market (the
most significant external driver of our performance) remaining
subdued in 2017, particularly during the second half.
We have been pleased to see continued good growth in the
private new build sector, where sales were up more than
15% in 2017. We believe we are now the largest supplier of
window profile to this market. Our dedicated specifications
teams have been successful in generating demand, well
supported by our ability to supply a comprehensive product
range through the new build fabricator network. As well as
windows, this includes composite doors, PVC and
aluminium bi-fold doors and the only sixty-minute fire rated
cavity closure system. Further, our InSite construction hinge
allows timber frame and modular home manufacturers to
install fully glazed windows into wall panels in the factory for
off-site construction.
Our new build forums have been successful, bringing
fabricators together with Eurocell and the house builders.
The objective is to agree consistent specifications, quality
and prices across the fabricator network. This allows new
build buyers to source consistent products from a wide
supplier base, mitigating their delivery risk.
Our larger trade fabricators also performed well in 2017,
taking a greater share of the available volume mix, albeit
with lower growth rates in the second half. Generally, the
larger trade fabricators have been increasing their capacity,
by extending or adding factory units and investing in new
plant and machinery. As such, they are benefiting from
economies of scale and automation, which is allowing
them to grow share at the expense of smaller fabricators.
Importantly, we also continue to build our prospect pipeline.
In the fourth quarter, sales started to come through from
customers who have recently moved on to our product
systems, with more new accounts contracted for 2018.
Finally, Vista Panels continues to perform very well,
with 39% of doors sales now channelled through our
branch network.
Adjusted EBITDA
Adjusted EBITDA was £23.1 million (2016: £22.7 million),
an increase of 2%.
Gross margin and return on sales in the Profiles division
are lower in 2017, largely as a result of increasing raw
material price pressure, particularly for resin. We have
been implementing selling price increases to mitigate this
where possible, but the market does lag supplier price
rises. Further information in relation to the impact of
increasing raw material prices is included in the Group
Financial Review.
22 EUROCELL PLC
Annual Report and Accounts 2017
Profiles
Third-party Revenue
Like-for-like / Organic
Vista Panels(1)
Inter-segmental Revenue
Total Revenue
Adjusted EBITDA
(1) Acquired March 2016
2017
£m
94.2
84.5
9.7
45.4
139.6
23.1
2016
£m
87.4
80.0
7.4
39.8
127.2
22.7
Change
%
8%
6%
31%
14%
10%
2%
In addition, margins have been impacted by a shift in sales
mix towards larger fabricators at the expense of smaller
customers as described above.
The increase in adjusted EBITDA is therefore primarily a
function of sales growth.
Ian Kemp
Profiles Sales Director
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STRaTEgIC REPORT
Divisional Reviews continued
Building Plastics
Building Plastics distributes a range of Eurocell manufactured and branded PVC
foam roofline products and Vista doors, as well as third-party manufactured
ancillary products. These include windows made by our fabricator customers
using products manufactured by Profiles, sealants, tools and rainwater products.
Distribution is through our national network of 190 branches to installers, small and independent builders, house builders and
nationwide maintenance companies. The branches also sell roofline products to independent wholesalers.
The Building Plastics division includes Security Hardware, acquired in February 2017. Security Hardware is a supplier of
locks and hardware, primarily to the RMI market.
Revenue
Building Plastics revenue was up 11% to £130.7m
(2016: £117.5m), which includes an increase in like-for-like
sales of 3%, as well as the impact of branch openings
and the acquisition of Security Hardware.
Like-for-like sales includes growth from branches opened
in 2015 and prior, as the more recent sites from that vintage
begin to mature. Growth was bolstered by increased sales of
windows, Skypod and Equinox through the branch network,
which were £15.6 million in 2017, compared to £13.3 million
last year. We have implemented window configuration
software across the network, using common pricing and
specifications for windows supplied to all Eurocell branches.
This is proving successful and we will develop the software
to incorporate products such as Skypod and doors.
Like-for-like growth also includes some benefit from an
initiative to improve our proposition as a one-stop shop for
customers, via the roll-out of an additional 500 product lines
in 2016. In addition, the acquisition of Vista Panels has
supported growth in the sales of doors through the branches,
which reached £6.6 million in 2017 (2016: £5.5 million).
In terms of new branches, we opened 31 in 2017, compared
to 18 in 2016. We now have a total of 190 branches
providing national coverage across the UK, which offers
a significant competitive advantage. Branches opened in
2016/17 added £7.0 million to sales in 2017.
Security Hardware was acquired in February 2017 for
consideration (net of cash acquired) of £1.3 million. Sales for
the period of £2.5 million were in line with our expectations.
As described in the Chief Executive’s Review, the integration
is now substantially complete and we look forward to the
introduction of our own range of hardware later in 2018.
Adjusted EBITDA
Adjusted EBITDA for 2017 was £8.6 million
(2016: £8.8 million), a decrease of 3%.
We maintained our gross margin in 2017. Although we
continue to experience cost inflation, a good proportion of
this has been mitigated with selling price increases
implemented through the year.
Higher overheads in Building Plastics includes significant
investment to accelerate the pace of expansion of our
branch network described above. New branches are a key
driver of future sales and profit growth, but they do create
downward pressure on profitability in the short term due to
investment in central infrastructure and in our teams at
new sites. We estimate that investment in 18 new branches
in 2016 and 31 in 2017 has together created a drag on
EBITDA of approximately £2 million in 2017, compared to a
drag of approximately £1 million in 2016.
Further information in relation to the impact of cost inflation and
new branches is included in the Group Financial Review.
The reduction in adjusted EBITDA and return on sales is
therefore a function of the significant investments made in
accelerating the branch roll-out in 2017.
We are making progress with initiatives to support new
branches reaching profitability sooner, which now include a
more comprehensive and sustained marketing campaign
and sharing resources with established sites in the same
region. Whilst there is more work to do in this area, we
are confident that, in future, new branches should reach a
break-even run-rate before their two-year anniversary and
be mature in 4-5 years.
24 EUROCELL PLC
Annual Report and Accounts 2017
Building Plastics
Third-party Revenue
Organic
Security Hardware(1)
Inter-segmental Revenue
Total Revenue
Adjusted EBITDA
(1) Acquired February 2017
2017
£m
130.7
128.2
2.5
1.1
131.8
8.6
2016
£m
117.5
117.5
–
0.7
118.2
8.8
Change
%
11%
9%
n/a
56%
12%
(3%)
When the 49 branches opened in 2016/17 are mature,
we expect a substantial improvement in performance for
the division.
As described in the Chief Executive’s Review, we expect to
open up to 15 branches in 2018. This will allow the team to
consolidate the existing estate, complete the work on
reducing break-even times and ensure the sales of windows
and other high-value products are maximised.
Tony Smith
Building Plastics
Commercial Director
Indicative branch economics (rounded)
Branch open
< 2 years
2–4 years
> 4 years
Number of branches
Average sales per branch
(£000)
50
150
22
500
118
800
Return on sales per branch
(%)(1)
Small
loss
> 10%
Mid-teen
%
(1) EBITDA as % of revenue before regional infrastructure and central costs
No. of branches (at the end of the year)
2017
2016
2015
2014
2013
190
159
141
128
123
Average revenue per branch (£000)
2017
2016
2015
2014
2013
674
722
681
711
647
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STRaTEgIC REPORT
Group Financial Review
Revenue
Revenue for 2017 was £224.9 million (2016: £204.8 million),
which represents growth of 10%, or 8% excluding
acquisitions. Like-for-like sales growth (i.e. excluding the
impact of acquisitions and branches opened in 2016/17)
was 4%.
As described in the Divisional Reviews, sales have been
driven by good like-for-like growth in Profiles (£4.5 million,
or 6% for the division), particularly in private new build,
solid like-for-like growth in the branch network (£3.8 million,
or 3% for the division) and the positive impact from
branches opened in 2016/17 (£7.0 million, or 6% for the
division). Together, the acquisitions of Vista Panels and
Security Hardware added £4.8 million to sales in 2017.
Gross Margin
We have experienced higher price pressure for raw
materials and traded goods. Resin was up 13% in 2017,
representing an additional cost to the business of
approximately £2.6 million. Inflation for other raw materials
and traded goods increased costs by a further £1.7 million.
In addition, margins have been impacted by the sales mix,
with stronger growth in sales to larger fabricators relative to
smaller customers.
As described in the Divisional Reviews, we continue to
mitigate cost inflation via the implementation of selling price
increases where possible. We recovered approximately
£3.3 million of the £4.3 million cost inflation in 2017, which
reflects the time lag in capturing the benefit.
We further offset the impact of cost inflation by increasing
the use of recycled materials in our primary extrusion
operations to 17% (2016: 14%). This resulted in a benefit of
£1.1 million to gross margin.
Overall, these factors drove a reduction in gross margin
from 52.0% in 2016 to 51.0% in 2017.
Distribution Costs and Administrative Expenses
(Overheads)
Overheads for the year were £82.9 million (2016:
£75.2 million), representing a similar percentage of sales for
both periods. The increase includes £3.8 million as a result
of new branches opened in 2016/17 and £2.3 million from
acquisitions. The balance of £1.6 million relates to an
increase of 2% in the like-for-like organic business, where
sales growth was 4% as described above. We continue to
focus on the tight control of underlying overheads, with the
increase driven largely by the impact of the Minimum Wage
legislation and higher volume related distribution costs.
We have made good progress
with our strategic priorities and
other self-help initiatives and
delivered robust financial
results in the process.”
Michael Scott
Chief Financial Officer
26
EUROCELL PLC
Annual Report and Accounts 2017
Group
Revenue
Gross Profit
Gross Margin %
Overheads
Adjusted1 EBITDA
Depreciation and Amortisation
Adjusted1 Operating Profit
Finance Costs
Adjusted1 Profit Before Tax
Tax
Adjusted1 Profit After Tax
Adjusted1 Basic EPS (pence per share)
Non-underlying Costs After Tax
Reported Profit After Tax
Reported Basic EPS (pence per share)
(1) See Adjusted Profit Measures on page 28
Revenue (£m)
2017
£000
2016
£000
224,906
114,624
51.0%
(82,890)
204,816
106,565
52.0%
(75,236)
31,734
(6,677)
25,057
(553)
24,504
(4,089)
20,415
20.4
(773)
19,642
19.6
31,329
(6,377)
24,952
(677)
24,275
(4,299)
19,976
20.0
(374)
19,602
19.6
204.8
3.8
4.5
213.11
7.0
4.8
224.9
2016
Building
Plastics
LFL
Profiles
Like-for-like
business
2016/2017
branches
Acquisitions
2017
(1) Like-for-like sales and overheads exclude acquisitions and branches opened in 2016 and 2017; Like-for-like sales up 4%
Gross Profit (£m)
8.9
(4.3)
3.3
1.1
(1.0)1
114.6
106.6
52.0%
2016 Gross
Margin
(0.2%)
Volume
Cost prices
(1) Other includes the impact of customer mix
(1.1%)
0.3%
Selling
price
Increased
use of post
consumer
material
Other
51.0%
2017 Gross
Margin
51.0%
Distribution Costs and Administrative Expenses
(Overheads) (£m)
3.8
2.3
82.9
1.3
0.3
76.81
75.2
2016
Wage
inflation
Other
Like-for-like
business
2016/2017
branches
Acquisitions
2017
(1) Like-for-like sales and overheads exclude acquisitions and branches opened in 2016 and 2017; Like-for-like overheads up 2%
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STRaTEgIC REPORT
Group Financial Review continued
Depreciation and Amortisation
Depreciation and amortisation for 2017 was £6.7 million
(2016: £6.4 million), with the increase due to amortisation
of acquired intangibles relating to the acquisitions of
Vista Panels and Security Hardware, as well as recent
capital investment.
Finance Costs
Finance costs for the year were £0.6 million (2016: £0.7 million),
reflecting lower average net debt in 2017.
Adjusted Profit Measures
Adjusted EBITDA, adjusted operating profit and adjusted
profit before tax all exclude non-underlying costs (see
opposite). Adjusted profit after tax and adjusted earnings per
share exclude non-underlying costs and the related tax effect.
Adjusted profit measures are used by management to
assess business performance and are provided here in
addition to statutory measures to help describe the
underlying results of the Group.
Non-underlying Costs
Non-underlying costs for 2017 of £0.8 million include
professional fees and earn-out costs related to the
acquisition of Security Hardware, as well as the
redundancy and settlement costs of a staff reorganisation.
Non-underlying costs for 2016 of £0.5 million comprise
duplicated costs relating to the handover period during
which the Company employed two CEO’s, as well as
professional fees related to the acquisition of Vista Panels.
Tax
The effective tax rate on adjusted profit before tax for
2017 of 16.7% was lower than the standard corporation tax
rate for the year due to the benefit of Patent Box relief.
The effective rate on adjusted profit before tax for 2016 of
17.7% reflected the beneficial impact on deferred tax of
reductions in the corporation tax rate enacted in the
period, as well as adjustments to prior year taxes.
The effective tax rate on reported profit before tax was
17.0% (2016: 17.7%).
Capital Expenditure (£m)
2017
2016
2015
7.5
7.2
6.4
Cash Flow (£m)
31.7
(2.6)
(5.4)
23.71
(7.5)
(0.4)
(8.7)
2017
Adjusted
EBITDA
Working
Capital
Net Cash
from
Operating
Activities
Cash generated from underlying operations of £28.8 million less tax and non-underlying costs paid.
Tax and
Other
Financing
Capex
Dividends
(1)
New Branches
Recycling
Operations
Other
£1.9
£0.9
£3.1
£1.6
(1.3)
5.8
Acquisitions
Change in
Net Debt
28 EUROCELL PLC
Annual Report and Accounts 2017
Earnings Per Share
Taking into account all of the factors described above,
adjusted basic earnings per share for 2017 was 20.4 pence
per share (2016: 20.0 pence per share).
trade and other receivables (£3.0 million) and in trade and other
payables (£3.2 million). This compares to a net inflow from
working capital of £0.8 million in 2016, which included a
reduction in inventory of £1.6 million.
Reported basic earnings per share for 2017 was
19.6 pence per share (2016: 19.6 pence per share).
Basic earnings per share
Adjusted basic earnings per share
Diluted earnings per share
Adjusted diluted earnings per share
2017
pence
19.6
20.4
19.6
20.4
2016
pence
19.6
20.0
19.6
19.9
Acquisitions
As previously described, we acquired Security Hardware
in February 2017 for an initial consideration of £1.3 million (net of
cash acquired). The impact of Security Hardware on Group
earnings for 2017 was not material.
Dividends
We paid an interim dividend of 3.0 pence per share in October
2017. The Board proposes a final dividend of 6.0 pence per
share, resulting in total dividends for the year of 9.0 pence
(2016: 8.5 pence). This represents an increase of 6%.
The dividend will be paid on 23 May 2018 to Shareholders
registered at the close of business on 27 April 2018. The
ex-dividend date will be 26 April 2018.
Retained earnings as at 31 December 2017 were
£46.7 million (2016: £35.8 million). The Company takes
steps to ensure distributable reserves are maintained at
an appropriate level through intra-group dividend flows.
Capital Expenditure
Capital expenditure for 2017 was £7.5 million
(2016: £7.2 million).
Capital expenditure includes investment to increase our
recycling capacity of £0.9 million and in new branches
opened in 2017 of £1.9 million. Investment of £3.1 million
in Operations includes new tooling costs and general
maintenance capex. Other capital expenditure of £1.6 million
includes branch refurbishments and various IT-related costs.
Cash Flow
Net cash generated from operating activities was
£23.7 million, compared to £28.4 million in 2016.
The increase in stocks has been driven largely by the 31 new
branches, as well as the introduction of new product lines to
the branch network. We have also built a higher level of safety
stocks to ensure consistent on-time deliveries, particularly
for our new build customers. Stock days were 55 at
31 December 2017, compared to 58 at 31 December 2016.
The changes to trade receivables and payables reflect
normal business seasonality, alongside increased activity
and growth in 2017. Debtor days were 37 at year end,
compared to 36 at the end of 2016.
Net cash generated from operating activities also include
tax paid in the year of £4.6 million (2016: £3.5 million).
Other payments include acquisitions of £1.3 million
(2016: £6.3 million) and capital investment of £7.5 million
(2016: £7.2 million).
Dividends paid represent the final dividend for 2016
of 5.7 pence per share (or £5.7 million) and the interim
dividend for 2017 of 3.0 pence per share (or £3.0 million).
Taking all of these factors into account, net debt fell by
£5.8 million during the year to £14.5 million at 31 December
2017 (31 December 2016: £20.3 million).
Net Debt (£000)
Cash
Borrowings
Net Debt
2017
2016
Change
11,361
(25,851)
(14,490)
5,559
(25,827)
(20,268)
5,802
(24)
5,778
Bank Facilities
We have an unsecured, multi-currency, revolving credit facility
of £45 million, provided by Barclays and Santander. The
Group operates comfortably within the terms of the facility
and related financial covenants. The facility matures in 2020.
Key Performance Indicators (‘KPIs’)
We utilise the financial highlights on page 1 to assess the
financial performance and position of the Group. Pages 2 to
33 detail the performance of the Group using both financial
and non-financial benchmarks.
This includes a net outflow from working capital for 2017
of £2.6 million, comprised of an increase in stocks (£2.8 million),
Michael Scott
Chief Financial Officer
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STRaTEgIC REPORT
Corporate Social Responsibility
PEOPLE
Health and safety
Incentives and rewards
Equality and diversity
Training and development
See more on page opposite
ENVIRONMENT
Greenhouse gas data
Reduce waste sent to landfill
See more on page 32
SUPPLIERS
Ethical and sustainable sourcing
Modern slavery
See more on page 32
CUSTOMERS
Sustainable and quality products
Service levels
Quality Policy Statement
See more on page 33
COMMUNITY
Nominated charities
Camp Kernow
See more on page 33
30
EUROCELL PLC
Annual Report and Accounts 2017
People
Health and safety
We employ over 1,500 people. The safety and the
well-being of these employees and our contractors
is our first operational priority.
We continue to maintain good safety performance
and our safety statistics continue to benchmark well
with industry standards.
Injury frequency rate (1)
Lost time injury frequency
rate (2)
2017
6.81
1.38
2016
5.15
1.05
Injuries per 100,000 hours worked.
(1)
(2) Lost time accidents per 100,000 hours worked
We recorded one major injury in 2017 (cut to the
hand) under the Reporting of Injuries, Diseases and
Dangerous Occurrences Regulations 2013 (‘RIDDOR’).
During 2017 we appointed a new Group Quality
Manager, with specific responsibility for health and
safety matters. The appointment has been
instrumental in driving improvements in our health
and safety culture, with an emphasis on ownership
and accountability to drive a more uniform and
consistent approach across the Group. This is
particularly important in our expanding branch
network, where we added 88 employees during
the year.
In terms of quality, the focus has been on
implementing key principles of quality management
and measuring systems, which have been captured
in our new Quality Policy Statement (see page 33).
Incentives and rewards
Our remuneration policies remain competitive
and packages include combinations of salary,
performance related pay and a contributory pension
scheme.
In addition, in 2017 we launched our first Save As
You Earn share scheme since the Initial Public
Offering (‘IPO'). This enables employees to save a
fixed sum each month, with an option to buy Eurocell
shares at a discounted purchase price at the end of
a three year savings period. Approximately 40% of
employees have decided to join the scheme, saving
an average £150 per month. We plan a similar
scheme for 2018.
Equality and diversity
Equality and diversity form part of Eurocell’s core values.
Our equal opportunities policy requires that we give full
and fair consideration to applications for employment by
disabled people. In the event of a colleague becoming
disabled, every effort will be made to ensure that their
employment with us continues and that appropriate
support is available.
We respect individuals and their rights in the workplace and
with this in mind specific policies are in place to prevent or,
where issues are raised, address harassment and bullying.
Our whistleblowing policy operates to give visibility
to issues that might not otherwise be uncovered or
resolved through normal channels. We recently
introduced a whistleblowing hotline, with an associated
employee awareness campaign and e-learning modules.
Our colleagues come from wide and diverse backgrounds,
nationalities and ethnic and religious groups and we respect
and embrace cultural differences wherever we operate.
We recognise the benefits of encouraging diversity across the
business and believe that this will contribute to our continued
success. All appointments are made based on merit and are
measured against specific objective criteria, including the
skills and experience needed for the position. We remain
committed to increasing the participation of women
throughout the Group, including at Board level, within the
steering group and senior management.
Gender diversity
Directors
Executive Committee
Senior managers
Other employees
Total
Male
no.
6
6
15
1,297
1,324
Female
no.
0
1
4
167
172
%
100
86
79
89
88
Total
average
no.
6
7
19
%
0
14
21
11 1,464
12 1,496
Training and development
We continue to invest in the training and development of our
staff, and support them in the delivery of our Group-wide and
individual objectives. We provide a number of training
programmes for our teams, using a combination of internal
and external service providers. In addition, we provide financial
and study leave support for our trainees who are in the
process of obtaining a professional qualification.
We operate a management development programme, which has
three levels reflecting the relative seniority of participants. During
2017, 24 delegates attended level 1 and level 2 of the programme.
Within the Group we also offer e-learning training programmes
to our employees. During 2017, staff from across the business
have completed and passed over 2,000 e-learning courses.
We have an apprenticeship programme and during 2017,
13 new apprentices have joined the Group.
Looking forward, we intend to invest more in the training and
development of our employees.
Overall, we work hard to ensure we remain a local employer of
choice, to help us attract and retain talented people.
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STRaTEgIC REPORT
Corporate Social Responsibility continued
Environment
We are committed to protect and minimise our impact on the
environment. We will operate in compliance with our relevant
environmental legislation and we will strive to use pollution
prevention and environmental best practice in all that we do.
We recognise that our operations result in emissions and waste
and we are committed to control, recover and re-use PVC
waste wherever possible. We promote the efficient use of
materials and resources throughout our facilities particularly
non-renewable resources and continue our development of
sustainably sourced products using recycled materials.
Environmental concerns and impacts are a consideration in
all of our decision making and activities and we promote
environmental awareness amongst our employees and
encourage them to work in an environmentally responsible
manner. This is achieved through training, education and
informing our employees about environmental issues that may
affect their work.
Emergency response procedures are maintained where
required by legislation or where significant health, safety
or environmental hazards exist.
Our environmental objectives are set out in alignment with
legislation and continually reviewed to ensure they are being
met. Our environmental policies apply to all our operations and
sufficient resources will be made available to ensure that this
policy is implemented. We will strive to continually improve our
environmental performance and review this policy in light of any
planned future activities.
Our policies are also communicated amongst all employees
and interested parties.
Greenhouse gas data
We are reporting our greenhouse gas (‘GHG’) emissions as
part of our Strategic Report and our GHG reporting period is
the same as our financial year.
GHG emissions for the Group for the year ended 31 December
2017 were, in tonnes of carbon dioxide equivalent (tCO2e):
Source
Fuel combustion (stationary)
Fuel combustion (mobile)
Facility operation
Purchased electricity
Total
tCO2e
446
6,365
64
18,792
25,667
%
1.7
24.8
0.3
73.2
The main driver behind the fall in GHG emissions is the
sharp drop in the carbon intensity of electricity over this
period, owing to the phasing out of coal-fired generation
and its replacement by gas and renewables.
Annual comparison and emissions intensity:
tCO2e
Total emissions
Emissions intensity*
2017
2016
% Change
25,666
26,385
114
129
(2.7)
(11.6)
* Expressed in tCO2e per £m revenue.
Methodology and emission factors
These emissions were calculated using the methodology set
out in the updated greenhouse gas reporting guidance,
Environmental Reporting Guidelines (Ref. PB 13944), issued by
the Department for Environmental, Food and Rural Affairs in
June 2013; and DEFRA’s 2017 carbon factors.
Reduce waste sent to landfill
Our recycling facility in Ilkeston collects old windows
(‘post-consumer’ waste) and customer factory offcuts
(‘post-industrial’ waste) and processes them into a recycled
PVC compound, which is then used in our other
manufacturing processes. By recycling these products we
reduce the amount of waste going to landfill. In 2017 we
increased the amount of waste that we recycled by 2.9k
tonnes.
Suppliers
Ethical and sustainable sourcing
We ensure that suppliers understand and work with us to
meet our aspirations.
Over 70% of our suppliers have been supplying Eurocell for
more than three years. All supply and tender agreements
include the following statement:
“The supplier advocates the principles of Corporate Social
Responsibility and requires a serious approach to social-
economic issues from its supply chain.”
All of our suppliers are required to confirm their
commitment to the following principles:
• The obligation to the global and local environment;
• Respect for fundamental human entitlements;
•
In purchasing activities, a commitment to improving the
organisation’s performance in relation to fairness to all;
• A system of internal and external reporting which
matches espoused values;
• A proactive promotion of sustainable practices and products;
• Recognition that there is responsibility to add value to
communities and societies upon which the organisation
has influence; and
• An ethical approach to purchasing activities.
32 EUROCELL PLC
Annual Report and Accounts 2017
Quality Policy Statement
Customers
To be trusted by our customers in everything we
do. Working in partnership with them to ensure
that they are able to differentiate their service and
product offerings from their competitors. Easy to
do business with and always responsive to their
needs, in a consistent, timely, courteous and
flexible manner.
Quality
Adherence to industry-leading specifications and
ISO-based standards for Quality & Environmental
Management and British Standards for Health
and Safety. Ensuring that suppliers understand
and work with us to meet our aspirations.
Constant improvement
Uniform standards across our business
benchmarked against industry best practice,
constantly reviewing and improving processes.
Benchmarked leading industry best practice
transferred across businesses and customers
with a view to reducing waste and improving
consistency. Always tracking and measuring
through business and departmental KPI’s
reflecting the business objectives.
Everyone’s responsibility
All departments responsible for constantly
reviewing, measuring, checking and improving
the quality of their work and ensuring that the
necessary training, facilities and tools are
available to get the job done, right first time
through a culture of continuous improvement.
All departments working together and
supporting each other with no barriers
and no silos.
Modern slavery
We are absolutely committed to preventing slavery and human
trafficking in our business activities, and to ensuring that our supply
chains are free from these practices.
We aim to identify modern slavery risks and prevent slavery and
human trafficking in our operations. We have made good
progress during 2017 in identifying any potential risks in the top
80% of our suppliers. In cases where medium or high risk is
identified, further assessments are being carried out.
Our full Anti-Slavery and Human Trafficking Statement is
published on our website at investors.eurocell.co.uk.
Customers
Sustainable and quality products
We adhere to industry-leading specifications and ISO-based
standards for Quality & Environmental Management and British
Standards for Health and Safety.
Service levels
We recently introduced the following customer-focused Quality
Policy Statement, which captures the way we aspire to work
at Eurocell.
Community
Nominated charities
We have the following nominated charities:
East Midlands Air Ambulance Service
and Starlight.
During 2017 a team of Eurocell employees
took part in the Derby 10k race and raised
£5,000 for the East Midlands Air Ambulance.
Amount raised for the
East Midlands Air Ambulance
£5,000
Camp Kernow
Camp Kernow is an award-winning organisation with an innovative off-grid environmental adventure centre dedicated
to reconnecting and engaging children with the natural environment and inspiring them to live more sustainably.
We provided various materials and components to support construction of the centre, some of which were made
using recycled post-consumer material.
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STRaTEgIC REPORT
Principal Risks and Uncertainties
Risk management is the responsibility of the Board and is a key factor in delivering
the Group’s strategic objectives.
The Board is responsible for setting the risk appetite, establishing
a culture of effective risk management and for ensuring that
effective systems and controls are in place and maintained.
How we manage risk
Risk is managed across the Group in the following ways:
• The Board meets annually to review strategy and set the
risk appetite.
• Risks faced by the Group are identified during the formulation
of the annual business plan and budget process, which sets
objectives and agrees initiatives to achieve the Group’s goals,
taking account of the risk appetite set by the Board.
• Senior management and risk owners consider the root cause
of each risk and assess the impact and likelihood of it
materialising. The analysis is documented in a risk register,
which identifies the level of severity and probability,
ownership and mitigation measures, as well as any proposed
further actions (and timescale for completion) for each
significant risk.
• At the beginning of the year the Group established an
executive Risk Management Committee, chaired by the
Chief Financial Officer. This Committee meets on a regular
basis (generally monthly). The status of the most significant
risks and mitigations are reviewed at each meeting, with
other risks reviewed on a cyclical basis.
• The Executive Directors also meet with senior managers on
a regular basis throughout the year. This allows the Executive
Directors to ensure that they maintain visibility over the
material aspects of strategic, financial and other risks.
• The Group’s Executive Directors also compile their own risk
assessment, ensuring that a top-down, bottom-up approach
is undertaken when considering the Group-wide
environment.
• The Group’s Audit and Risk Committee assists the Board
in assessing and monitoring risk management across the
Group. The role of the Committee includes ensuring the
timely identification and robust management of inherent and
emerging risks, by reviewing the suitability and effectiveness
of risk management processes and controls. The Committee
also reviews the risk register to ensure net risk and proposed
further actions are together consistent with the risk appetite
set by the Board.
Senior managers take ownership of specific risks and implement
policies and procedures to mitigate exposure to those risks.
Risk Management Process
The risk management process sits alongside our strong
governance culture and effective internal controls to provide
assurance to the Board that risks are being appropriately
identified and managed.
d c o n t r o l
n
n it o r a
o
M
Identify ris
k
s
q
uired
s re
n
io
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a
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a
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Risk Management Process
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I d e n t i
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tify net risk
34 EUROCELL PLC
Annual Report and Accounts 2017
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Medium
High
IMPACT
Internal control
The Group has a well-defined system of internal controls.
The Group has a robust process of financial planning and
monitoring, which incorporates Board approval of operating
and capital expenditure budgets. Performance against the
budget is subsequently monitored and reported to the Board
on a monthly basis. The Board also monitors overall
performance against operating, safety and other targets set
at the start of the year. Performance is reported formally to
Shareholders through the publication of its results both annually
and half-yearly. Operational management regularly reports
on performance to the Executive Directors.
The Group also has processes in place for ensuring business
continuity and emergency planning.
management, with the largest and most complex projects being
approved by the Board. The schedule of authority limits was
updated in December 2016, to reflect the development of the
business since its IPO, and approved by the Board.
In order to further enhance the internal control and risk
management processes, the Group appointed KPMG as
internal auditor in March 2017. KPMG work closely with the
Risk Management Committee in delivering the Groups internal
audit programme.
With the assistance of the Audit and Risk Committee, the Board
has reviewed the effectiveness of the system of internal control.
Following its review, the Board determined that it was not aware
of any significant deficiency or material weakness in the system
of internal control.
Day-to-day operations are supported by a clear schedule of
authority limits that define processes and procedures for
approving material decisions. This ensures that projects
and transactions are approved at the appropriate level of
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STRaTEgIC REPORT
Principal Risks and Uncertainties continued
Risk profile
The principal risks monitored by the Board are as follows:
Principal Risk and Impact
MACRO-ECONOMIC CONDITIONS
The Group’s products are used in the residential and
commercial building and construction markets, both
within the RMI sector, for new residential housing
developments and for new construction projects.
The Group’s private RMI business is strongly correlated
to the level of household disposable incomes. The
Group’s new build business is particularly influenced by
the level of activity in the house building industry.
As such, the Group’s business and ability to fund
ongoing operations is dependent on the level of activity
and market demand in these sectors, itself often a
function of general economic conditions (including
interest rates and inflation) in the UK.
EU REFERENDUM
There remains significant uncertainty over how
the economic landscape will be affected by the
Referendum result.
This in turn could impact on our ability to grow the
business (e.g. due to economic uncertainty) and/or the
cost of our raw materials (see Raw Material Prices).
RAW MATERIAL PRICES
The Group’s manufacturing operations depend on the
supply of PVC resin, a material derivative of ethylene
which in turn is a derivative of crude oil.
The price of PVC resin can therefore be subject to
fluctuations based on the markets for crude oil and
ethylene, as well as the market for resin itself. In
addition, although we pay for resin in sterling, crude
oil and ethylene are priced in US Dollars and Euros
respectively. As such, the price of resin in sterling is also
impacted by international currency markets.
Our ability to pass on resin and other raw material or
traded goods price increases to our customers will
depend on market conditions at the time.
RAW MATERIAL SUPPLY
There are only a limited number of PVC resin and
certain other raw material suppliers and we operate with
limited material storage capacity.
Failure to receive raw materials on a timely basis could
impact on our ability to manufacture products and meet
customer demand.
UNPLANNED PLANT DOWNTIME
The business is dependent on the continued and
uninterrupted performance of its production facilities.
Each of the facilities is subject to operating risks, such
as industrial accidents (including fire); extended power
outages; withdrawal of permits and licences (particularly
in the context of the regulated operation of the recycling
facility); breakdowns in machinery; equipment or
information systems; prolonged maintenance activity;
strikes; natural disasters and other unforeseen events.
36 EUROCELL PLC
Annual Report and Accounts 2017
Strategic
Priorities Mitigation
Risk Change in
Reporting Period
Movement
• Notwithstanding macro conditions,
we expect our strategic priorities and
self-help initiatives to support sales
and market share growth.
• Perception of increased
political and economic
uncertainty following UK
2017 General Election.
• Initiatives include: growing market share
to exploit spare manufacturing capacity,
investment in our specifications team
(targeting new build, commercial and
public sector work) and expanding the
branch network.
• We currently operate comfortably
within the terms of our existing bank
facility and related financial covenants.
• The general RMI market is
currently subdued.
• Specific markets for our
products are broadly flat at
present.
• The UK base rate was
increased in November
2017, the first increase in
ten years, partly as a result
of increasing inflationary
pressures.
• Reducing the pace of
branch network expansion
can improve short-term
profit and cash flows.
• Strategic priorities and self-help
initiatives noted above.
• Flexible plans with the ability to adapt
if circumstances change (e.g. curtail
investment in the short term to protect
the business).
• Brexit negotiations on-going,
but perception of increasing
uncertainty as to the terms
under which the UK will
leave the EU.
• Where possible we pass through resin
price increases to our customers.
• Increased use of recycled material in
our manufacturing.
• Use of more than one supplier to
provide competitive pricing.
• Resin supply contracts contain
mechanisms to help mitigate some
variations in price.
• Resin and other raw material
prices increased significantly
in 2017, primarily due to the
weakness in Sterling.
• Partially mitigated with selling
price uplifts, increased use
of recycled material and
manufacturing efficiencies.
• There may be further raw
material pricing pressure in
2018.
• Raw material tests to identify potential
alternative suppliers are on-going.
• Spot market for resin available to
access.
• Contractual arrangements for certain
key suppliers include liquidated
damages for failure to supply.
• Regular reviews to test financial stability
of key suppliers.
• We have meaningful spare
manufacturing capacity.
• Regular planned maintenance to
reduce the risk of plant failure.
• Maintenance capital investment of
approximately £5 million per annum
across the Group.
• Extrusion facilities spread over
3 manufacturing sites.
• Lower global production and
supply into Europe of PVC resin
contributed to increasing prices
in 2017.
• New US capacity expected
to come on line in 2018 and
beyond, potentially increasing
supplies into Europe.
• Competitive resin sourcing
introduced for 2017.
• Group-wide disaster recovery
plans reviewed and updated
in 2017.
• Capital investment in the
recycling plant of £1.8 million
in 2016/17 to increase
capacity and eliminate
bottlenecks.
• Successful project in 2017
to increase raw material
feedstock for the recycling
plant.
Movement key:
Increase
No change
Decrease
Strategic Priorities key:
Target growth in market share
Develop innovative new products
Explore potential bolt-on acquisition opportunities
Expand our branch network
Increase the use of recycled materials
Principal Risk and Impact
CORPORATE AND REGULATORY RISKS
We may be adversely affected by unexpected corporate
or regulatory risks. This could include health and safety,
reputational and environmental events, or other legal
and compliance matters.
Enacted or soon to be enacted increases in the penalty
regime have increased the potential financial impact of
breaches or incidents in many cases.
These areas are receiving additional management
focus, but the impact of the underlying risk has been
increasing of late.
UNSUCCESSFUL BRANCH OPENINGS
The Group has invested in expanding the branch
network over the last two years.
Good new sites may become more difficult to find.
New branches may fail to reach the required scale
and therefore deliver the required sales and profitability
within an acceptable timeframe.
CUSTOMER CREDIT RISK
We do not insure our receivables, so there is an inherent
risk that default by a large customer could result in a
material bad debt.
COMPETITOR ACTIVITY
The Group has a number of existing competitors who
compete on range, price, quality and service. Increased
competition could reduce volumes and margins on
manufactured and traded products.
FAILURE TO DEVELOP NEW PRODUCTS
Failure to innovate could reduce our growth potential,
render existing products obsolete and cause a
reduction in market share.
The launch of new products and new variants of existing
products is an inherently uncertain process. We cannot
guarantee that we will continuously develop successful new
products or new variants of existing products.
Nor can we predict how customers and end-users will react
to such new products or how successful our competitors
will be in developing products which are more attractive
than ours.
ABILITY TO ATTRACT AND RETAIN KEY
PERSONNEL AND HIGHLY SKILLED INDIVIDUALS
The Group’s success depends inter alia, on the efforts and
abilities of certain key personnel and its ability to attract and
retain such personnel.
The Executive Directors and senior managers have
significant experience in the relevant sectors and
capital markets and are expected to make an important
contribution to the Group’s growth and success.
Strategic
Priorities Mitigation
Risk Change in
Reporting Period
Movement
• We have procedures and policies in
place to support compliance with
regulations.
• Regular communication and training
on policy compliance.
• Monitoring procedures in place,
including near miss and potential hazard
reporting for health and safety matters.
• Internal and third-party site audits to
test compliance with our policies.
• Health and safety continues
to be high-profile risk area.
• New position of Group
Quality Manager in post
mid-2017, with specific focus
on driving improvements in
health and safety behaviours.
• General Data Protection
Regulations (‘GDPR’) come
into force in May 2018,
with increased compliance
requirements and higher
penalties for breaches.
• Large portfolio of potential new sites,
prioritised based on detailed research
into areas most likely to be successful.
• Trials of reduced start-up costs in new
branches in progress.
• Significant acceleration of
the network expansion, with
18 new sites in 2016 and 31
opened in 2017.
• More to do on consolidating
the existing estate, completing
the work to reduce break-even
times and maximise sales of
high-value products.
• In-depth credit review for new and
• Increased economic
ongoing customer accounts.
• Experienced Credit Manager (over
15 years with the Group) and strong
credit control team.
uncertainty and falling
consumer confidence may
lead to more business failures.
• No material bad debts in 2017,
but inherent risk remains.
• Strong market and customer
• The Group has continued
awareness, with good intelligence
around competitor activity.
to gain market share in both
divisions.
• Focus on customer proposition and
points of differentiation in product and
service offering.
• The more uncertain market
environment has potentially
weakened some of our key
competitors.
• We invest continuously in research and
development through our in-house
team.
• The team is highly focused on new
ways to develop existing products and
to be innovative with new ones.
• Recent successes include
new products to support
off-site home construction, an
improved PVC bi-fold door
alongside the introduction of an
aluminum bi-fold door offering,
a new sheet-tile roof system
and improvements to the
Modus and Skypod ranges.
• We also have a strong product
pipeline with more than 25
projects in development.
• Market rate compensation for all
personnel, including leadership team.
• Clear strategic direction provides
attractive backdrop to working at
Eurocell.
• Recent introduction for senior
team of long-term incentive
plans and adjustments to
fixed/variable compensation
to support high retention rate.
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STRaTEgIC REPORT
Principal Risks and Uncertainties continued
Strategic
Priorities Mitigation
Risk Change in
Reporting Period
Movement
• Market level or better salaries and good
benefits package.
• Induction and training programme.
• New Group HR Director
(appointed in 2017)
designing strategy to improve
retention and recruitment,
leadership and development,
employee engagement and
communication.
• Reducing churn rate in our
branch business is a primary
objective of the new strategy.
• SAYE scheme launched for all
personnel in 2017.
• Physical security of servers at
third-party off-site data centre with
full disaster recovery capability.
• Network defences enhanced
and Wi-Fi access controls
improved in 2017.
• Password and safe use policies
in place.
• Internet usage monitored.
• Anti-malware regularly used.
• Cyber awareness campaign
and promotion of IT security
policies introduced for all
employees early in 2018.
• Acquisition and integration
of Security Hardware now
substantially complete.
• Public communication of bolt-on
acquisitions being a strategic priority.
• Good knowledge of companies
operating in our sector and related
sectors.
• We have a tried and tested procedure
for the integration of new acquisitions
and a good track record of recent
success.
Principal Risk and Impact
SHORTAGES OR INCREASED COSTS OF
APPROPRIATELY SKILLED LABOUR
The Group is subject to supply risks related to the
availability and cost of labour, particularly in our
branch business. We may also experience labour cost
increases (including those related to the Minimum
Wage) or disruptions in circumstances where we have
to compete for employees with the necessary skills and
experience in tight labour markets.
CYBER SECURITY
A breach of IT security (externally or internally) could result
in an inability to operate systems effectively (e.g. viruses) or
the release of inappropriate information (e.g. hackers).
This remains a high profile area and is receiving
considerable management focus.
FAILURE TO IDENTIFY, COMPLETE AND
INTEGRATE BOLT-ON ACQUISITIONS
Exploring potential bolt-on acquisitions is one of our
strategic priorities.
We may not be able to identify appropriate bolt-on
acquisitions.
Any future acquisition we do make poses integration
and other risks which may significantly affect our results
or operations.
The acquisition and integration of companies is a
complex, costly and time-consuming process involving
a number of possible risks. These include diversion
of management attention, failure to retain personnel,
failure to maintain customer service levels, disruption to
relationships with various third parties and unanticipated
liabilities.
38 EUROCELL PLC
Annual Report and Accounts 2017
STRaTEgIC REPORT
Viability Statement
As required by provision C.2.2 of the Code, the Directors have taken into
account forecasts to assess the future funding requirements of the Group,
and compared them with the level of committed available borrowing facilities.
The Directors confirm that we have a
reasonable expectation that the Company
and the Group will continue in operation
and meet their liabilities as they fall due
in the next three years.
Going Concern
The Directors have reviewed the
Company’s and the Group’s forecast
and projections, which demonstrate that
the Company and the Group will have
sufficient headroom on their bank facilities
for the foreseeable future and that the
likelihood of breaching the related
covenants in this period is remote.
Accordingly the Directors continue to
adopt the going concern basis in
preparing the annual Financial
Statements.
A period of three years has been adopted as
this is the timeframe used by the Board in
forming the Group’s strategy, in appraising
material investments and in accessing
financial viability. The assessment of viability
has been made with reference to the
Group’s current position and future
prospects, its strategy, its management of
risk, and also the Board’s assessment of
the outlook in the marketplace.
The Board considers its strategy and risks
on strategy away days, and revisits these
annually when considering the next year’s
budget. The three-year plan considers
revenue and earnings growth and how
this impacts on cash flows and key ratios.
Operational plans and financing options
are considered as part of this process.
In preparing the plan, the Group adopts
a prudent forecast in respect of like-for-like
sales growth, but assumes other initiatives,
such as expansion of the branch network,
in line with the published strategy. The
plan is stress tested by applying the
following scenarios:
Scenario 1
Macro-economic conditions lead
to a decline in sales
Decreases in revenues have been
applied over the 3-year plan period.
Scenario 2
Commodity prices and/or
exchange rates or raw material
shortages lead to a sustained
increase in resin prices
Increases in resin costs have been
applied over the 3-year plan period.
Scenario 3
Scenario 1 and 2 combined
There is a possibility that both of the
above scenarios could materialise at
the same time, therefore we have
assessed the combined impact
through the 3-year plan period.
The Board considers these tests to
be sufficient to test the viability of the
Group given the size of the Group
and the markets it operates within.
As described in Principal Risks and
Uncertainties above, we have
measures in place to help mitigate
the impact of these events should
they occur.
This Strategic Report was approved by the Board on 8 March 2018.
Mark Kelly
Chief Executive Officer
Michael Scott
Chief Financial Officer
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39
CORPORaTE gOvERNaNCE
Board of Directors
Mark Kelly
Chief Executive Officer
Bob Lawson
Non-executive Chairman
Michael Scott
Chief Financial Officer
Date of appointment:
29 March 2016
Date of appointment:
4 February 2015
Date of appointment:
1 September 2016
Experience:
Mark Kelly joined the Group in March
2016 and was appointed Chief
Executive Officer in May 2016. He was
formerly Chief Executive of Grafton
Merchanting GB and previously
worked for BDR Thermea Group BV,
IMI and Novar. Mark has previous
experience of the PVC windows and
doors industry having worked for
Duraflex and Celuform.
Experience:
Bob Lawson is the Non-executive
Chairman of Genus plc. He was
previously the Chairman at Barratt
Developments plc, Hays plc and the
Federation of Groundwork Trust.
Prior to this Bob was Managing
Director for the Vitec Group for four
years, Chief Executive Officer of
Electrocomponents plc for eleven
years and subsequently Chairman for
a further six years. Bob is Chairman
of the Nomination Committee.
Experience:
Michael Scott joined the Group as
Chief Financial Officer in September
2016. Michael previously worked at
Drax Group plc, where he held senior
financial positions including Group
Financial Controller and Head of
Corporate Finance & Investor
Relations. Prior to Drax, Michael
worked for MT International and Arthur
Andersen, where he qualified as a
Chartered Accountant.
Committee membership:
Committee membership:
40 EUROCELL PLC
Annual Report and Accounts 2017
Key:
Member of the Audit and Risk Committee
Member of the Remuneration Committee
Member of the Nomination Committee
Patrick Kalverboer
Non-executive Director
Frank Nelson
Senior Independent
Non-executive Director
Martyn Coffey
Independent Non-executive
Director
Date of appointment:
16 August 2013
Date of appointment:
4 February 2015
Date of appointment:
4 February 2015
Experience:
Patrick Kalverboer is a managing
partner of H2 Equity Partners, a private
equity house that, prior to March 2015,
held a controlling interest in Eurocell.
Patrick has over 20 years of private
equity experience and has been
involved in various investments made
by H2 (and its predecessors) in both an
executive and non-executive capacity.
Experience:
Frank Nelson was Finance Director of
Galliford Try plc from 2000 to 2012.
He is the Senior Independent
Non-executive Director at each
of McCarthy & Stone plc, HICL
Infrastructure Company Limited and
Telford Homes plc. Frank is also a
fellow of the Chartered Institute of
Management Accountants. He is the
Chairman of the Audit and Risk
Committee and is the Senior
Independent Non-executive Director.
Experience:
Martyn Coffey is the Chief Executive
Officer of Marshalls plc. Prior to his
role at Marshalls, Martyn was
Divisional Chief Executive Officer
at BDR Thermea Group BV, with
responsibility for operations in the
UK, France, Germany, Iberia and
Italy. He is also a Director of the
Mineral Products Association.
Martyn is the Chairman of the
Remuneration Committee.
Committee membership:
Committee membership:
Committee membership:
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41
CORPORaTE gOvERNaNCE
Chairman’s Introduction
Letter from the Chairman
Dear Shareholder,
I am pleased to report that, in our third year as a listed business,
Eurocell has delivered more progress and continued to develop
and improve its systems of governance and internal control.
This Corporate Governance Statement, together with the
Reports of the Nomination, Audit and Risk and Remuneration
Committees on pages 46 to 64, explain how our governance
framework operates and how we apply the principles of
business integrity, high ethical values and professionalism in all
our activities. I hope that it provides you with a meaningful
insight into how we operate and the matters on which we have
focused during the year.
I am committed to ensuring that the Company manages its
affairs in compliance with the principles and provisions of the
Code. I am pleased to report that the Board considers the
Company to have complied with the relevant provisions of the
Code throughout the year in all material respects. I can also
confirm that, in the opinion of the Directors, this Annual Report
presents a fair, balanced and understandable assessment of the
Group’s position and prospects and provides the information
necessary for Shareholders to assess the Group’s strategy,
business model and performance.
The Group’s strategy is outlined on pages 20 and 21 of the
Strategic Report.
As a Board, we recognise that we are accountable to
Shareholders for good corporate governance. We seek to
promote consistently high standards of governance throughout the
Group, which are recognised and understood by all.
The respective responsibilities of the Directors and the auditors
in connection with the Financial Statements are explained in the
Statement of Directors’ Responsibilities on page 68 and
Auditors’ Report pages 69 to 75.
Good governance involves good and effective leadership, robust
systems and processes that are regularly tested, and a good
understanding of risk appetite. The Board seeks to add value
through guiding the strategy of the Group, constructive
challenge and dialogue and through engagement with
Shareholders and other stakeholders. Each Director continues
to make a very valuable contribution to the Board.
This Corporate Governance Statement, which is part of the
Directors’ Report, has been prepared in accordance with the
principles of the UK Corporate Governance Code published in
April 2016 (the ‘Code’), which the Board fully supports. The Code
is published by the Financial Reporting Council and is available on
its website at www.frc.org.uk.
I would like to thank my Board and management colleagues for
their contributions to the governance of the Company. I look
forward to working with them in 2018 to continue to build on the
foundations and system of governance that we have established
in support of our long-term objectives.
Bob Lawson
Chairman
8 March 2018
I am pleased to report
that, in our third year as a
listed business, Eurocell
has delivered more
progress and continued to
develop and improve its
systems of governance
and internal control.”
42 EUROCELL PLC
Annual Report and Accounts 2017
Corporate Governance Statement
Role of the Board
The Board comprises a Non-executive Chairman, three
Non-executive Directors and two Executive Directors, who are
equally and collectively responsible for the proper stewardship
and leadership of the Company. Their biographical details are
set out on pages 40 and 41.
The Code recommends that for companies beneath the
FTSE 350, the Board should comprise at least two
Non-executive Directors, who are determined by the Board
to be independent in character and judgement and free from
relationships or circumstances which may affect, or could
appear to affect, this judgement. The Company regards
Martyn Coffey and Frank Nelson as ‘independent
Non-executive Directors’ within the meaning of the Code.
The formal schedule of matters reserved for the Board’s
consideration includes the following:
• Approval of the Group’s strategy, long-term objectives,
annual operating budgets and capital expenditure plans.
• Approving transactions of significant value or major strategic
importance, including acquisitions.
• Approving significant changes to the Group’s capital,
corporate or management structure.
• Monitoring and assessing the overall effectiveness of the
Group’s risk management processes and internal control
systems, including those related to health and safety,
financial controls and anti-bribery policies and procedures.
• Approving the Annual and Half-Year Reports, including
Financial Statements.
• Approving other corporate communications related to
matters decided by the Board.
• Board appointments and succession planning and setting
terms of reference for Board Committees.
• Remuneration matters, including the general framework for
remuneration and share and incentive schemes.
The Board has delegated specific responsibilities to the
Nomination, Audit and Risk and Remuneration Committees.
The Nomination Committee Report on page 46 explains
how the Board and senior management appointments,
succession planning and development are being addressed.
The Audit and Risk Committee Report on pages 47 to 49
provides details of how the Board applies the Code in relation to
financial reporting, risk management and internal controls.
The Remuneration Committee Report on pages 50 to 64 gives
details of Directors’ remuneration and policy.
Day-to-day management and the implementation of strategies
agreed by the Board are delegated to the Executive Directors.
The Board meets regularly to discuss key operational issues and
prescribe actions as appropriate. The Group’s reporting
structure below Board level is designed so that all decisions are
made by those most qualified to do so in a timely manner.
Key to the structure is the Executive Committee (the ‘Steering
Group’), comprising nine senior managers, including the two
Executive Directors. Management teams report to members of
the Steering Group, which meets each month.
The Board receives regular updates from the Steering Group in
relation to business issues and developments.
This structure enables the Board to make informed decisions on
a range of key issues including strategy and risk management.
Role of the Chairman
The Board has concluded that the Chairman has met the
independence criteria of the Code since appointment.
There is a clear division of responsibilities between the
Chairman and the Chief Executive Officer.
The Chairman is responsible for ensuring that the Board
functions effectively. He sets the agenda for Board meetings
and ensures that adequate time is devoted to discussion of all
agenda items, particularly strategic issues, facilitating the
effective contribution of all Directors and ensuring that the Board
as a whole is involved in the decision-making process.
Role of the Chief Executive Officer
The Chief Executive Officer has principal responsibility for all
operational activities and the day-to-day management of the
business, in accordance with the strategies and policies approved
by the Board. The Chief Executive also has responsibility for
communicating to the Group’s employees the expectations of the
Board in relation to culture, values and behaviours.
Role of the Senior Independent Director and
Non-executive Directors
The Senior Independent Director has an important role on the
Board, providing a sounding board for the Chairman, leading on
corporate governance issues and serving as an intermediary for
the other Non-executive Directors. He is available to
Shareholders if they have concerns which contact through the
normal channels of the Chairman, Chief Executive Officer or
other Executive Directors has failed to resolve, or for which such
contact is not appropriate.
All Non-executive Directors are required to allocate sufficient
time to the Company to discharge their responsibilities effectively.
The Non-executive Directors act in a way they consider will
promote the long-term success of the Group for the benefit of,
and with regard to the interests of its Shareholders.
Board composition, commitment and
election of Directors
The Nomination Committee leads the process for Board
appointments and makes recommendations to the Board.
On appointment, Board members, in particular the Chairman and
the Non-executive Directors, disclose their other commitments
and agree to allocate sufficient time to the Company to discharge
their duties effectively and ensure that these other commitments
do not affect their contribution.
The current Board commitments of all Directors are shown on
pages 40 and 41. Their terms of appointment are reported on
page 57. Directors’ length of service on the Board is set out in the
table below.
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CORPORaTE gOvERNaNCE
Corporate Governance Statement continued
Length of service
Bob Lawson
Mark Kelly
Michael Scott
Patrick Kalverboer
Frank Nelson
Martyn Coffey
Date joined Eurocell
Date joined the Board
1 January 2015
29 March 2016
4 February 2015
29 March 2016
1 September 2016 1 September 2016
16 August 2013
4 February 2015
4 February 2015
16 August 2013
1 January 2015
1 January 2015
The Company’s Articles of Association contain powers of
removal, appointment, election and re-election of Directors
and provide that all of the Directors must retire and may offer
themselves for re-election at each Annual General Meeting
(‘AGM’).
At the upcoming AGM, all the Directors intend to offer
themselves for re-election. We consider all the Directors to be
effective, committed to their roles and to have sufficient time
available to perform their duties.
Board evaluation and effectiveness
It is the Group’s intention that a performance evaluation of the
Board and its Committees is undertaken on a periodic basis.
Such a review considers the following:
• Effectiveness of the Board’s decision-making.
• Strategy development process.
• Board composition.
• Succession planning.
• Risk and risk management systems.
• Culture.
The evaluation process is designed to stimulate thought and
discussion, and includes consideration over the effectiveness of
Executive Directors, Non-executive Directors and the Chairman.
The Senior Independent Director separately reviews the Chairman’s
performance with the other Non-executive Directors. The results of
the evaluation are considered by the Chairman and discussed by
the Board.
The Board believes that the evaluation process described above
is thorough, robust and works well. All Directors are expected to
engage fully, with a genuine desire to enhance overall Board
performance. The process includes sufficient objectivity and
confidentiality to ensure that challenge is acknowledged and
acted upon.
The first internal evaluation was undertaken in 2015 as part of
the Group’s IPO process. In the light of changes to the Board
post IPO, with a new Chief Executive Officer and Chief Financial
Officer joining the Group in 2016, no review was carried out in
2017. However, in accordance with the Code, an external
evaluation of the Board will be carried out every three years by
an independent third-party facilitator. Such an external
evaluation is currently in progress and the results will be
included in next year’s Annual Report.
44 EUROCELL PLC
Annual Report and Accounts 2017
Taking all of the above into account, the Board is satisfied that
the composition of the Board and its Committees provides an
appropriate balance of skills, experience, independence and
knowledge to allow the Board and its Committees to discharge
their duties and responsibilities effectively and in line with the
Code.
Board meetings and attendance
There were six regular Board meetings scheduled during 2017,
four meetings of the Audit and Risk Committee, two meetings
of the Remuneration Committee and two meetings of the
Nomination Committee. Non-executive Directors also attended
site visits.
The Chief Executive and Chief Financial Officer are usually
invited to attend Audit and Risk Committee meetings, although
the Audit and Risk Committee also meets with the external
auditor without any Executive Director being present. The Chief
Executive is invited to attend Remuneration Committee
meetings when appropriate. The Company Secretary is also
Secretary to the Remuneration Committee and the Audit and
Risk Committee, and attends meetings for this purpose.
Number of meetings
attended
Bob Lawson
Frank Nelson
Martyn Coffey
Patrick Kalverboer
Mark Kelly
Michael Scott
Audit and
Risk
Committee
Remuneration
Committee
Nomination
Committee
–
4/4
4/4
–
–
–
2/2
2/2
2/2
–
–
–
2/2
2/2
2/2
2/2
2/2
–
Board
6/6
6/6
6/6
5/6
6/6
6/6
The Company Secretary
All the Directors have access to the advice and services of the
Company Secretary. The Company Secretary has responsibility
for ensuring that all Board procedures are followed and for advising
the Board, through the Chairman, on governance matters.
The Company Secretary provides updates to the Board on
regulatory and corporate governance issues, new legislation, and
Directors’ duties and obligations. The appointment and removal of
the Company Secretary is one of the matters reserved for the Board.
Whenever necessary, Directors may take independent
professional advice at the Company’s expense. Board
Committees are provided with sufficient resources to undertake
their duties, including the option to appoint external advisers
when they deem it appropriate.
Board induction, development and support
New Directors receive a formal induction on joining the Board,
which covers Group policies and other key information. Tailored
training may be arranged to meet individual needs, for example
to refresh knowledge of the Listing Rules and regulatory
compliance. Typically, a new Director will meet the Chairman
and other Non-executive Directors in one-on-one sessions; he
or she will have meetings with key management, briefings with
external advisers and Shareholders, and a programme of site
visits will be arranged at which the Director meets site-based
staff to gain a full understanding of the business.
Looking forward, it is the Company’s expectation that training
will be built in to the annual Board programme, designed to
incorporate a range of in-depth topics of particular relevance to
the business. Training needs will be identified through the Board
evaluation process and through individual reviews between the
Directors and the Chairman. Directors are expected to attend
external courses and seminars as appropriate to maintain and
develop their Board competencies.
During 2017, there were Board briefings relating to changes to
financial reporting and corporate governance (including health
and safety regulations and business continuity planning). There
were also individual meetings between Non-executive Directors
and senior managers relating to areas of particular interest.
place to mitigate them. In conducting its review, the Board has
included a robust assessment of these risks, and the
effectiveness of mitigating controls.
The Audit and Risk Committee Report on pages 47 to 49
describes the internal control system and how it is managed
and monitored.
The Board confirms that no significant failings or weaknesses were
identified in relation to the review. The Board also acknowledges
that such systems are designed to manage, rather than eliminate,
the risk of failure to achieve business objectives and can only
provide reasonable and not absolute assurance against material
misstatement or loss.
Engagement with Shareholders
The Board considers that communications with Shareholders are
extremely important. Now in our third year as a listed business,
we have developed open and frequent dialogue with investors.
The Chief Executive and Chief Financial Officer meet regularly with
major Shareholders and potential investors to discuss the Group’s
performance, strategic issues and Shareholder investment
objectives. We also periodically arrange site visits for investors.
Statement of compliance with the Code
This Corporate Governance Statement, together with the
Nominations Committee Report, the Audit and Risk Committee
Report and the Remuneration Committee Report, provide a
description of how the main principles of the Code have been
applied within Eurocell during 2017.
It is the Board’s view that Eurocell was in compliance with the
relevant provisions set out in the Code in all material respects.
Alongside the Annual and Half-Year Results, the Group follows a
regular reporting and announcement schedule to ensure that
matters of importance affecting the Group are communicated to
investors. In addition, in 2017 the Group launched a much improved
investor website: investors.eurocell.co.uk
This statement complies with sub sections 2.1, 2.2(1), 2.3(1), 2.5,
2.7 and 2.10 of Rule 7 of the Disclosure Rules and Transparency
Rules of the Financial Conduct Authority. The information
required to be disclosed by sub-section 2.60 of Rule 7 is shown
on pages 65 to 67.
During 2017, a total of approximately 87 investor meetings were
held, at which at least 57 institutions were represented. Feedback
from these meetings and other Shareholder communications are
provided to the Board. The Board also receives copies of analysts’
and brokers’ briefings.
The Chairman is available to meet with institutional Shareholders
to discuss governance and strategy and gain an understanding of
Shareholder views and concerns. The Chairman ensures that the
views of Shareholders are communicated to the Board as a
whole. The Senior Independent Director and other Non-executive
Directors are also available to meet Shareholders separately if
requested.
Risk management and internal control
The Board acknowledges its responsibility for determining the
nature and extent of the significant risks it is willing to take in
achieving its strategic objectives, and for the Group’s system of
internal control.
The Board has carried out a review of the effectiveness of the
Group’s risk management and internal control systems,
including financial, operational and compliance controls, for the
period covered by this Annual Report.
The Strategic Report comments in detail (pages 34 to 38) on the
nature of the principal risks and uncertainties facing the Group;
in particular those that would threaten our business model,
future performance, solvency or liquidity and the measures in
Annual General Meeting
Our AGM will be held at Fairbrook House on 18 May 2018.
The notice of our AGM, together with the Directors’ voting
recommendations on the resolutions to be proposed, is included
on a separate circular to Shareholders and will be dispatched at
least 20 working days before the meeting. The notice will be
available to view at investors.eurocell.co.uk.
All Directors attend the AGM, including the Chairs of the Audit and
Risk, Remuneration and Nomination Committees, who are available
to answer questions. The Board welcomes questions from
Shareholders who have an opportunity to raise issues informally or
formally before or during the meeting.
For each proposed resolution, the proxy appointment forms
provide Shareholders with the option to direct their proxy vote
either for or against the resolution or to withhold their vote.
The proxy form and any announcement of the results of a vote
make it clear that a ‘vote withheld’ is not a vote in law and will
not be counted in the calculation of the proportion of the votes
for and against the resolution.
All valid proxy appointments are properly recorded and counted
by Equiniti, the Company Registrars. Information on the number
of shares represented by proxy, the proxy votes for and against
each resolution, and the number of shares in respect of which
the vote was withheld for each resolution, together with the
proxy voting result, are given at the AGM. The total votes cast,
including those at the AGM are published on our website
(investors.eurocell.co.uk) immediately after the meeting.
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Nomination Committee
Statement from Bob Lawson, Chair of the Nomination Committee
Dear Shareholder,
I am pleased to report to you on the main activities of the
Committee and how it has performed its duties during 2017.
I chair Nomination Committee meetings, but would not do so
where the Committee was discussing matters relating to my
own reappointment or replacement as Chairman.
During the year the Nomination Committee held two scheduled
meetings. Attendance at meetings is shown on page 44.
Activities during the year
• Assisted the Executive Directors with the selection and
recruitment of a new Head of Human Resources, following
the retirement of Glenn Parkinson in October 2017.
• Organisational succession and development planning at
Board and senior management level.
Diversity
The Committee remains committed to achieving diversity in its
widest sense in the composition of the Board, senior
management and throughout the Group. This includes diversity
in gender and ethnicity.
Our objective is to recruit people with an appropriate range of
skills, knowledge and experience. We would like to see women
represented fairly on the Board and Steering Group and we will
continue to work towards this. Our overriding policy in any new
appointment is to select on merit to ensure the continued
success of the business.
Bob Lawson
Chair of the Nomination Committee
8 March 2018
Members:
Bob Lawson (Chairman)
Patrick Kalverboer
Frank Nelson
Martyn Coffey
Mark Kelly
Role and Responsibilities:
The principal duties of the Nomination Committee are to:
• Keep under review the structure, size and composition
of the Board, including the skills, knowledge and
experience required by it.
• Keep under review the time commitments required from
Non-executive Directors.
• Consider succession planning for the Directors and
other senior managers, giving due weight to the
achievement of diversity in its widest sense.
Identify and nominate candidates to fill any vacancies
arising in Board positions.
•
46 EUROCELL PLC
Annual Report and Accounts 2017
Audit and Risk Committee
Statement from Frank Nelson, Chair of the Audit and Risk Committee
Dear Shareholder,
I am pleased to report to you on the Audit and Risk
Committee’s objectives and activities during 2017.
This report, which is part of the Directors’ Report,
explains how the Audit and Risk Committee has
discharged its responsibilities during 2017, and
reflects the recent changes to reporting under the
Code. I hope you find it useful and informative.
The role of the Audit and Risk Committee is to
oversee financial reporting. The Committee reviews
the ongoing effectiveness of the Group’s internal
controls and provides assurance on the Group’s risk
management processes. The Committee also
assesses information received from the external and
internal audit functions.
The Committee has reviewed the Group’s Financial
Statements contained in this Annual Report and is
satisfied that they present a fair, balanced and
understandable assessment of the Group’s position
and prospects. The Committee has provided
assurance to this effect to the Board.
The Audit and Risk Committee is the body appointed
by the Board with responsibility for carrying out the
functions required by the Listing Rules DTR 7.1.3R.
The terms of reference of the Committee include all
the matters required under the Code.
The Chairman of the Committee is a Fellow of the
Chartered Institute of Management Accountants and
the Board is satisfied he has recent and relevant
financial experience as required by the Code.
During the year, the Audit and Risk Committee held
four scheduled meetings. Attendance is shown on
page 44.
The external auditors were invited to attend all
meetings of the Committee. Other individuals, such
as the Chief Executive Officer, the Chief Financial
Officer and other members of the Board are invited
to attend the Committee meetings as and when
appropriate.
In addition, the external auditors’ met with the
Committee without executive management being
present. The external auditors’ also met separately
with each of the Audit and Risk Committee Chairman
and the Chief Financial Officer.
Members:
Frank Nelson (Chairman)
Martyn Coffey
The Company Secretary acts as secretary to the Committee.
Role and Responsibilities:
The principal duties of the Audit and Risk Committee are to:
• Review the Annual Report, Half-Year Report and any other formal
announcements relating to the Group’s financial performance, giving
due consideration to significant accounting issues and judgements
contained therein, as well as compliance with accounting standards
and other legal and regulatory requirements.
• Review the Annual Report and Financial Statements to advise the
Board on whether they give a fair, balanced and understandable
explanation of the Group’s business and performance over the
relevant period.
• Review the Group’s financial reporting systems and procedures.
• Review the Group’s internal controls and risk management systems
and advise the Board whether they are adequate, by considering
reports on their effectiveness from the Chief Financial Officer and
Chief Executive Officer, together with reports from the Group’s
outsourced internal auditor and from the external auditor.
• Review and update the Group’s risk register.
• Review the Group’s procedures to ensure compliance with the
provisions of the Bribery Act 2010 and the Group’s whistleblowing policy.
• Review external auditors’ independence and objectivity, audit and
non-audit fees and make recommendations regarding audit tender
and the appointment and remuneration of the auditors’, together
with the terms of their engagement.
• Review the annual audit plan and monitor the effectiveness of the
external audit process.
• Monitor and review the effectiveness of the outsourced internal
audit function. Review the internal audit plan, all internal audit
reports, and review and monitor management’s responses to the
findings and recommendations of the internal audit function.
• Consider the adequacy of the Group’s finance function.
• Review the Group’s tax strategy.
• Review the Committee Terms of Reference.
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CORPORaTE gOvERNaNCE
Audit and Risk Committee continued
Summary of activities
The areas of particular focus for the Committee in 2017, and up
to the date of this Annual Report, were as follows:
• Reviewed the 2016 and 2017 Annual Reports, as well as the
2017 Half-Year Report.
• Considered information presented by management on
significant accounting estimates and judgements adopted in
respect of the Group’s 2016 and 2017 Financial Statements
and the 2017 Half-Year Report.
• Reviewed reports from the external auditors’ setting out their
findings as a result of their audits for the years ended 31
December 2016 and 2017, as well as their review of the 2017
Half-Year Report.
• Reviewed the external auditors’ plan for their audit for the
year ended 31 December 2017.
• Reviewed documentation prepared to support the viability
statement and going concern assumption set out on page 39.
• Considered the impact of new accounting standards and
financial reporting requirements, including guidance issued
by the Financial Reporting Council (‘FRC’).
• Considered reports by management related to the
effectiveness of the Group’s systems of risk management
and internal control.
• Reviewed the Group’s risk register.
• Considered reports prepared by the Group’s outsourced
internal audit function.
• Reviewed and updated the Group’s Whistleblowing and
Anti-bribery policies.
The Committee is kept up to date with changes to accounting
standards and developments in financial reporting, company
law and other regulatory matters through presentations from the
external auditors’, Chief Financial Officer and the Company’s
Finance function.
Key accounting estimates and judgements
As described above, the Committee reviewed the key estimates
and judgements used in the preparation of the Group’s 2017
Financial Statements. These were as follows:
Inventory valuation
The Committee critically reviewed the carrying value of the
Group’s inventory, particularly with regard to management’s
assessment of the appropriate level of provisioning against
obsolescence as at 31 December 2017. This review was
undertaken in the context of current trading and the forecast
for the next financial year. The Committee concurred with
management’s assessment of the carrying value of Group
inventory. The Committee noted that there continues to be
considerable management focus on both the optimisation of
finished goods inventory levels and, looking forward, on the
operational controls over the management of inventory.
Accounts receivable recoverability
The Committee considered and critically evaluated the Group’s
methodology with respect to setting provisions for potential bad
and doubtful debts, as well as the absolute level of provisions
held as at 31 December 2017. The review took into account the
specific nature and characteristics of customers in the Group’s
two major divisions. The Committee is satisfied that the current
level of provisions is appropriate.
Provisions for dilapidations on leased properties
The Group currently operates with 190 branches, each of which
is situated in a leased property. Leases are typically for five years,
with a three-year break clause. The Committee undertook a
review of the methodology used to estimate the liability for
remedial works that may arise with respect to the Group’s
leasehold properties, as well as the absolute level of provision
held and amounts utilised. The Committee is satisfied that the
current level of provision is reasonable.
Carrying value of intangible assets
The carrying value of goodwill and intangible assets are assessed
at least annually, or when an indication of impairment arises.
Where the carrying value of an asset exceeds its recoverable
amount (i.e. the higher of value in use and fair value less costs to
sell), the asset is written down. The Committee is satisfied that
the key estimates applied to assess the recoverable amounts are
reasonable. Further details on impairment along with the key
estimates are provided in Note 16.
Risk management
The Group’s risk management processes are set out in detail on
pages 34 to 35.
The Group maintains a written risk register that identifies key
risks, the probability of those risks occurring and the impact
they would have on the Group if unmitigated. Against each
gross risk, the controls that exist to manage and, where
possible, minimise or eliminate those risks are also listed, and
an assessment of net risk is provided. The risk register also
identifies any further actions required such that net residual risk
is consistent with the risk appetite set by the Board. The register
is regularly updated to reflect changes in circumstances.
The Group, established a Risk Management Committee early
in 2017, chaired by the Chief Financial Officer. This Committee
reviews the most significant risks and the status of related
mitigating actions each month, with other risks reviewed on a
cyclical basis.
The Audit and Risk Committee reviews the risk register twice
per year to ensure the timely identification and robust
management of inherent and emerging risks taking place.
To the extent that any failings or weaknesses are identified
during the review process, appropriate measures are taken
to remedy these.
48 EUROCELL PLC
Annual Report and Accounts 2017
Information relating to the management of risks and any
changes to the assessment of key risks is reported by the
Audit and Risk Committee to the Board.
An annual review of external audit effectiveness is undertaken
by the Committee.
Whistleblowing and bribery
The Audit and Risk Committee monitors any reported incidents
under our whistleblowing policy, which is available to all
employees. This policy sets out the procedure for employees to
raise legitimate concerns about any wrongdoing without fear of
criticism, discrimination or reprisal. No matters were raised
under the policy during 2017.
The Audit and Risk Committee also takes responsibility for
reviewing the policies and procedures adopted by the Group to
prevent bribery. The Group is committed to a zero-tolerance
position with regard to bribery. The Committee is satisfied
that the Group’s procedures with respect to these matters
are adequate.
Frank Nelson
Chair of the Audit and Risk Committee
8 March 2018
Internal controls
The Group has an established internal control framework, the
key features of which include clearly defined reporting lines and
authorisation limits and a comprehensive budget and monthly
reporting system. The schedule of authorisation limits was
updated in December 2016, to reflect the development of the
business since its IPO, and approved by the Board.
The internal control framework governs the internal financial
reporting process of the business, with checks and balances
built into the system that are designed to reduce the likelihood
of material error or fraud.
The Committee monitors and reviews the effectiveness of
internal controls on an ongoing basis, primarily by reviewing
reports from senior management.
Internal audit
In order to further enhance the internal control and risk
management processes, the Group implemented an outsourced
internal audit function in March 2017. Following a formal tender
process the Company appointed KPMG to fulfil this role.
The Committee worked with KPMG to set the programme for
internal audit in 2017, which included reviews over the Group’s
risk management systems, payroll, cyber security, GDPR
readiness and management’s branch audit process.
External audit and auditors’ independence
The Audit and Risk Committee has primary responsibility for
making a recommendation to the Board on the appointment,
reappointment and removal of the external auditors’. It keeps
under review the scope and results of the audit, its cost
effectiveness and the independence and objectivity of the
auditors’. There are no contractual obligations restricting our
choice of external auditors.
The Group’s current auditors’ PwC were appointed at the Audit and
Risk Committee meeting on 29 April 2015, following the Company’s
IPO. PwC has processes in place designed to maintain
independence, including regular rotation of the audit partner.
The Committee has also adopted policies to safeguard the
independence of its external auditors’. Any work awarded to the
external auditors’ with a value of more than £5,000 in aggregate
in any financial year, other than an audit, requires the specific
approval of the Committee. Where the Committee perceives
that the independence of the auditors’ could be compromised,
the work will not be awarded to it. Details of amounts paid
to PwC for audit and audit related assurance services in 2017
are set out on page 88.
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CORPORaTE gOvERNaNCE
Directors’ Remuneration Report
Remuneration Committee Chairman’s Letter
Dear Shareholder,
I am pleased to present the Directors’ Remuneration Report for
2017. The report is split into two parts:
• Part A: The Directors’ Remuneration Policy – which provides
a summary of the remuneration policy for which Shareholder
approval was obtained at the 2016 AGM and which will
continue to apply without amendment for the forthcoming
year; and
• Part B: The Annual Report on Remuneration – which sets out
payments and awards made to the Directors and details the
link between Company performance and remuneration for
2017 and how the policy will be operated for 2018.
As no changes are proposed to the existing policy, only one
remuneration resolution will be tabled at the 2018 AGM i.e. the
advisory Shareholder vote on the Annual Report on
Remuneration.
Work of the committee during the year
The Committee met two times during 2017. The main
Committee activities during the year (full details of which are set
out in the relevant sections of this report) included:
• Agreeing the performance against the targets and payout for
the 2016 annual bonus awards.
• Agreeing Executive Director base salary increases from
1 April 2017.
• Setting the performance targets for the 2017 annual bonus.
• Agreeing the award levels and earnings per share and
operating cash flow targets for the 2017 PSP awards.
• Approving awards under the Eurocell Save As You Earn
Scheme (including awards to the two Executive Directors).
• Approving the vesting of Mark Kelly’s buyout share award at
the 12-month anniversary of grant.
Pay for Performance
As described in earlier sections of this Annual Report, our senior
management team delivered very good progress against our
strategic priorities in 2017. Further, against a more challenging
economic backdrop, the business reported robust financial
results and another consistent operational performance.
Sales growth was good at 8% (excluding acquisitions), with
market share gains across the Group. Profitability was solid,
having been impacted by a subdued Repair, Maintenance and
Improvements (‘RMI’) market and especially by higher raw
material cost inflation. Where possible, the team mitigated
pricing pressure with selling price increases, but the market
does lag supplier rises so there is a delay in capturing the
benefit. However, management also delivered on initiatives
which increased significantly the use of recycled material in
our manufacturing operations, in order to further alleviate
cost inflation.
In addition, the business made significant investments in 2017,
including opening 31 new branches and progressing capital
expenditure to expand our recycling capability. Management
Members:
Martyn Coffey (Chairman)
Bob Lawson
Frank Nelson
Role and Responsibilities:
The Committee’s principal responsibilities are to:
• Recommend to the Board the remuneration strategy and
framework for the Chairman, Executive Directors and
senior managers.
• Determine, within that framework, the individual
remuneration arrangements for the Executive Directors
and senior managers.
• Oversee any major changes in employee benefit
structures throughout the Group.
50 EUROCELL PLC
Annual Report and Accounts 2017
believes these investments leave the Group well placed to
deliver further gains in market share and more control of
material costs in the future.
The Committee believes that the above approach takes due
account of market and best practice and, importantly, also
reflects and supports Eurocell’s strategy and promotes the
Company’s long-term success.
Format of this Report and matters to be approved
at our AGM
Notwithstanding the fact that: (i) we will not be seeking
Shareholder approval for any changes to our Remuneration
Policy at the 2018 AGM; and (ii) the relevant Regulations do not
require us to reproduce our Remuneration Policy in this report;
for ease of reference we have decided to include a summary of
our policy in addition to the Annual Report on Remuneration
section of the report (in respect of which we will be holding an
advisory vote at the forthcoming AGM). The full Directors’
Remuneration Policy was disclosed in the 2015 Annual Report.
I hope that you will continue to show support for our approach
to remuneration at Eurocell. Should you have any queries
or comments, please feel free to contact me at
martyn.coffey@eurocell.co.uk.
Martyn Coffey
Chair of the Remuneration Committee
8 March 2018
This performance has been reflected in the payments made
to the Executive Directors under the Annual Bonus Plan,
amounting to 40% of salary. Performance against the adjusted
profit before tax element of the bonus resulted in a bonus of
42% of that element (i.e. approx. 30% of salary) while
performance against the cash flow element of the bonus
resulted in a bonus of 33% of that element (i.e. approx. 10%
of salary). In addition, the health and safety underpin was
considered satisfied.
Further details of these bonus pay-outs (including information
regarding performance against the relevant targets and the
operation of the deferred share element of the plan) can be
found on page 60 and 61 of this report.
No Performance Share Plan (‘PSP') awards vested during the
year (the first vestings for the current Executive Directors are
due to take place in 2019 based on EPS and operating cash
flow performance over the three years to 31 December 2018).
Summary of our Directors’ Remuneration Policy
At the AGM on 19 May 2016, we put our Remuneration Policy
to Shareholders for a binding vote. We were very pleased to receive
unanimous approval for the policy. We do not propose making any
changes to the policy this year. Therefore, the main elements of
the Executive Directors’ packages will remain as follows:
• Base salaries
Salary levels (as well as overall remuneration opportunity)
will be positioned to reflect experience and responsibility.
Mark Kelly’s and Michael Scott’s current salaries are
£367,200 and £234,600 respectively. In line with other
Eurocell employees, with effect from 1 April 2018, these
salaries will be increased by 2%.
• Pensions/benefits
A defined contribution/salary supplement of 15% of salary
will continue to be offered, together with a standard suite of
other benefits.
• Annual bonus
The maximum annual bonus remains at 100% of salary.
For 2018, reflecting Eurocell’s underlying strategy, 70% of the
bonus will be based on adjusted profit before tax and 30%
will be based on cash flow targets. The targets will be subject
to a health and safety underpin. Up to 50% of any bonus
earned is normally deferred into shares for three years.
• Long-term incentives
PSP awards are expected to be made in April 2018.
Award levels will be set at 100% of salary for Mark Kelly and
Michael Scott. Performance targets will be based on three
year earnings per share growth (two-thirds of the award)
and cash flow (one-third) targets.
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Directors’ Remuneration Report continued
Explanatory foreword
This report contains the material required to be set out as the Directors’ Remuneration Report for the purposes of Part 4 of
The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. Our Directors’
Remuneration Policy was approved at the 2016 AGM. We are not proposing to make any changes to this policy, which will continue
to apply for the forthcoming year. For ease of reference, we have set out in Part A below the key features of our policy. The full,
formal policy is as disclosed in the 2015 Annual Report, which is available on the Company’s website.
Part B constitutes the Annual Report on Remuneration. The auditors have reported on certain parts of the Annual Report on
Remuneration and stated whether, in their opinion, those parts have been properly prepared in accordance with the Companies
Act 2006. Those parts which have been subject to audit are clearly indicated.
PART A: DIRECTORS’ REMUNERATION POLICY
The following table summarises the key aspects of the Directors’ Remuneration Policy:
Executive Directors
Element and Purpose
Policy and Operation
Maximum
Performance Measures
Base salary
This is the core element of
pay and reflects the
individual’s role and
position within the Group
with some adjustment to
reflect their capability and
contribution.
Base salaries will be reviewed each year
by the Committee.
The Committee does not strictly follow
data, but uses the median position (as
against appropriate size and/or sector
peers) as a reference point in considering,
in its judgement, the appropriate level of
salary having regard to other relevant
factors including corporate and individual
performance and any changes in an
individual’s role and responsibilities.
Base salary is paid monthly in cash.
Benefits
To provide benefits valued
by recipients.
The Executive Directors can receive a car
allowance or company car, private family
medical cover, permanent health
insurance and life assurance.
The Committee reserves discretion to
introduce new benefits where it concludes
that it is appropriate to do so, having
regard to the particular circumstances and
to market practice.
Where appropriate, the Company will
meet certain costs relating to Executive
Director relocations.
n/a
n/a
It is anticipated that salary
increases will generally be in
line with those awarded to
salaried employees. However,
in certain circumstances
(including, but not limited to,
changes in role and
responsibilities, market levels,
individual and Company
performance), the Committee
may make larger salary
increases to ensure they are
market competitive. The
rationale for any such increase
will be disclosed in the
relevant Annual Report on
Remuneration.
It is not possible to prescribe
the likely change in the cost of
insured benefits or the cost of
some of the other reported
benefits year-to-year, but the
provision of benefits will
operate within an annual limit
of £100,000 (plus a further
100% of base salary in the
case of relocations).
The Committee will monitor
the costs of benefits in
practice and will ensure that
the overall costs do not
increase by more than the
Committee considers
appropriate in all the
circumstances.
52 EUROCELL PLC
Annual Report and Accounts 2017
Element and Purpose
Policy and Operation
Maximum
Performance Measures
Pension
To provide retirement
benefits.
Executive Directors can receive pension
contributions to personal pension
arrangements or, if a Director is impacted
by annual or lifetime limits on contribution
levels to qualifying pension plans, the
balance can be paid as a cash
supplement.
The maximum employer’s
contribution is limited to up to
15% of base salary.
n/a
Annual Bonus Plan
To motivate executives and
incentivise delivery of
performance over a
one-year operating cycle,
focusing on the short-to-
medium-term elements of
our strategic aims.
Annual Bonus Plan levels and the
appropriateness of measures are reviewed
annually at the commencement of each
financial year to ensure they continue to
support our strategy.
The maximum level of
Annual Bonus Plan outcomes
is 100% of base salary per
annum for the duration of
this policy.
Once set, performance measures and
targets will generally remain unchanged
for the year, except to reflect events such
as corporate acquisitions or other
significant events where the Committee
considers it to be necessary in its opinion
to make appropriate adjustments.
Annual Bonus Plan outcomes can be paid
in a mix of cash and deferred shares
granted under the Company’s Deferred
Share Plan (‘DSP’), following the
determination of achievement against
performance measures and targets.
Awards under the DSP are deferred for
such periods as the Committee selects at
grant, which will not normally be less than
(but may be longer than) three years and
are subject to continued employment.
Where an element of bonus is payable as
deferred shares under the DSP, individuals
may be able to receive a dividend
equivalent in cash or shares equal to the
value of dividends which would have been
paid during the vesting period.
Clawback and malus provisions apply to
the Annual Bonus Plan and DSP, as
explained in more detail in the notes to the
policy table, as disclosed in the 2015
Annual Report.
The performance
measures applied may be
financial or non-financial
and corporate, divisional
or individual and in such
proportions as the
Committee considers
appropriate.
Attaining the threshold
level of performance for
any measure will not
produce a pay-out of
more than 20% of the
maximum portion of
overall annual bonus
attributable to that
measure, with a sliding
scale to full pay-out for
maximum performance.
However, the Annual
Bonus Plan remains a
discretionary arrangement
and the Committee retains
a standard power to apply
its judgement to adjust the
outcome of the Annual
Bonus Plan for any
performance measure
(from zero to any cap)
should it consider that to
be appropriate.
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Directors’ Remuneration Report continued
Executive Directors continued
Element and Purpose
Policy and Operation
Maximum
Performance Measures
Long-term incentives
To motivate and incentivise
delivery of sustained
performance over the long
term, and to promote
alignment with
Shareholders’ interests, the
Company operates the
Performance Share Plan
(‘PSP’).
Awards under the PSP take the form of
nil-cost options which vest to the extent
performance conditions are satisfied over
a period of at least three years.
The PSP allows for awards
over shares with a maximum
value of 150% of base salary
per financial year.
The Committee expressly
reserves discretion to make
such awards as it considers
appropriate within these limits.
Under the PSP plan rules, vested awards
may also be settled in cash.
The PSP rules allow that the number of
shares subject to vested PSP awards may
be increased to reflect the value of
dividends that would have been paid in
respect of any ex-dividend dates falling
between the grant of awards and the
expiry of any vesting period.
Malus and clawback provisions apply to
PSP awards and are explained in more
detail in the notes to the policy table, as
disclosed in the 2015 Annual Report.
The Committee may set
such performance
conditions on PSP awards
as it considers appropriate
(whether financial or
non-financial and whether
corporate, divisional or
individual).
Performance periods may
be over such periods as
the Committee selects at
grant, which will not
normally be less than (but
may be longer than) three
years.
No more than 25% of
awards vest for attaining
the threshold level of
performance conditions.
Share ownership
guidelines
To further align the
interests of Executive
Directors with those of
Shareholders.
All-employee
share plans
To encourage share
ownership by employees,
thereby allowing them to
share in the long-term
success of the Group and
align their interests with
those of the Shareholders.
Executive Directors are expected to build
up a prescribed level of shareholding
within five years of commencement of
employment (or such longer period as the
Committee may determine).
n/a
100% of base salary for all
Executive Directors.
The Committee reserves the
power to amend (but not
reduce) these levels in future
years.
These are all-employee share plans
established under HMRC tax-advantaged
regimes and follow the usual form for
such plans.
The maximum participation
levels for all-employee share
plans will be the limits for such
plans set by HMRC from time
to time.
Consistent with normal
practice, such awards will
not be subject to
performance conditions.
Executive Directors will be able to
participate in all-employee share plans
on the same terms as other Group
employees.
54 EUROCELL PLC
Annual Report and Accounts 2017
Chairman and Non-executive Directors
Element and Purpose
Policy and Operation
Maximum
Performance Measures
Chairman/Non-
executive Director fees
To enable the Company to
recruit and retain Chairmen
and Non-executive
Directors of the highest
calibre, at the appropriate
cost.
The fees paid to the Chairman and
Non-executive Directors aim to be
competitive with other fully listed
companies of equivalent size and
complexity.
The fees payable to the Non-executive
Directors are determined by the Board,
with the Chairman’s fees determined by
the Remuneration Committee. Fees are
paid monthly in cash.
The Chairman and Non-executive
Directors will not participate in any new
cash or share incentive arrangements
from admission.
The Company reserves the right to provide
benefits (including travel and office
support) to the Chairman and Non-
executive Directors.
Any increases actually made
will be appropriately
disclosed.
n/a
The aggregate fees (and any
benefits) of the Chairman and
Non-executive Directors will
not exceed the limit from time
to time prescribed within the
Company’s Articles of
Association for such fees
(currently £325,000 per
annum in aggregate).
If the Chairman and/or
Non-executive Directors
devote special attention to the
business of the Company, or
otherwise perform services
which in the opinion of the
Directors are outside the
scope of the ordinary duties of
a Director, they may be paid
such additional remuneration
as the Directors or any
Committee authorised by the
Directors may determine.
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Directors’ Remuneration Report continued
Other elements of our policy include:
Recruitment Remuneration Policy
The Company’s recruitment remuneration policy aims to give the Committee sufficient flexibility to secure the appointment and
promotion of high-calibre executives to strengthen the management team and secure the skill sets to deliver our strategic aims.
In terms of the principles for setting a package
for a new Executive Director, the starting point for
the Committee will be to apply the general policy
for Executive Directors as set out above and
structure a package in accordance with that
policy. Any caps contained within the policy for
fixed pay do not apply to new recruits, although
the Committee would not envisage exceeding
these caps in practice.
The Annual Bonus Plan, DSP and PSP will
operate (including the maximum award levels) as
detailed in the general policy in relation to any
newly appointed Executive Director. For an
internal appointment, any variable pay element
awarded in respect of the prior role may either
continue on its original terms or be adjusted to
reflect the new appointment as appropriate.
For external and internal appointments, the
Committee may agree that the Company will
meet certain relocation expenses as it considers
appropriate.
For external candidates, it may be necessary to make additional awards in
connection with the recruitment to buy-out awards forfeited by the individual on
leaving a previous employer.
For the avoidance of doubt, buy-out awards are not subject to a formal cap.
Any recruitment-related awards which are not buy-outs will be subject to the
limits for Annual Bonus Plan and PSP as stated in the general policy. Details of
any recruitment-related awards will be appropriately disclosed.
For any buy-outs the Company will not pay more than is, in the view of the
Committee, necessary and will in all cases seek, in the first instance, to deliver
any such awards under the terms of the existing Annual Bonus Plan, DSP or
PSP. It may, however, be necessary in some cases to make buy-out awards on
terms that are more bespoke than the existing Annual Bonus Plan, DSP or PSP.
All buy-outs, whether under the Annual Bonus Plan, DSP, PSP or otherwise, will
take due account of the service obligations and performance requirements for
any remuneration relinquished by the individual when leaving a previous
employer. The Committee will seek (where it is practicable to do so) to make
buy-outs subject to what are, in its opinion, comparable requirements in respect
of service and performance. However, the Committee may choose to relax this
requirement in certain cases (such as where the service and/or performance
requirements are materially completed, or where such factors are, in the view of
the Committee, reflected in some other way, such as a significant discount to
the face value of the awards forfeited) and where the Committee considers it to
be in the interests of Shareholders.
A new Chairman/Non-executive Director would be recruited on the terms explained above in respect of the main policy for such Directors.
Service contracts
Executive Directors
The Committee’s policy is that each Executive Director’s service agreement should be of indefinite duration, subject to termination
upon no more than 12 months’ notice by either party. The service agreements of both Executive Directors comply with that policy.
Contracts contain provisions allowing the Company to make payments in lieu of notice (albeit not including bonus or benefits) but
do not contain change of control provisions.
The Committee reserves flexibility to alter these principles if necessary to secure the recruitment of an appropriate candidate and,
if appropriate, introduce a longer initial notice period (of up to two years) reducing over time.
The date of each Executive Director’s contract is:
Mark Kelly
Michael Scott
29 March 2016
1 September 2016
56 EUROCELL PLC
Annual Report and Accounts 2017
Chairman/Non-executive Directors
The Chairman and each Non-executive Director is engaged for an initial period of three years. These appointments can be renewed
following the initial three-year term. These engagements can be terminated by either party on twelve months’ notice.
Neither the Chairman nor any Non-executive Directors can participate in the Company’s incentive plans, are not entitled to any
pension benefits and are not entitled to any payment in compensation for early termination of their appointment beyond the twelve
months’ notice referred to above.
Name
Bob Lawson
Patrick Kalverboer
Frank Nelson
Martyn Coffey
Date of Original
Appointment
Date of Latest
Appointment
4 February 2015
4 February 2015
4 February 2015
4 February 2015
2 February 2018
2 February 2018
2 February 2018
2 February 2018
Term
3 years
3 years
3 years
3 years
The Directors’ service agreements and letters of appointment are available for Shareholders to view from the Company Secretary
on request.
Termination/change of control policy summary
It is appropriate for the Committee to consider treatments on a termination having regard to all of the relevant facts and
circumstances available at that time. This policy applies both to any negotiations linked to notice periods on a termination and any
treatments that the Committee may choose to apply under the discretions available to it under the terms of the Annual Bonus Plan,
DSP and PSP. The potential treatments on termination under these plans are summarised in the table below:
Incentives
Annual Bonus
Plan
If a leaver is deemed to be a ‘good leaver’; for example, leaving
through injury, ill-health, disability, retirement, redundancy, sale of
business or otherwise at the discretion of the Committee
Committee has discretion to determine an annual
bonus which may be limited to the period actually
worked.
If a leaver is not a ‘good leaver’
Change in control
Annual bonus generally
paid.
Committee has discretion to
determine annual bonus.
Deferred Share
Plan
Awards normally vest either on cessation or the
normal vesting date. The Committee can pro-rate
awards if considered appropriate.
All awards will normally
lapse.
Performance
Share Plan
Will receive a pro-rated award subject to the
application of the performance conditions at the
end of the normal performance period.
All awards will normally
lapse.
Committee retains standard discretions to either
vary/disapply time pro-rating or to accelerate
vesting to the earlier date of cessation (determining
the performance conditions at that time).
Awards vest on a pro rata
basis, unless the Committee
determines not to pro-rate.
Will receive a pro-rated
award subject to the
application of the
performance conditions at
the date of the event, unless
the Committee determines
not to pro-rate.
On death, Annual Bonus Plan, DSP and PSP awards typically vest in full (with pro-rating also potentially applying).
The Company has the power to enter into settlement agreements with Directors and to pay compensation to settle potential legal
claims. In addition, and consistent with market practice, in the event of the termination of an Executive Director, the Company may
make a contribution towards that individual’s legal fees and fees for outplacement services as part of a negotiated settlement.
Any such fees will be disclosed as part of the detail of termination arrangements. For the avoidance of doubt, the policy does not
include an explicit cap on the cost of termination payments.
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Directors’ Remuneration Report continued
Other policy matters
The 2015 Annual Report also set out formal details of our approach to:
• Travel and hospitality;
• Differences between the policy on remuneration for Directors from the policy on remuneration for other employees;
• Committee discretions;
• External appointments;
• Considerations of employment conditions elsewhere in the Group;
• The operation of malus and clawback in relation to the PSP and annual bonus; and
• How the views of Shareholders are taken into account.
The Committee is mindful of ongoing debate regarding the publication of ratios comparing CEO to employee pay. The Committee
does not at present consider it appropriate to publish such data in this report as it is concerned that no common methodology has
yet been established amongst UK companies and their investors for these comparisons. The Company’s expectation is that it will
publish ratios showing comparisons in future years when, as can be expected, UK regulations or guidance develop a common
methodology.
Illustrations of application of Remuneration Policy
1200
1000
800
0
0
0
£
600
£461k
£1,210k
31%
£741k
31%
13%
25%
400
100%
62%
38%
200
0
Minimum
On-target
Maximum
1200
1000
800
0
0
0
£
600
400
200
0
Long-term incentive
Annual bonus
Fixed
£768k
31%
31%
£469k
13%
25%
£290k
100%
62%
38%
Minimum
On-target
Maximum
Chief Executive Officer – Mark Kelly
Chief Financial Officer – Michael Scott
58 EUROCELL PLC
Annual Report and Accounts 2017
The charts above aim to show how the Remuneration Policy for Executive Directors will be applied in 2018 using the assumptions
in the table below.
Minimum
• Consists of base salary, benefits and pension.
• Base salary is the salary to be paid with effect from 1 April 2018.
• Estimated value of a full year’s benefits, including car allowance, private medical cover, health insurance and
life assurance.
• Pension measured as the cash allowance in lieu of Company contributions at 15% of salary.
Mark Kelly
Michael Scott
Base Salary
Benefits
Pension
Total Fixed
£374,544
£239,292
£29,785
£14,322
£56,182 £460,511
£35,894 £289,508
Target
Based on what the Director would receive if performance was on-target (excluding share price appreciation and
dividends):
• Annual bonus: consists of the on-target bonus of 50% of maximum opportunity.
• Long-term incentives: consists of the threshold level of vesting (25% vesting) under the PSP.
Maximum
Based on the maximum remuneration receivable (excluding share price appreciation and dividends):
• Annual bonus: consists of maximum bonus of 100% of base salary.
• Long-term incentives: consists of the face value of awards (at 100% of salary for both Executive Directors) under
the PSP.
PART B: THE ANNUAL REPORT ON REMUNERATION
The Committee (unaudited information)
The members of the Remuneration Committee are:
Martyn Coffey (Chairman)
Bob Lawson
Frank Nelson
The Committee’s principal responsibilities are to:
• Recommend to the Board the remuneration strategy and framework for the Chairman, Executive Directors and senior managers.
• Determine, within that framework, the individual remuneration arrangements for the Executive Directors and senior managers.
• Oversee any major changes in employee benefit structures throughout the Group.
The Chief Executive Officer is invited to attend meetings of the Committee, except when his own remuneration is being discussed,
and the Chief Financial Officer and other Executive and Non-executive Directors attend meetings as required. Bob Lawson takes
no part in any discussions relating to his own remuneration.
The Committee met two times during the year, with all members of the Committee present at these meetings.
The Committee has formal terms of reference which can be viewed on the Company’s website (investors.eurocell.co.uk).
FIT Remuneration Consultants LLP (‘FIT’), signatories to the Remuneration Consultants Group’s Code of Conduct, are appointed
by the Committee and provide advice to the Committee on all matters relating to remuneration, including best practice. FIT
provided no other services to the Group and, accordingly, the Committee was satisfied that the advice provided by FIT was
objective and independent. FIT’s fees in respect of 2017 were £8,824 (excluding VAT). FIT’s fees were charged on the basis of the
firm’s standard terms of business for advice provided.
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Directors’ Remuneration Report continued
Audited Information
Single total figure table (audited)
The remuneration for the Chairman, Executive and Non-executive Directors of the Company who performed qualifying services
during the relevant financial year is detailed below. The Chairman and Non-executive Directors received no remuneration other than
their annual fee.
For the year ended 31 December 2017:
Director
Mark Kelly (2)
Michael Scott(3)
Robert Lawson
Patrick Kalverboer
Frank Nelson
Martyn Coffey
For the year ended 31 December 2016:
Director
Mark Kelly(2)
Michael Scott(3)
Patrick Bateman(4)
Matthew Edwards(5)
Robert Lawson
Patrick Kalverboer
Frank Nelson
Martyn Coffey
Salary/fees
£000
Taxable
benefits(1)
£000
Bonus
£000
Long-term
incentives
£000
Pension
£000
365
233
120
40
48
45
28
14
–
–
–
–
Salary/fees
£000
Taxable
benefits(1)
£000
274
77
189
117
120
40
48
45
26
4
8
8
–
–
–
–
146
93
–
–
–
–
Bonus
£000
220
61
59
39
–
–
–
–
Other
£000
322
–
–
–
–
–
Total
remuneration
£000
916
375
120
40
48
45
–
–
–
–
–
–
55
35
–
–
–
–
Long-term
incentives
£000
Pension
£000
Other
£000
Total
remuneration
£000
–
–
–
–
–
–
–
–
41
12
28
17
–
–
–
–
–
–
–
1
–
–
–
–
561
154
284
182
120
40
48
45
Notes:
(1) Taxable benefits comprise car allowance, private family medical cover, permanent health insurance and life assurance.
(2) Mark Kelly was appointed to the Board with effect from 29 March 2016 and was appointed Chief Executive Officer with effect from 1 May 2016. Other in 2017 relates to the value
of the recruitment award over 123,864 Eurocell plc shares granted on 28 June 2016 in connection with an amount forfeited on cessation of employment with his previous
employer. The award vested after the expiry of a 12-month deferral period and was subject to continued employment but no other performance conditions. The value of the shares
is based on the closing Eurocell share price on the date of vesting. While the buyout award also included the potential payment of £200,000 in cash, this amount was ultimately
forfeited by Mr. Kelly and therefore no compensation was payable by Eurocell for this cash part of the buyout.
(3) Michael Scott was appointed Chief Financial Officer with effect from 1 September 2016.
(4) Patrick Bateman resigned with effect from 30 June 2016.
(5) Matthew Edwards left the Company with effect from 30 June 2016. Other in 2016 relates to payments for legal fees and other expenses made to Mr Edwards in connection with
his settlement agreement.
The aggregate emoluments (being salary/fees, bonuses, benefits and pension allowances) of all Directors for 2017 was £1,544,000
(2016: £1,434,000).
Further information on the 2017 annual bonus (audited)
In 2017, the annual bonus metrics were a blend of targets relating to adjusted profit before tax (70% of the bonus opportunity)
and cash flow (30% of the bonus opportunity). In addition, a health and safety adjustment underpin applied which, if not achieved,
could reduce the bonus pay-out.
60 EUROCELL PLC
Annual Report and Accounts 2017
More particularly, the adjusted profit before tax and cash flow bonus targets were as follows:
£m
Adjusted Profit before Tax
Cash flow
Threshold
Target
Maximum
23.6
28.1
24.8
29.6
26.7
31.8
Actual
24.5
28.8
Pay-out
(% of max)
42
33
Performance against the adjusted profit before tax element of the bonus resulted in a bonus of 42% of that element (i.e. approx.
30% of salary).
Performance against the cash flow element of the bonus resulted in a bonus of 33% of that element (i.e. approx. 10% of salary).
The health and safety underpin was also considered satisfied.
In total, this results in a total bonus pay-out of 40% of salary.
50% of the annual bonus paid to Mark Kelly and Michael Scott will be deferred into shares under the DSP.
Statement of Directors’ shareholding and share interests (audited)
The table below details for each Director, the total number of Directors’ interests in shares at 31 December 2017:
Director
Mark Kelly
Michael Scott
Patrick Kalverboer (1)
Robert Lawson
Frank Nelson
Martyn Coffey
Beneficially owned
31 Dec 16(2)
Beneficially
owned
31 Dec 17(2)
Vested but
unexercised
awards
Unvested
DSP
Unvested
PSP(3)
Unvested
SAYE
SOG
(% of salary)(4)
SOG
met?(4)
43,939
–
20,159,094
58,596
28,571
5,714
109,469
14,215
30,000
72,811
28,571
10,714
–
–
–
–
–
–
45,502
12,724
–
–
–
–
421,565
220,656
–
–
–
–
11,029
11,029
–
–
–
–
100
100
–
–
–
–
No
No
n/a
n/a
n/a
n/a
Notes:
(1) The interests of H2 Equity Partners are noted as interests of Patrick Kalverboer. Mr Kalverboer is a managing partner of H2 Equity Partners. On 16 March 2017 H2 Equity Partners
disposed of its entire shareholding in the Company.
(2) The beneficial shareholdings set out above include those held by Directors and their respective connected persons.
(3) Performance-based share awards.
(4) Under share ownership guidelines implemented by the Remuneration Committee, Executive Directors are required to build and then maintain a shareholding equivalent to at least
100% of base salary within five years of commencement of employment. As described above, Mark Kelly and Michael Scott were appointed in March and September 2016
respectively and continue to build their shareholdings to comply with this guideline.
Performance Share Plan awards granted in 2017
The following awards were made under the PSP in 2017:
Mark Kelly
Michael Scott
Date of grant
4 April 2017
4 April 2017
Basis of award
(% salary)
Share price(1)
Number of
shares
Face value of
award at grant
Exercise period
100
100
243.0
243.0
148,148
94,650
360,000
230,000
April 2020 to April 2021
April 2020 to April 2021
Notes:
(1) Rounded to one decimal place for the purposes of presentation in this report.
The performance conditions applying to the awards made in April 2017 relate to: (i) adjusted earnings per share growth for
two-thirds of the award; and (ii) Group cash flow targets for one-third of the award. Group cash flow is defined as the aggregate of
EBITDA less working capital (and excluding capital expenditure) for each of the three financial years falling in the performance period.
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Directors’ Remuneration Report continued
More specifically:
Adjusted EPS growth target to 31 December 2019
Portion of award vesting
Above 13% p.a.
Between 7% p.a. and 13% p.a.
7% p.a.
Below 7% p.a.
100%
Pro rata on straight-line between 25% and 100%
25%
0%
Operating cash flow to 31 December 2019
Portion of award vesting
Above £103.7 million
Between £84.9 million and £103.7 million
£84.9 million
Below £84.9 million
100%
Pro rata on straight-line between 25% and 100%
25%
0%
Outstanding Share Plan awards
Details of all outstanding share awards made to Executive Directors are set out below:
Award
type
Ex
price
(p)
Grant
date
Interest at
1 January
2017
Awards
granted
Awards
lapsed
Awards
vested
in the year
in the year
in the year
Interest at
31 December
2017
Exercise period Notes
Executive
Mark Kelly
Michael Scott
PSP
Recruitment
PSP
DSP
SAYE 163.2
0 28/06/16
0 28/06/16
0 04/04/17
0 04/04/17
07/04/17
PSP
PSP
DSP
SAYE 163.2
0
19/12/16
0 04/04/17
0 04/04/17
07/04/17
273,417
119,424
–
–
–
126,006
–
–
–
Patrick Bateman
Matthew Edwards
PSP
PSP
0 09/03/15
118,094
0 09/03/15
57,142
–
–
148,148
45,502
11,029
–
94,650
12,724
11,029
–
–
–
–
–
–
–
–
–
–
–
–
–
–
119,424
–
–
–
–
–
–
–
–
–
273,417
–
148,148
45,502
11,029
Jun 19 – Jun 20
Jun 17 – Jun 18
Apr 20 – Apr 21
Apr 20 – Apr 21
Apr 20 – Oct 20
126,006 Dec 19 – Dec 20
Apr 20 – Apr 21
Apr 20 – Apr 21
Apr 20 – Oct 20
94,650
12,724
11,029
118,094 Mar 18 – Mar 19
57,142 Mar 18 – Mar 19
(1)
(2)
(3)
(4)
(5)
(1)
(3)
(4)
(5)
(6)
(6)
Notes:
(1) Performance targets are presented on page 60 of the Annual Report 2016.
(2) Recruitment award of shares with a value of £200,000 (measured at the date of grant) in relation to an amount forfeited on cessation from previous employer. As first disclosed in
the Annual Report 2015, the shares vested 12 months from grant, subject to continued employment. The number of shares under award (119,424) was increased by 4,440
dividend equivalent shares at vesting.
(3) Performance targets for the 2017 PSP awards are set out above.
(4) Deferred Share Bonus awards in respect of the 2016 annual bonus award.
(5) Awards granted under the Eurocell plc Save As You Earn Scheme. Awards are based on a 3-year savings contract with an exercise price of 163.2p.
(6) Performance targets are presented on page 61 of the Annual Report 2016. Pursuant to the PSP rules, these awards have been pro-rated to reflect the cessation of employment of
Messrs Bateman and Edwards and shall vest on the normal vesting dates (subject to performance against the above targets).
During the year ended 31 December 2017, the highest mid-market price of the Company’s shares was 274.5p and the lowest
mid-market price was 170.1p. At 31 December 2017 the share price was 215.0p.
The aggregate gains by all Directors during 2017 was £322,146 (2016: £nil).
Payments to past Directors (audited)
No payments were made to past Directors during the year. The March 2018 vesting of the PSP awards held by past Directors will
be disclosed in the 2018 Annual Report and Accounts.
Payments for loss of office (audited)
No payments for loss of office were made during the year.
62 EUROCELL PLC
Annual Report and Accounts 2017
Performance graph and CEO remuneration table (unaudited)
The following graph shows the Total Shareholder Return (‘TSR’) performance of an investment of £100 in Eurocell plc’s shares
from its listing in March 2015 to the end of the period, compared with a £100 investment in the FTSE SmallCap Index over the
same period. The FTSE SmallCap Index was chosen as a comparator because it represents a broad equity market index of similar
sized companies.
TSR Index
150
140
130
120
110
100
90
3 March 2015
31 December 2015
31 December 2016
31 December 2017
Source: Thomson Reuters
Eurocell
FTSE SmallCap
The table below details certain elements of the CEO’s remuneration over the same period as presented in the TSR Index graph:
Single figure of total remuneration
Annual bonus pay-out against maximum %
maximum opportunity %
Long-term incentive vesting rates against
2017
2016
Mark Kelly: £916,442
Mark Kelly: 40%
Patrick Bateman: £284,457
Mark Kelly: £560,558
Patrick Bateman: 33%
Mark Kelly: 80%
2015
Patrick Bateman: £637,098
Patrick Bateman: 87%
Mark Kelly: n/a
Patrick Bateman: n/a
Mark Kelly: n/a
Patrick Bateman: n/a
As the Company listed in March 2015, part of the 2015 remuneration relates to when Eurocell was a privately owned Company.
Percentage change in remuneration of Director undertaking the role of CEO (unaudited)
The Regulations require us to show the year-on-year percentage change in remuneration received by the Chief Executive Officer,
compared with the change in remuneration received by all UK employees. As Mark Kelly replaced Patrick Bateman in July 2016,
there is no appropriate base against which to measure the percentage change in remuneration received by the Chief Executive
Officer. The table below presents the year-on-year percentage change in remuneration received by all UK employees:
Salary and fees
Short-term incentives
All taxable benefits
Percentage increase in remuneration
between 2016 and 2017
CEO
n/a
n/a
n/a
All staff
2.7%
0%
0%
Mark Kelly joined the Company on 29 March 2016 and his total remuneration for 2016 (9 months) was £560,558 and for 2017
(12 months) was £916,442.
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Directors’ Remuneration Report continued
Relative importance of spend on pay (unaudited)
The table below details the change in total employee pay between 2016 and 2017 as detailed in Note 8 of the Financial Statements,
compared with distributions to Shareholders by way of dividend, share buybacks or any other significant distributions or payments.
Total gross employee pay
Dividends/share buybacks
The average number of employees during the year was 1,496 (2016: 1,289).
% change
11%
6%
2017
£m
47.4
9.0
2016
£m
42.7
8.5
Statement of voting at General Meeting
The following table shows the results of the binding Remuneration Policy vote at the 19 May 2016 AGM and the advisory Directors’
Remuneration Report vote at the 19 May 2017 AGM.
For (including discretionary)
Against
Votes withheld
19 May 2016 AGM
(Binding Vote)
Approval of the
Directors’ Remuneration Policy
19 May 2017 AGM
(Advisory Vote)
Annual Report on Remuneration
Total number of votes
% of votes cast
Total number of votes
% of votes cast
85,931,870
–
–
100%
–
–
73,190,172
349,500
2,108,300
99.52%
0.48%
–
Implementation of policy for 2018 (unaudited information)
Base salary
• Base salaries from 1 April 2017 were as follows: £367,200 for Mark Kelly, and £234,600 for Michael Scott. In line with other
Eurocell employees, with effect from 1 April 2018, these salaries will be increased by 2% to £374,544 and £239,292 respectively.
Pension
• Contribution rates for Executive Directors will be 15% of salary in 2018.
Benefits
• Details of the benefits received by Executive Directors are set out in Note 1 to the Single Total Figure Table on page 60.
There is no intention to introduce additional benefits in 2018.
Annual bonus
• The annual bonus opportunity for 2018 will be structured in a similar manner to 2017. The maximum bonus will be 100% of
salary and will be payable based on performance against a blend of adjusted profit before tax (70% of the bonus opportunity)
and operating cash flow (30% of the bonus opportunity) targets.
• These targets will be set in light of internal and external forecasts and will require significant outperformance to generate higher levels
of pay-out. In addition, a health and safety adjustment underpin will apply which, if not achieved, could reduce the bonus pay-out.
• Up to 50% of any bonus earned will be deferred into shares for three years.
• Given the competitive nature of the Company’s sector, the specific performance targets for 2018 are considered to be
commercially sensitive and, accordingly, are not disclosed at this time, although strong levels of disclosure will be made in next
year’s report in relation to the 2018 bonus outturn.
Long-term incentives
• Awards will be made under the PSP in 2018 to the Executive Directors structured in a similar manner to the awards made in
2017, in that awards will be made which will vest subject to three-year earnings per share (two-thirds of the award) and operating
cash flow (one-third) targets.
• Full details of these targets will be disclosed in next year’s report, with these targets no less challenging in relative terms than the
targets applied to the 2017 PSP awards.
Chairman and Non-executive Directors’ fees
• The fees of the Chairman and Non-executive Directors will remain unchanged from 2017 levels.
64 EUROCELL PLC
Annual Report and Accounts 2017
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Directors’ Report
The Directors’ Report includes the Corporate Governance
Statement set out on pages 43 to 45.
tax policy rests with the Chief Financial Officer, who reports the
Group’s tax position to the Audit and Risk Committee on a
regular basis.
The Directors’ Report and Strategic Report comprise the
‘Management Report’ for the purpose of the Financial Conduct
Authority’s Disclosure Guidance and Transparency Rules
(DTR 4.1.8R).
The Directors of the Company are listed on pages 40 and 41 and
were in place on the date this Directors’ Report was approved.
The Group is UK domiciled and the majority of its activity is
within the United Kingdom.
Strategic Report
As permitted by section 414C of the Companies Act 2006,
certain information required to be included in the Directors’
Report has been included in the Strategic Report, which is set
out on pages 4 to 39. Specifically, this relates to information on
the Group’s strategy, business model, likely future developments
and risk management.
Tax Policy
We are committed to compliance with tax law and practice in
the UK. Compliance for us means paying the amount of tax
we are legally obliged to pay and doing so at the right time.
It involves disclosing all relevant facts and circumstances to
the UK tax authorities and claiming appropriate reliefs and
incentives where available.
Risk management
The level of risk that we accept in relation to UK tax is consistent
with our overall objective of achieving certainty in the Group’s tax
affairs. At all times, we seek to comply fully with our regulatory
and other obligations, and to act in a way that upholds our core
values and reputation as a responsible corporate citizen. We see
compliance with tax legislation as key to managing tax risk, and
understand the importance of tax in the wider context of business
decisions.
UK Corporate Governance Code
Matters related to corporate governance and our compliance
with the Code are set out in the Corporate Governance
Statement on pages 43 to 45, which is incorporated herein
by reference.
Processes have been put in place to ensure tax is considered as
part of our overall decision-making processes, with tax risks
managed by local finance teams and escalated through to
appropriate levels of management and, ultimately, to the Board
when necessary.
Results
Our Financial Statements for year ended 31 December 2017 are
set out on pages 69 to 109. The Financial Statements should be
read in conjunction with the Chief Executive’s Review, Divisional
Reviews and the Group Financial Review.
Dividends
The Board is recommending a final dividend of 6.0 pence
(2016: 5.7 pence) per share which, together with the interim
dividend of 3.0 pence (2016: 2.8 pence) per share, makes a
combined dividend of 9.0 pence (2016: 8.5 pence) per share.
Payment of the final dividend, if approved at the Annual General
Meeting, will be made on 23 May 2018 to Shareholders
registered at the close of business on 27 April 2018.
The ex-dividend date will be 26 April 2018.
Dividends paid in the year to 31 December 2017 and disclosed in the
cash flow statement of £8.7 million (2016: £8.0 million), is comprised
of the 2016 final dividend of 5.7 pence per share and the 2017
interim dividend of 3.0 pence per share, which were paid in May
and October 2017 respectively.
Tax planning
In structuring our commercial activities, we will always consider,
among other factors, the relevant tax laws. We believe that it is
fair to mitigate tax using generally available reliefs in the spirit in
which they are intended. However, any tax planning that we
undertake will have commercial and economic substance and
we will not use aggressive tax planning or enter into complicated
tax avoidance schemes.
Engaging with HMRC
We aim to have a good working relationship with HMRC. We will
engage with honesty and integrity, and in a spirit of cooperative
compliance. We will make all returns and pay tax on a timely
basis, across all types of tax.
Share Capital
Details of our issued share capital, including movements during the
year, are shown in Note 23 to the Financial Statements. We have one
class of ordinary shares, which carries no fixed income. Each share
carries the right to one vote at our general meetings. The ordinary
shares are listed on the Official List and traded on the London
Stock Exchange.
Tax governance
Our tax policy is set out below. It is determined by the Board
and overseen by the Audit and Risk Committee. The Board
reviews the policy, and our compliance with it, on an annual
basis. Operational responsibility for the execution of the Group’s
As at 31 December 2017, we had 100,137,186
(2016: 100,000,000) ordinary shares of 0.001 pence each
in nominal value in issue (the ‘issued share capital’).
Holders of ordinary shares are entitled to receive dividends
when declared, to receive the Company’s Annual Report, to
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Directors’ Report continued
attend and speak at general meetings of the Company, to
appoint proxies and to exercise voting rights.
Whilst the Board has the power under the Articles of Association
to refuse to register a transfer of shares, there are no such
restrictions on the transfer of shares in place.
Under the Company’s Articles of Association, the Directors have
power to suspend voting rights and the right to receive
dividends in respect of shares in circumstances where the
holder of those shares fails to comply with a notice issued under
section 793 of the Companies Act 2006. The Company is not
aware of any agreements between Shareholders that may result
in restrictions on the transfer of securities or voting rights.
Share schemes
The Company operates a number of share schemes.
Long-Term Incentive Plans payable to executives and senior
managers are operated under our Performance Share Plan
(‘PSP’). Executive Directors and PDMRs have a proportion of
their annual bonus deferred for three years under our Deferred
Share Plan (‘DSP’). During 2017 the Company successfully
launched a Save As You Earn (or sharesave scheme) which was
available to all employees.
All shares issued under these plans carry the same rights as
those already in issue.
Related party transactions
Other than in respect of arrangements set out in Note 28 to the
Financial Statements and in relation to the employment of
Directors, details of which are provided in the Remuneration
Committee Report on pages 50 to 64, there is no material
indebtedness owed to or by us to any employee or any other
person or entity considered to be a related party.
Substantial Shareholders
As at 29 December 2017, the Company had been notified of the
following holdings of voting rights in its shares under Chapter 5
of the Disclosure Guidance and Transparency Rules of the
Financial Conduct Authority:
Shareholder
Woodford Investment Management
Aberforth Partners
JO Hambro Capital Management
AXA Investment Managers
Alantra Asset Management
Hargreave Hale
Ruffer
Santander Asset Management UK
BlackRock Investment Management
Janus Henderson Investors
No. of Shares
14,885,249
12,020,396
10,825,011
7,561,862
6,596,666
6,080,516
4,969,314
4,905,877
4,422,324
3,035,714
% of voting
rights
15%
12%
11%
8%
7%
6%
5%
5%
4%
3%
The Takeover Directive
The rights and obligations attached to the issued share capital
are set out in the Articles of Association (see below).
There are no agreements in place between the Company, its
employees or Directors for compensation for loss of office or
employment that trigger as a result of a takeover bid.
Articles of Association
The Company’s Articles of Association can only be amended by
special resolution of the Shareholders. Our current articles are
available on our website at investors.eurocell.co.uk.
The Company’s Articles of Association give powers to the Board
to appoint Directors. All Board members are required to retire
and submit themselves for re-election by Shareholders at each
Annual General Meeting.
The Board of Directors may exercise all the powers of the
Company, subject to the provisions of relevant legislation, the
Company’s Articles of Association and any directions given by
the Company in general meetings. The powers of the Directors
include those in relation to the issue and buyback of shares.
Directors’ retirement by rotation
In accordance with above and in line with the Code, all Directors
in office will retire and offer themselves for re-election at the
2018 AGM.
The Articles of Association provide that a Director may be
appointed by an ordinary resolution of Shareholders or by
existing Directors, either to fill a vacancy or as an additional
Director.
The Executive Directors serve under contracts that are
terminable with 12 months’ notice from the Company and
12 months’ notice from the Executive Director. The Non-
executive Directors serve under letters of appointment and
do not have service contracts with the Company.
Copies of the service contracts of the Executive Directors and
the letters of appointment of the Non-executive Directors are
available for inspection at the Company’s registered office
during normal business hours and will be available for inspection
at the Company’s AGM.
Directors’ interests
Details of Directors’ remuneration, interests in the share capital
(or derivatives or other financial instruments relating to those
shares) of the Company and of their share-based payment
awards are contained in the Remuneration Committee Report
on pages 50 to 64. No change in the interests of the Directors
has been notified between 31 December 2017 and the date of
this report.
66 EUROCELL PLC
Annual Report and Accounts 2017
Research and development
The Group undertakes research and development work in
support of it objectives. Further details of our research and
development activities can be found in the Strategic Report on
pages 4 to 21.
Payments to suppliers
It is Group policy to abide by the payment terms agreed with
suppliers, provided that the supplier has performed its
obligations under the contract.
Donations
In accordance with the Group’s policy, no political donations were
made and no political expenditure was incurred during 2017.
Greenhouse gas emissions
See Corporate Social Responsibility on page 32.
Disclosures required by Listing Rule 9.8.4R
There were no waivers of dividends during the year. There are
no other disclosures to be made under the above listing rule.
By Order of the Board
Gerald Copley
Company Secretary
8 March 2018
Directors’ indemnities
Pursuant to the Articles of Association, the Company has
executed a deed poll of indemnity for the benefit of the Directors
of the Company and persons who were Directors of the Company
in respect of costs of defending claims against them and
third-party liabilities. These provisions, deemed to be qualifying
third-party indemnity provisions pursuant to section 234 of the
Companies Act 2006, were in force during the year ended
31 December 2017 and remain in force. The indemnity provision
in the Company’s Articles of Association also extends to provide
a limited indemnity in respect of liabilities incurred as a director,
secretary or officer of an associated company of the Company.
A copy of the deed poll of indemnity is available for inspection at
the Company’s registered office during normal business hours
and will be available for inspection at the Company’s AGM.
Conflicts of interest
Under the Companies Act 2006, Directors must avoid situations
where they have, or could have, a direct or indirect interest that
conflicts or possibly may conflict with the Company’s interests.
As permitted by the Act, the Company’s Articles of Association
enable Directors to authorise actual or potential conflicts of
interest.
Legal and regulatory compliance
The executive team is responsible for identifying and carrying
out assessments of those areas of the business where material
legal and regulatory risks may be present. Where issues are
identified, mitigating actions are built into an action plan
involving the drafting and communication of policies and the
delivery of training where appropriate, or are approached by
way of a revision to key contractual terms. The Board receives
regular reports on material litigation and the legal action taken
to support our strategy.
Health and Safety
We are committed to providing a safe place for employees to
work. Our policies are reviewed on an ongoing basis to ensure
that the approach to training, risk assessment, safe systems of
working and accident management are appropriate. As part of
this process, a rolling audit programme is in place to ensure that
health, safety, environmental and security risks are assessed
stringently and that robust control measures are in place to limit
or mitigate risk as appropriate.
Other matters
Employee disclosure (including Equality and Diversity)
See Corporate Social Responsibility on page 31.
Financial risk management
Please refer to Note 3 of the Financial Statements.
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CORPORaTE gOvERNaNCE
Statement of Directors’ Responsibilities in respect
of the Financial Statements
Each of the Directors, whose names and functions are listed in
the corporate governance section on pages 40 and 41 confirm
that, to the best of their knowledge:
• the Company Financial Statements, which have been
prepared in accordance with United Kingdom Generally
Accepted Accounting Practice (United Kingdom Accounting
Standards, comprising FRS 101 “Reduced Disclosure
Framework”, and applicable law), give a true and fair view of
the assets, liabilities, financial position and loss of the
Company.
• the Group Financial Statements, which have been prepared
in accordance with IFRSs as adopted by the European
Union, give a true and fair view of the assets, liabilities,
financial position and profit of the Group.
• the Strategic Report includes a fair review of the
development and performance of the business and the
position of the Group and Company, together with a
description of the principal risks and uncertainties that
it faces.
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.
The Directors’ Responsibility Statement was approved by the
Board on 8 March 2018.
Mark Kelly
Chief Executive Officer Chief Financial Officer
Michael Scott
The Directors are responsible for preparing the Annual Report
and the Financial Statements in accordance with applicable law
and regulation.
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.
• 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 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 and the
Directors’ Remuneration Report comply with the Companies Act
2006 and, as regards the Group Financial Statements, Article 4 of
the IAS Regulation.
The Directors are also responsible for safeguarding the assets of
the Group and Company and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of Financial
Statements may differ from legislation in other jurisdictions.
The Directors consider that the Annual Report and Accounts,
taken as a whole, is fair, balanced and understandable and
provides the information necessary for Shareholders to assess
the Group and Company’s performance, business model
and strategy.
68 EUROCELL PLC
Annual Report and Accounts 2017
FINaNCIaL STaTEmENTS
Independent Auditors’ Report
to the members of Eurocell plc
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS
Opinion
In our opinion:
• Eurocell 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 2017 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 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 and, as regards
the Group Financial Statements, Article 4 of the IAS Regulation.
We have audited the Financial Statements, included within the Annual Report and Accounts 2017 (the “Annual Report”), which
comprise: the Consolidated and Company Statements of Financial position as at 31 December 2017; the Consolidated Statement
of Comprehensive Income, the Consolidated Cash Flow Statement, and the Consolidated and Company Statements of Changes
in Equity for the year then ended; and the Notes to the Financial Statements, which include a description of the significant
accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
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 public interest entities, and we have
fulfilled our other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not
provided to the Group or the Company.
Other than those disclosed in Note 5 to the Financial Statements, we have provided no non-audit services to the Group or the
Company in the period from 1 January 2017 to 31 December 2017.
Our audit approach
Overview
• Overall Group materiality: £1.3m (2016: £1.2m), based on 5% of underlying profit before tax.
• Overall Company materiality: £0.7m (2016: £0.7m), based on 1% of total assets.
Materiality
• Financially significant components were determined to be those that represented 15% or more
of the consolidated underlying profits before tax.
• The financial information of Eurocell Building Plastics Limited and Eurocell Profiles Limited was
therefore included as a full scope audit.
Audit scope
Key audit
matters
• Together these represent 89% of the consolidated revenues and underlying profits before tax.
• For the remaining entities, we also scoped in any individual balances that were above £1.3m
and represented 15% or more of the consolidated balance. This resulted in Property, Plant and
Equipment for Eurocell Group Limited and Cash and Cash Equivalents for Vista Panels Limited
and S&S Plastics Limited being included in our audit scope.
• Analytical review procedures were performed over all other remaining balances within the
out-of-scope subsidiary Companies.
• Assessment of the valuation of inventory (Group).
• Trade receivables provisions (Group).
• Dilapidations provisions (Group).
• Recoverability of investments and amounts owed by subsidiary undertakings (Company).
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FINaNCIaL STaTEmENTS
Independent Auditors’ Report continued
to the members of Eurocell plc
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.
We gained an understanding of the legal and regulatory framework applicable to the Group and the industry in which it operates,
and considered the risk of acts by the Group, which were contrary to applicable laws and regulations, including fraud. We designed
audit procedures at Group and significant component level to respond to the risk, recognising that the risk of not detecting a
material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate
concealment by, for example, forgery or intentional misrepresentations, or through collusion. We focused on laws and regulations
that could give rise to a material misstatement in the Group and Company Financial Statements, including, but not limited to, the
Companies Act 2006, the Listing Rules and UK tax legislation. Our tests included, but were not limited to, review of the Financial
Statement disclosures to underlying supporting documentation, review of correspondence with regulators, enquiries of
management and review of internal audit reports in so far as they related to the Financial Statements. There are inherent limitations
in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and
transactions reflected in the Financial Statements, the less likely we would become aware of it.
We did not identify any key audit matters relating to irregularities, including fraud. As in all of our audits, we also addressed the risk
of management override of internal controls, including testing journals and evaluating whether there was evidence of bias by the
Directors that represented a risk of material misstatement due to fraud.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the
Financial Statements of the current period and include the most significant assessed risks of material misstatement (whether or not
due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of
resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the
results of our procedures thereon, were addressed in the context of our audit of the Financial Statements as a whole, and in
forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks
identified by our audit.
KEY AUDIT MATTER
HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER
Assessment of the valuation of inventory
Refer to pages 34 to 38 (Risk management / Principal risks and
uncertainties), pages 47 to 49 (Audit & Risk Committee report),
Note 1 (Accounting policies) and Note 17 (Inventories).
We understood the nature of the costs absorbed into inventory
and determined their appropriateness, considering the
requirements of IAS 2 Inventories (‘IAS 2').
Inventory totalled £21.1m as at 31 December 2017 (2016:
£17.4m) after provisions of £1.8 million (31 December 2016:
£1.8 million).
We tested, on a sample basis, the valuation and calculation
of costs absorbed into inventory. We also assessed the
reasonableness of the Directors’ estimates in this area for bias.
We focused on this area because the Directors’ assessment of
the absorption of labour and overhead costs into inventory and
the assessment of the recoverability of inventory involved
complex and subjective judgements.
Specifically the determination of inventory provisions for slow
moving, obsolete and discontinued line items, reflecting the level
of inventory held across the 190 branches and manufactured
goods at the year end, requires the exercise of judgement.
In addition, we also focused on this area because the incentive
schemes of the Directors and senior management are based
upon financial measures, including profit, which we concluded
gave a greater risk of manipulation of judgements, including
inventory costing and provisioning, to ensure that bonus targets
are achieved.
We found no material exceptions from the procedures
noted above.
We understood the Directors’ methodology for calculating
inventory provisions and evaluated the Directors’ assumptions
over future forecast usage and validated historic usage to
underlying revenue records. We found no material exceptions
from these procedures.
We tested, on a sample basis, inventory held as at 31 December
2017 to verify that sale prices in 2018 were above cost.
Based on the results of our audit work, we found that the
inventory recognised by the Directors was at an appropriate
value and was consistent with the requirements of IAS 2.
Group
70 EUROCELL PLC
Annual Report and Accounts 2017
KEY AUDIT MATTER
HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER
Trade receivables provisions
Refer to pages 34 to 38 (Risk management/ Principal risks and
uncertainties), pages 47 to 49 (Audit & Risk Committee report),
Note 1 (Accounting policies) and Note 18 (Trade and other
receivables).
The Group had gross trade receivables of £28.8m as at
31 December 2017 (2016: £26.5m) against which provisions of
£0.9 million (2015: £0.7 million) were held.
We focused on this area because the Directors’ assessment of
the provisions required in respect of trade receivables involved
subjective judgements.
In addition, we also focused on these areas because the
incentive schemes of the Directors and senior management
are based upon financial measures including profit, which we
concluded gave a greater risk of manipulation of judgements,
including those around trade receivables provisions, to ensure
that bonus targets are achieved.
Group
We understood the Directors’ methodology for calculating
trade receivables provisions across the Group and considered
whether these complied with relevant IFRSs.
We tested the ageing of amounts due at the balance sheet
date to understand and quantify the potential risk in overdue
balances. We then challenged management in respect of those
customers with whom amounts were past due but not impaired
to assess for bias. We also assessed the Directors’ history of
accuracy over this key estimate.
We tested, on a sample basis, cash received from customers
following the year-end to validate the appropriateness of the
Directors’ estimates.
We found no material exceptions from the procedures noted above.
Based on the results of our audit work, we found that the
provisions recorded by the Directors were materially accurate
and were consistent with the requirements of the relevant IFRSs.
Dilapidations provisions
Refer to pages 34 to 38 (Risk management/ Principal risks and
uncertainties), pages 47 to 49 (Audit & Risk Committee report),
Note 1 (Accounting policies) and Note 21 (Provisions).
We understood the Directors’ methodology for calculating
dilapidations provisions across the Group and considered
whether these complied with relevant IFRSs.
The Group held provisions in respect of dilapidations of
£1.1 million (2016: £1.5 million).
We focused on this area because the Directors’ assessment of
the provisions required in respect of dilapidations involved
subjective judgements.
In addition, we also focused on this area because the incentive
schemes of the Directors and senior management are based
upon financial measures including profit, which we concluded
gave a greater risk of manipulation of judgements, including
those around dilapidations provisions, to ensure that bonus
targets are achieved.
In respect of dilapidation provisions for Eurocell Profiles, we
tested management’s assessment to the most recent third party
estimate of the expected costs less amounts spent during 2017.
For Eurocell Building Plastics, we tested management’s estimated
average branch dilapidations cost to actual costs incurred in
respect of leases exited during the current and prior year.
We found no material exceptions from the procedures noted above.
Based on the results of our audit work, we found that the
provisions recorded by the Directors were materially accurate
and were consistent with the requirements of the relevant IFRSs.
Group
Recoverability of investments and amounts owed by
subsidiary undertakings
Investments in subsidiary companies are £17.8m as at
31 December 2017 (2016: £17.8m) and amounts owed by
subsidiary undertakings total £53.1m (2016: £48.0m).
We have reviewed the impairment assessment performed by
the Directors.
The recovery of the assets requires the use of judgement by
the Directors. There is a risk that impairments to these assets
may not be booked by the Directors as it could hinder the ability
of the Company to pay dividends.
This has included comparing the carrying value of the investments
to their net assets values and assessing the estimated profits and
cash flows of the subsidiaries for reasonableness.
We found no material exceptions from the procedures noted above.
Company
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FINaNCIaL STaTEmENTS
Independent Auditors’ Report continued
to the members of Eurocell 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.
Eurocell operates in the market of the extrusion of UPVC (unplasticised polyvinyl chloride) window and building products to the new
and replacement window market and the sale of building plastics materials. The Group has sites throughout the UK with its
headquarters in Alfreton. The business is managed as two primary divisions:
– Eurocell Building Plastics, focusing on sales and distribution across around 190 branches within the UK to smaller scale customers.
This segment includes the trading subsidiary companies Eurocell Building Plastics Limited and Security Hardware Limited; and
– Eurocell Profiles, focusing on manufacture and distribution to large-scale customers. This division includes the trading
subsidiaries Eurocell Profiles Limited, Vista Panels Limited and S&S Plastics Limited.
Each legal entity has its own local finance team and management team who report directly into the head office finance and
management teams.
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the Consolidated
Financial Statements as a whole, taking into account the geographic structure of the Group, the accounting processes and
controls, and the industry in which the Group operates.
All audit work, including work on components, was completed by the Group team.
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 Group materiality
£1.3m (2016: £1.2m)
£0.7m (2016: £0.7m).
How we determined it
5% of underlying profit before tax.
1% of total assets.
Rationale for
benchmark applied
We believe that underlying profit before tax is
the key measure used by the Shareholders in
assessing the performance of the Group.
This benchmark, which excludes the non-
underlying items described in Note 7 to the
Financial Statements, provides consistent
year on year basis for determining materiality
by eliminating the non-underlying and/or
disproportionate impact of these items.
We believe that total assets is the primary
measure used by the Shareholders in assessing
the financial position of the entity, and is a
generally accepted auditing benchmark.
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 £1.2m and £0.8m. Certain components were audited to a local
statutory audit materiality that was also less than our overall Group materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £65,000 (Group
audit) (2016: £60,980) and £35,000 (Company audit) (2016: £35,000) as well as misstatements below those amounts that, in our
view, warranted reporting for qualitative reasons.
72 EUROCELL PLC
Annual Report and Accounts 2017
Going concern
In accordance with ISAs (UK), we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add or draw
attention to in respect of the Directors’ Statement in the Financial
Statements about whether the directors considered it appropriate to
adopt the going concern basis of accounting in preparing the Financial
Statements and the Directors’ identification of any material uncertainties
to the Group’s and the Company’s ability to continue as a going concern
over a period of at least twelve months from the date of approval of the
Financial Statements.
We have nothing material to add or to draw attention
to. 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.
We are required to report if the Directors’ Statement relating to Going
Concern in accordance with Listing Rule 9.8.6R (3) is materially
inconsistent with our knowledge obtained in the audit.
We have nothing to report.
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, the Companies Act 2006,
(CA06), ISAs (UK) and the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and
matters as described below (required by ISAs (UK) unless otherwise stated).
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 2017 is consistent with the Financial Statements and has been prepared in accordance
with applicable legal requirements. (CA06)
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. (CA06)
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FINaNCIaL STaTEmENTS
Independent Auditors’ Report continued
to the members of Eurocell plc
The Directors’ assessment of the prospects of the Group and of the principal risks that would threaten the
solvency or liquidity of the Group
We have nothing material to add or draw attention to regarding:
• The Directors’ confirmation on page 45 of the Annual Report that they have carried out a robust assessment of the principal
risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity.
• The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
• The Directors’ explanation on page 39 of the Annual Report as to how they have assessed the prospects of the Group, over
what period they have done so and why they consider that period to be appropriate, and their statement as to whether they
have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the
period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
We have nothing to report having performed a review of the Directors’ statement that they have carried out a robust assessment of
the principal risks facing the Group and statement in relation to the longer-term viability of the Group. Our review was substantially
less in scope than an audit and only consisted of making inquiries and considering the Directors’ process supporting their
statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code (the
“Code”); and considering whether the statements are consistent with the knowledge and understanding of the Group and
Company and their environment obtained in the course of the audit. (Listing Rules)
Other Code Provisions
We have nothing to report in respect of our responsibility to report when:
• The statement given by the Directors, on page 42, that they consider the Annual Report taken as a whole to be fair, balanced
and understandable, and provides the information necessary for the members to assess the Group’s and Company’s position
and performance, business model and strategy is materially inconsistent with our knowledge of the Group and Company
obtained in the course of performing our audit.
• The section of the Annual Report on page 47 to 49 describing the work of the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee.
• The Directors’ statement relating to the Company’s compliance with the Code does not properly disclose a departure from a
relevant provision of the Code specified, under the Listing Rules, for review by the auditors.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006. (CA06)
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, 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.
74 EUROCELL PLC
Annual Report and Accounts 2017
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 and the part of the Directors’ Remuneration Report to be audited are not in agreement with
the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit and Risk Committee, we were appointed by the Board of Directors on 29 April 2015
to audit the Financial Statements for the year ended 31 December 2015 and by the members for subsequent financial periods.
The period of total uninterrupted engagement is 3 years, covering the years ended 31 December 2015 to 31 December 2017.
Mark Smith (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Birmingham
8 March 2018
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FINaNCIaL STaTEmENTS
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2017
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Operating profit
Finance expense
Profit before tax
Taxation
Profit for the year and total
comprehensive income
Basic earnings per share
Year ended
31 December
2017
Underlying
£000
Year ended
31 December
2017
Non-underlying*
£000
Year ended
31 December
2017
Total
£000
Year ended
31 December
2016
Underlying
£000
Year ended
31 December
2016
Non-underlying*
£000
Year ended
31 December
2016
Total
£000
224,906
(110,282)
114,624
(17,254)
(72,313)
25,057
(553)
24,504
(4,089)
–
–
224,906
(110,282)
–
–
(843)
(843)
–
(843)
70
114,624
(17,254)
(73,156)
24,214
(553)
23,661
(4,019)
20,415
20.4
(773)
19,642
19.6
204,816
(98,251)
106,565
(15,517)
(66,096)
24,952
(677)
24,275
(4,299)
19,976
20.0
–
–
–
–
(455)
(455)
–
(455)
81
204,816
(98,251)
106,565
(15,517)
(66,551)
24,497
(677)
23,820
(4,218)
(374)
19,602
19.6
Note
4,9
6
10
9
11
12
*Non-underlying items are detailed in Note 7. The Group’s policy regarding the recognition of non-underlying costs is outlined on page 81.
The Notes on pages 80 to 109 are an integral part of these Consolidated Financial Statements.
76 EUROCELL PLC
Annual Report and Accounts 2017
Consolidated Statement of Financial Position
As at 31 December 2017
Assets
Property, plant and equipment
Intangible assets
Total non-current assets
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets
Liabilities
Current liabilities
Borrowings
Trade and other payables
Provisions
Corporation tax
Total current liabilities
Non-current liabilities
Borrowings
Trade and other payables
Provisions
Deferred tax
Total non-current liabilities
Total liabilities
Net assets
Equity attributable to equity holders of the Parent
Share capital
Share premium account
Share-based payment reserve
Retained earnings
Total equity
Note
14
15
17
18
19
20
21
19
20
21
22
23
23
24
2017
£000
2016
£000
31,167
19,431
50,598
21,094
31,578
11,361
64,033
29,294
19,713
49,007
17,404
28,123
5,559
51,086
114,631
100,093
–
(33,011)
(405)
(2,448)
(35,864)
(25,851)
(718)
(654)
(2,170)
(29,393)
(65,257)
49,374
(42)
(29,042)
(48)
(2,873)
(32,005)
(25,785)
(520)
(1,463)
(2,194)
(29,962)
(61,967)
38,126
100
2,104
480
46,690
49,374
100
1,926
348
35,752
38,126
The Financial Statements on pages 76 to 109 were approved and authorised for issue by the Board of Directors on 8 March 2018
and were signed on its behalf by:
Mark Kelly
Director
Michael Scott
Director
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FINaNCIaL STaTEmENTS
Consolidated Cash Flow Statement
For the year ended 31 December 2017
Cash generated from operations
Non-underlying costs
Cash generated from underlying operations
Income taxes paid
Non-underlying costs paid
Net cash generated from operating activities
Investing activities
Acquisition of subsidiaries
Purchase of property, plant and equipment
Sale of property, plant and equipment
Purchase of intangible assets
Net cash used in investing activities
Financing activities
Proceeds from bank borrowings
Repayment of bank and other borrowings
Finance expense paid
Dividends paid to equity Shareholders
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Year ended
31 December
2017
£000
Year ended
31 December
2016
£000
27,926
843
28,769
(4,557)
(489)
23,723
(1,260)
(7,068)
15
(413)
(8,726)
–
(42)
(449)
(8,704)
(9,195)
31,782
455
32,237
(3,537)
(273)
28,427
(6,332)
(6,342)
–
(877)
(13,551)
8,000
(8,523)
(643)
(8,000)
(9,166)
5,802
5,710
5,559
11,361
(151)
5,559
Note
30
7
29
19
19
13
31
31
78 EUROCELL PLC
Annual Report and Accounts 2017
Consolidated Statement of Changes in Equity
For the year ended 31 December 2017
Balance at 1 January 2017
Comprehensive income for the year
Profit for the year
Total comprehensive income for the year
Contributions by and distributions to owners
Exercise of share options
Share-based payments
Deferred tax on share-based payments
Dividends paid
Total transactions with owners recognised directly in equity
Share
capital
£000
Share
premium
account
£000
Share-based
payment
reserve
£000
Retained
earnings
£000
Total
equity
£000
100
1,926
348
35,752
38,126
–
–
–
–
–
–
–
–
–
178
–
–
–
178
–
–
19,642
19,642
19,642
19,642
(178)
260
50
–
–
–
–
(8,704)
–
260
50
(8,704)
132
(8,704)
(8,394)
Balance at 31 December 2017
100
2,104
480
46,690
49,374
Balance at 1 January 2016
Comprehensive income for the year
Profit for the year
Total comprehensive income for the year
Contributions by and distributions to owners
Share-based payments
Deferred tax on share-based payments
Dividends paid
Total transactions with owners recognised directly in equity
Share
capital
£000
100
Share
premium
account
£000
1,926
Share-based
payment
reserve
£000
Retained
earnings
£000
Total
equity
£000
380
24,150
26,556
–
–
–
–
–
–
–
–
–
–
–
–
–
–
19,602
19,602
19,602
19,602
18
(50)
–
–
–
(8,000)
18
(50)
(8,000)
(32)
(8,000)
(8,032)
Balance at 31 December 2016
100
1,926
348
35,752
38,126
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FINaNCIaL STaTEmENTS
Notes to the Financial Statements
For the year ended 31 December 2017
1 ACCOUNTING POLICIES (GROUP)
Corporate information
Eurocell plc (the ‘Company’) and its subsidiaries (together the ‘Group’) is a publicly listed company incorporated and domiciled in
England and Wales. The registered office is Fairbrook House, Clover Nook Road, Alfreton, Derbyshire, DE55 4RF.
The Group is principally engaged in the extrusion of UPVC window and building products to the new and replacement window
market and the sale of building materials across the UK.
Basis of preparation
The principal accounting policies adopted in the preparation of the Financial Statements are set out below. The policies have been
consistently applied to all years presented, unless otherwise stated.
The Group has adequate resources to continue in operational existence for the foreseeable future and, as a result of this, the going
concern basis has been adopted in preparing the Financial Statements.
The Group Financial Statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as
adopted by the European Union and with the Companies Act 2006 applicable to companies reporting under IFRS. The Financial
Statements have been prepared under the historical cost convention, as modified by fair values.
The preparation of the Group Financial Statements requires the use of certain critical accounting estimates. It also requires
management to exercise judgement in 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 Financial Statements are disclosed in Note 2.
Basis of consolidation
The Consolidated Financial Statements comprise the Financial Statements of the Company and its subsidiaries at 31 December 2017
and present the results as if they formed a single entity. Where the Company has power, either directly or indirectly, to govern the
financial and operating policies of another entity or business so as to obtain benefits from its activities, it is classified as a subsidiary.
Subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtained control, and continue to be
consolidated until the date when such control ceases. Intercompany transactions and balances, unrealised gains and losses
resulting from intra-group transactions and dividends are eliminated in full.
The Consolidated Financial Statements incorporate the results of business combinations using the purchase method. In the
balance sheet, the acquiree’s identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the
acquisition date.
Changes in accounting policies and disclosures applicable to the Company and the Group.
No new standards, amendments or interpretations, effective for the first time for the year ended 31 December 2017 have had a
material impact on the Company or Group. However, a number of major new standards will soon become effective.
IFRS 9 Financial Instruments (effective from 1 January 2018) addresses the classification, measurement and recognition of financial
assets and liabilities and replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement.
The main impact of adopting this standard is likely to arise from the adoption of the expected loss model of assessing the
impairment of trade receivables. Management has modelled the impact of adopting the expected loss model and estimates that
retained earnings would be decreased by less than £50,000 as at 1 January 2018.
IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018) replaces IAS 18 Revenue and IAS 11 Construction
Contracts. The standard addresses revenue recognition and establishes principles for reporting useful information to users of
Financial Statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts
with its customers.
Revenue is recognised when a customer obtains control of goods or services, giving them the ability to direct the use and obtain
the benefits of those goods and services. Variable consideration is included in the transaction price if it is highly probable that the
cumulative revenue will not be reversed when any outstanding uncertainty is resolved.
80 EUROCELL PLC
Annual Report and Accounts 2017
Management has completed an assessment of its existing contractual relationships with customers, and has determined that there
will be no material impact of implementing IFRS 15 on its revenue streams.
IFRS 16 Leases (effective from 1 January 2019) fundamentally changes the way in which certain leases are recognised in the
Financial Statements, with most operating leases brought on to the balance sheet. The standard replaces IAS 17 Leases and
related interpretations, and addresses the definitions of a lease, recognition and measurement of leases and establishes principles
for reporting useful information to the users of Financial Statements about the leasing activities of both lessees and lessors.
Management is in the process of reviewing its lease contracts, determining the appropriate discount rates and establishing value in
use for its various leased assets. An initial assessment of the impact of adopting IFRS 16 has been conducted, based upon the
Group’s lease commitments as at 31 December 2017. This assessment indicates that the Group would recognise additional
non-current assets and lease liabilities of approximately £32.9 million on adoption of the standard, with additional depreciation of
£9.9 million and finance costs of £1.9 million being incurred in the first year of adoption, offset by a corresponding reduction in
administrative costs of £9.6 million. In making this assessment, management has assumed that the Group would apply the
Modified Retrospective transition approach.
In addition to the standards noted above, the following standards, which are not expected to have a material impact on the Group’s
future Financial Statements, were in issue but not yet effective (and in some cases had not yet been adopted by the EU):
•
•
•
•
•
•
•
IFRS 2 Share Based Payments (effective from 1 January 2018);
IFRS 4 Insurance Contracts (effective from 1 January 2018);
IFRS 17 Insurance Contracts (effective from 1 January 2021);
IAS 28 Investments in Associates and Joint Ventures (effective from 1 January 2018 and 2019);
IAS 40 Investment Property (effective from 1 January 2018);
IFRIC 22 Foreign Currency Transactions and Advanced Consideration (effective from 1 January 2018); and
IFRIC 23 Uncertainty Over Income Tax Treatment (effective from 1 January 2019).
The Group does not intend to adopt any standard, revision or amendment before the required implementation date.
Revenue
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be
reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of consideration received
or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. The Group assesses its
revenue arrangements against specific criteria in order to determine if it is acting as a principal or agent. The Group has concluded
that it is acting as a principal in all of its revenue arrangements.
Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer (when the
goods are delivered). The amounts are recognised net of any discounts or rebates payable, which are accrued at the point at which
the goods are delivered.
Administrative expenses – non-underlying
The Group presents some material items of income and expense as non-underlying costs. This is done when, in the opinion of the
Directors, the nature and expected infrequency of the circumstances merit separate presentation in the Financial Statements. This
treatment allows users of the Financial Statements to better understand the elements of financial performance in the year; it
facilitates comparison with prior periods; and it helps in understanding trends in financial performance.
Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The cost of acquisition is measured as the aggregate of
the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the
acquirer, in exchange for control of the acquire. Direct costs of acquisition are recognised immediately as an expense.
Goodwill is initially measured at cost, being the excess of the cost of a business combination over the fair value of the identifiable
assets, liabilities and contingent liabilities acquired at the acquisition date. Goodwill is capitalised as an intangible asset with any
impairment in carrying value being charged to the Consolidated Statement of Comprehensive Income. Where the fair value of
identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the
Consolidated Statement of Comprehensive Income on the acquisition date.
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Notes to the Financial Statements continued
For the year ended 31 December 2017
1 ACCOUNTING POLICIES (GROUP) CONTINUED
Externally acquired intangible assets
Externally acquired intangible assets are initially recognised at cost and subsequently amortised on a straight-line basis over their
useful economic lives.
Intangible assets are recognised on business combinations if they are separable from the acquired entity or give rise to other
contractual/legal rights. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques (see
Note 2 relating to critical estimates and judgements below).
The significant intangibles recognised by the Group, their useful economic lives and the methods used to determine the cost of
intangibles acquired in a business combination are as follows:
Intangible asset
Software
Technology based
Marketing related
Customer related
Useful economic life
Five to ten years
Ten to seventeen years
Ten to fifteen years
Four to twelve years
Valuation method
Cost to acquire
Cost to acquire
Cost to acquire
Cost to acquire
The amortisation charge for the year is included within administration costs within the Consolidated Statement of
Comprehensive Income.
Impairment of tangible assets, intangible assets and investments
Impairment tests on non-current assets are undertaken annually at the financial year end or at any other time when an indication of
impairment arises. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair
value less costs to sell), the asset is written down accordingly.
Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the smallest
group of assets to which it belongs for which there are separately identifiable cash flows – its cash-generating unit (‘CGU’).
Goodwill is allocated on initial recognition to each of the Group’s CGUs that are expected to benefit from the synergies of the
combination giving rise to the goodwill.
Impairment charges are included in the Consolidated Statement of Comprehensive Income, except to the extent they reverse gains
previously recognised in Other Comprehensive Income. An impairment loss recognised for goodwill is not reversed.
Property, plant and equipment
Items of property, plant and equipment are initially recognised at cost. As well as the purchase price, cost includes directly
attributable costs and the estimated present value of any future unavoidable costs of dismantling and removing items. The
corresponding liability is recognised within provisions.
Freehold land and assets in the course of construction are not depreciated. Depreciation is provided on all other items of property,
plant and equipment so as to write-off their cost less residual value over their expected useful economic lives. It is provided at the
following rates:
Asset class
Freehold property
Leasehold improvements
Plant and machinery
Mixing plant
Extruders
Stillages and tooling
Other
Motor vehicles
Office equipment and fixtures
Depreciation policy
2.5% per annum straight-line
Equal instalments over the period of the lease
Between 20% and 25% per annum on cost
13 years based on production usage
5 to 10 years based on production usage
Between 10% and 25% per annum on cost
Between 20% and 25% per annum on cost
Between 20% and 25% per annum on cost
Inventories
Inventories are initially recognised at cost, and subsequently at the lower of cost and net realisable value. Cost comprises all costs
of purchase and conversion and other costs incurred in bringing the inventories to their present location and condition. In
determining the cost of raw materials, consumables and goods purchased for resale, the weighted average purchase price is used.
For work in progress and finished goods, cost is taken as production cost, which includes a proportion of attributable overheads.
82 EUROCELL PLC
Annual Report and Accounts 2017
Financial assets
The Group classifies all of its financial assets as loans and receivables and has not classified any of its financial assets as held to
maturity. The Group’s loans and receivables comprise trade and other receivables and cash and cash equivalents in the
balance sheet.
Loans and receivable assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an
active market. They arise principally through the provision of goods and services to customers, but also incorporate other types of
contractual monetary asset. They are initially recognised at fair value plus transaction costs that are directly attributable to their
acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for
impairment.
Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the
counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the
terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of
the future expected cash flows associated with the impaired receivable. For trade receivables, which are reported net of provisions,
such provisions are recorded in a separate allowance account with the loss being recognised within administrative expenses in the
Consolidated Statement of Comprehensive Income. On confirmation that the trade receivable will not be collectable, the gross
carrying value of the asset is written-off against the associated provision.
From time to time, the Group elects to renegotiate the terms of trade receivables due from customers with which it has previously
had a good trading history. Such renegotiations will lead to changes in the timing of payments rather than changes to the amounts
owed and, in consequence, the new expected cash flows are discounted at the original effective interest rate and any resulting
difference to the carrying value is recognised in administrative expenses.
Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with
original maturities of three months or less from inception, and – for the purpose of the statement of cash flows – bank overdrafts.
Bank overdrafts are shown within loans and borrowings in current liabilities in the balance sheet.
Financial liabilities
The Group classifies its financial liabilities as other financial liabilities which include the following items:
• Bank borrowings which are initially recognised at fair value net of any transaction costs directly attributable to the issue of the
instrument. Such interest-bearing liabilities are subsequently measured at amortised cost using the effective interest rate
method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability
carried in the balance sheet.
• Trade payables and other short-term monetary liabilities, which are initially recognised at fair value and subsequently carried at
amortised cost using the effective interest method.
Taxation
Tax on the profit for both the current and prior periods comprises both current and deferred tax and is recognised in the
Consolidated Statement of Comprehensive Income, except to the extent that it relates to items recognised directly in equity.
Current tax is the expected tax payable on taxable income for the year, using tax rates that have been enacted at the balance
sheet date, and any adjustment to tax payable in respect of prior years.
The Group recognises a current tax asset in respect of relief claimed under the Patent Box when the inflow of economic benefits
arising from that asset is virtually certain, deemed to be the submission of a claim to HM Revenue and Customs.
Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the balance sheet differs from
its tax base, except for differences arising on:
• the initial recognition of goodwill;
• the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the
•
transaction affects neither accounting nor taxable profit; and
investments in subsidiaries and jointly controlled entities where the Group is able to control the timing of the reversal of the
difference and it is probable that the difference will not reverse in the foreseeable future.
Recognition of deferred tax assets is restricted to those instances where it is probable that future taxable profits will arise against
which the difference can be utilised.
The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the reporting
date and are expected to apply when the deferred tax liabilities/(assets) are settled/(recovered).
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Notes to the Financial Statements continued
For the year ended 31 December 2017
1 ACCOUNTING POLICIES (GROUP) CONTINUED
Taxation continued
Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities
and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either:
• the same taxable group company; or
• different group entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and
settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are
expected to be settled or recovered.
Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past
event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material,
provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments
of the time value of money and, when appropriate, the risks specific to the liability.
The Group has recognised provisions for liabilities of uncertain timing or amount in respect of leasehold dilapidations. The provision
is measured at the best estimate of the expenditure required to settle the obligation at the reporting date, discounted at a pre-tax
rate as described above.
Share capital
The Group’s ordinary shares are classified as equity instruments.
Dividends
Dividends are recognised when they become legally payable. In the case of interim dividends to equity Shareholders, this is when
declared by the Directors. In the case of final dividends, this is when approved by the Shareholders at the Annual General Meeting.
Retirement benefits: defined contribution scheme
The Group operates a defined contribution pension scheme. The assets of the scheme are held separately from those of the Group
in an independently administered fund. The amount charged to the Consolidated Statement of Comprehensive Income represents
the contributions payable to the scheme in respect of the accounting period. The Group has no obligation to pay future
pension benefits.
Operating leases
Operating leases are contractual arrangements conferring the right of use of an asset but where substantially all of the risks and
rewards incidental to ownership are not transferred to the Group, the total rentals payable under the lease are charged to the
Consolidated Statement of Comprehensive Income on a straight-line basis over the lease term. The aggregate benefit of lease
incentives is recognised as a reduction of the rental expense over the lease term on a straight-line basis.
Foreign currency
The Group’s Financial Statements are presented in British Pounds Sterling. For each entity, the Group determines the functional
currency, and items included in the Financial Statements of each entity are measured using that functional currency.
Transactions entered into by Group entities in a currency other than the currency of the primary economic environment in which
they operate (their ‘functional currency’) are recorded at the prevailing rate when the transactions occur. Foreign currency monetary
assets and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on the retranslation of
unsettled monetary assets and liabilities are recognised immediately in the Consolidated Statement of Comprehensive Income.
Share-based payment transactions
The Group has applied the requirements of IFRS 2 Share-Based Payments.
Equity-settled share-based payments are measured at fair value at the date of grant. The fair value is determined at the grant date
using the Black-Scholes valuation model and equity-settled share-based payments are expensed on a straight-line basis over the
vesting period, based upon the Company’s estimate of the shares that will eventually vest and adjusted for the effect of non-market
based vesting conditions.
Fair value is measured based on the value of options over shares on the date of grant and the likelihood of all or part of the
option vesting.
84 EUROCELL PLC
Annual Report and Accounts 2017
2 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The Group makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated
based on historical experience and other factors, including expectations of future events, that are believed to be reasonable under
the circumstances. In the future, actual experience may differ from these estimates and assumptions. The estimates and
assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the
next financial year are discussed below.
Estimates and assumptions
a) Carrying value of inventories
Management review the market value of, and demand for, its inventories on a periodic basis to ensure inventory is recorded in the
Financial Statements at the lower of cost and net realisable value. Any provision for impairment is recorded against the carrying
value of inventories. The key judgement is the extent to which items of inventory remain saleable as they age. Management use
their knowledge of market conditions to assess future demand for the Group’s products and achievable selling prices.
Further disclosures relating to inventories are provided in Note 17.
b) Recoverability of trade receivables
Management makes allowance for doubtful debts based on an assessment of the recoverability of trade receivables. Allowances
are applied to trade receivables where events or changes in circumstances indicate that the carrying amounts may not be
recoverable. Management specifically analyse historical bad debts, customer creditworthiness, current economic trends and
changes in customer payment terms when making a judgement to evaluate the adequacy of the provision for doubtful debts.
Where the expectation is different from the original estimate, such difference will impact on the carrying value of trade receivables
and the amount credited or charged in the Consolidated Statement of Comprehensive Income. Further disclosures relating to trade
receivables are provided in Note 18.
c) Dilapidation provisions
The Group recognises dilapidation provisions on the leasehold properties it occupies. The key estimate is the level of provision
required for each property, which management assesses based on past experience within the property portfolio. If the actual cost
of dilapidations in respect of the Group’s branch network was on average 10% greater or less than expected, the provision would
change by less than £50,000. These provisions are reviewed semi-annually to ensure that they reflect the current best estimate of
the provision required. Further disclosures relating to dilapidation provisions are provided in Note 21.
d) Carrying value of intangible assets
Management assesses the carrying value of its goodwill and intangible assets at least annually, or when an indication of impairment
arises. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs
to sell), the asset is written down accordingly. Recoverable amounts are determined from ‘value-in-use’ calculations applied to
each Cash Generating Unit, which have been predicated on discounted cash flow projections from formally approved budgets
covering a three year period. The key estimates as highlighted in Note 16 are the discount rate and the level of profit growth
assumed in perpetuity. If the discount rate increased by 100 basis points, or if the level of profit growth in perpetuity was zero, none
of the Group’s Cash Generating Units would be at risk of impairment.
3 FINANCIAL INSTRUMENTS – RISK MANAGEMENT
The Group is exposed through its operations to the following financial risks:
• credit risk
• market risk
•
•
foreign exchange risk
liquidity risk
In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note
describes the Group’s objectives, policies and processes for managing those risks and the methods used to measure them.
Further quantitative information in respect of these risks is presented throughout these Financial Statements. There have been no
substantive changes in the Group’s exposure to financial instrument risks, its objectives, policies and processes for managing
those risks, or the methods used to measure them from previous periods unless otherwise stated in this note.
Principal financial instruments
The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows:
• trade and other receivables
• cash and cash equivalents
• trade and other payables
• bank overdrafts
•
floating-rate bank loans
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FINaNCIaL STaTEmENTS
Notes to the Financial Statements continued
For the year ended 31 December 2017
3 FINANCIAL INSTRUMENTS – RISK MANAGEMENT CONTINUED
The Group finances its activities using cash generated from operations and its revolving credit facility. It does not use invoice
discounting or any other financing facilities.
A summary of the financial instruments held by category is provided below:
Financial assets
Cash and cash equivalents
Trade and other receivables
Total financial assets
Financial liabilities
Trade and other payables
Borrowings
Total financial liabilities
2017
£000
11,361
27,702
39,063
2017
£000
33,729
25,851
59,580
2016
£000
5,559
25,287
30,846
2016
£000
29,562
25,827
55,389
Impairment of financial assets
Impairments of trade receivables are outlined in Note 18. No further impairments to financial assets are considered necessary.
Factors which are considered when assessing the need for impairment include the liquidity of the asset, its maturity profile and
other commercial considerations.
General objectives, policies and processes
The Board has overall responsibility for the determination of the Group’s risk management objectives and policies and, whilst
retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the
effective implementation of the objectives and policies to the Group’s finance function.
The Board receives monthly reports from the Chief Financial Officer through which it reviews the effectiveness of the processes put
in place and the appropriateness of the objectives and policies it sets. These are then discussed at regular Board meetings.
The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group’s
competitiveness and flexibility. Further details regarding these policies are set out below:
Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual
obligations. The Group is mainly exposed to credit risk through its trade receivables arising from its normal commercial activities. It
is Group policy, implemented locally, to assess the credit risk of new customers before entering contracts.
Existing credit risks associated with trade receivables are managed in line with Group policies as discussed in the financial assets
section of accounting policies.
Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. This risk is mitigated by
ensuring that deposits are only made with banks and financial institutions with a good rating issued by an industry-recognised
independent third party e.g. Standard and Poor’s.
Further disclosures regarding financial assets are provided in Note 18.
Market risk
The Group is exposed to market risk from bank borrowings which incur variable interest rate charges linked to base rate plus a
margin. The Group’s policy aims to manage the interest cost of the Group within the constraints of its financial covenants
and forecasts.
During 2017 and 2016 the Group’s borrowings at variable rate were denominated in Sterling.
Further disclosures relating to bank borrowings are provided in Note 19.
86 EUROCELL PLC
Annual Report and Accounts 2017
Foreign exchange risk
Foreign exchange risk is the risk that the fair value of a financial instrument or future cash flow will fluctuate because of changes in
foreign exchange rates. The Group’s exposure to foreign exchange risk arises when individual Group entities enter into transactions
denominated in a currency other than their functional currency. The Group manages its exposure to fluctuations in currency rates
by wherever possible negotiating both purchases and sales to be denominated in Sterling. The profit or loss arising from likely
changes in foreign exchange is not significant.
Liquidity risk
Liquidity risk arises from the Group’s management of working capital and the finance charges and principal repayments on its debt
instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due.
The Group’s policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due.
To achieve this aim, cash flow forecasts are prepared and updated on a regular basis to ensure that the Group has adequate
headroom in its facilities.
The Board receives monthly updates on the Group’s liquidity position and any issues are reported by exception.
At the end of the financial year, the most recent cash flow projections indicated that the Group expected to have sufficient liquid
resources to meet its obligations under all reasonably foreseeable circumstances.
The following table sets out the contractual maturities (representing undiscounted contractual cash flows) of financial liabilities:
At 31 December 2017
Trade and other payables
Bank overdraft and borrowings
Total
At 31 December 2016
Trade and other payables
Bank overdraft and borrowings
Total
Total
£000
Up to 3
months
£000
Between
3 and 12
months
£000
Between
1 and 2
years
£000
Between
2 and 5
years
£000
(33,729)
(26,000)
(32,905)
–
(59,729)
(32,905)
(106)
–
(106)
(307)
–
(411)
(26,000)
(307)
(26,411)
Total
£000
Up to 3
months
£000
(29,562)
(26,042)
(29,042)
(42)
(55,604)
(29,084)
Between
3 and 12
months
£000
Between
1 and 2
years
£000
–
–
–
–
–
–
Between
2 and 5
years
£000
(520)
(26,000)
(26,520)
Over
5 years
£000
–
–
–
Over
5 years
£000
–
–
–
Capital disclosures
The Group’s objective when managing capital, which is deemed to be total equity plus total debt and which totalled £75,225,000
(2016: £63,953,000) at the balance sheet date, is to safeguard the Group’s ability to continue as a going concern, through the
optimisation of the debt and equity balance, and to maintain good headroom on its debt facilities and financial covenants. The Group
manages its capital structure and makes appropriate decisions in the light of current economic conditions and its strategic objectives.
The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and sustain the
future development of the business.
The funding requirements of the Group are met by the utilisation of external borrowings together with available cash.
A key objective of the Group’s capital management is to maintain comfortable headroom over the covenants set out in its existing
facility agreements and to maintain a comfortable headroom over and above these requirements.
The financial covenants which are in place are as follows:
• Leverage: the ratio of total net debt to consolidated EBITDA of any relevant period of not more than 3:1.
•
Interest cover: the ratio of EBITDA to net interest payable in respect of any relevant period of not less than 4:1.
Covenants are measured semi-annually on a rolling twelve-month basis. As at 31 December 2017 they were 0.5:1 and 57:1
respectively (2016: 0.6:1 and 46:1).
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FINaNCIaL STaTEmENTS
Notes to the Financial Statements continued
For the year ended 31 December 2017
3 FINANCIAL INSTRUMENTS – RISK MANAGEMENT CONTINUED
The following table sets out the Group’s foreign currency denominated monetary assets and monetary liabilities at the
reporting date:
Trade and other receivables
Cash and cash equivalents
Other interest-bearing borrowings
Trade and other payables
Trade and other receivables
Cash and cash equivalents
Other interest-bearing borrowings
Trade and other payables
4 REVENUE
Revenue arises from:
Sale of goods
External revenue by location of customers:
United Kingdom
Rest of European Union
Rest of World
There are no customers with sales in excess of 10% of total Group revenues.
5 AUDITORS’ REMUNERATION
Total amounts payable to the Group’s auditors were as follows:
Audit of these Financial Statements
Amounts receivable by auditors and their associates in respect of:
Audit of Financial Statements of subsidiaries pursuant to legislation
Audit-related assurance services
As at 31 December 2017
Euro
£000
175
288
–
(458)
GBP
£000
Total
£000
31,403
11,073
(25,851)
(33,271)
31,578
11,361
(25,851)
(33,729)
5
(16,646)
(16,641)
As at 31 December 2016
Euro
£000
38
327
–
(241)
124
GBP
£000
Total
£000
28,085
5,232
(25,827)
(29,321)
28,123
5,559
(25,827)
(29,562)
(21,831)
(21,707)
2017
£000
2016
£000
224,906
204,816
2017
£000
221,667
2,943
296
224,906
2016
£000
202,055
2,761
–
204,816
2017
£000
43
116
25
184
2016
£000
16
118
25
159
88 EUROCELL PLC
Annual Report and Accounts 2017
6 EXPENSES BY NATURE
Depreciation of property, plant and equipment
Amortisation of intangible assets
(Profit)/loss on disposal of property plant and equipment and intangible assets
Cost of inventories
Employee benefits expense (Note 8)
Non-underlying costs (Note 7)
Rentals under operating leases
Other expenses
Total cost of sales, distribution costs and administration expenses
7 NON-UNDERLYING COSTS
Amounts included in the Consolidated Statement of Comprehensive Income are as follows:
Acquisition related costs
Redundancy and settlement costs
HSE penalty
Duplicated costs related to CEO handover period
2017
£000
5,119
1,558
(51)
100,210
47,378
843
10,415
35,220
200,692
2016
£000
5,005
1,372
86
92,728
42,728
455
5,325
32,620
180,319
2017
£000
414
361
68
–
843
2016
£000
112
–
–
343
455
Any expenses arising from the acquisition of subsidiary undertakings are classified as non-underlying due to the fact that they
relate solely to the transfer of ownership rather than ongoing operations. Of the £414,000 (2016: £112,000) acquisition costs,
£322,000 (2016: £nil) relates to contingent consideration which is dependent upon continued employment and £92,000
(2016: £112,000) relates to professional fees and transaction costs incurred in respect of completed acquisitions.
The redundancy and settlement costs of £361,000 (2016: £nil) relate to a reorganisation of the production function in the Profiles
division and have been classified as non-underlying because they relate to termination costs for positions that no longer exist.
The penalty of £68,000 (2016: £nil) relates to a fine imposed by the Health and Safety Executive (‘HSE') following their prosecution
of the Company in respect of an accident incurred in August 2016. The penalty has been classified as non-underlying because
such costs are not in the normal course of business and are not expected to recur in the foreseeable future.
In the prior year, the Group recognised the duplicated salary costs relating to the handover period between its current and previous
Chief Executive Officer as non-underlying.
8 EMPLOYEE BENEFITS EXPENSE
Staff costs (including Directors) comprise:
Wages and salaries
Share-based payments
Social security costs
Pension costs – defined contribution plans
The average monthly number of employees, including Directors, during the year were as follows:
Production
Office and administration
Distribution
2017
£000
2016
£000
41,808
260
4,137
1,173
47,378
2017
No.
432
302
762
38,152
18
3,575
983
42,728
2016
No.
434
236
619
1,496
1,289
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FINaNCIaL STaTEmENTS
Notes to the Financial Statements continued
For the year ended 31 December 2017
8 EMPLOYEE BENEFITS EXPENSE CONTINUED
Key management personnel compensation and Directors’ remuneration
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the
activities of the Group, which is considered to be the Directors of the Company and the Directors of the Group’s
subsidiary companies.
Emoluments
Share-based payment
Pension and other post-employment benefit costs
2017
£000
1,889
169
190
2,248
2016
£000
1,865
234
132
2,231
Directors’ remuneration is set out in the Remuneration Report.
During the year, retirement benefits were accruing to two Directors in respect of defined contribution pension schemes (2016: two).
The highest paid Director received remuneration of £916,442 (2016: £560,558).
In total 123,864 share options were exercised by Directors of the Group during the year (2016: nil).
The value of contributions paid in cash in lieu of pension in respect of the highest paid Director amounted to £54,810
(2016: £41,123).
The Group’s policy for consulting with, sharing information with, and encouraging the involvement of employees is discussed
on pages 30 and 31.
9 SEGMENTAL INFORMATION
The Group organises itself into a number of operating segments that offer different products and services. They are managed
separately because each business requires different technology and marketing strategies.
Internal reporting provided to the chief operating decision maker, which has been identified as the executive management team
including the Chief Executive Officer and the Chief Financial Officer, reflects this structure.
The Group has aggregated its operations into two reported segments, as these business units have similar products, production
processes, types of customer, methods of distribution, regulatory environments and economic characteristics:
• Profiles – extrusion and sale of UPVC window and building products to the new and replacement window market across the UK.
• Building Plastics – sale of building plastic materials across the UK.
The Corporate segment includes amortisation in respect of acquired intangible assets.
Profiles
2017
£000
Building
Plastics
2017
£000
Corporate
2017
£000
Total
2017
£000
139,553
(45,377)
131,877
(1,147)
94,176
130,730
–
–
–
271,430
(46,524)
224,906
23,166
(159)
(3,859)
8,568
(112)
(795)
–
(1,287)
(465)
31,734
(1,558)
(5,119)
19,148
7,661
(1,752)
25,057
(843)
(553)
23,661
Revenue
Total revenue
Inter-segmental revenue
Total revenue from external customers
Adjusted EBITDA
Amortisation
Depreciation
Operating profit before non-underlying costs
Non-underlying costs
Finance expense
Profit before tax
90 EUROCELL PLC
Annual Report and Accounts 2017
Revenue
Total revenue
Inter-segmental revenue
Total revenue from external customers
Adjusted EBITDA
Amortisation
Depreciation
Operating profit before non-underlying costs
Non-underlying costs
Finance expense
Profit before tax
Additions to plant, property, equipment and intangible assets
Segment assets
Segment liabilities
Borrowings
Corporation tax payable
Deferred tax liability
Total liabilities
Total net assets
Additions to plant, property, equipment and intangible assets
Segment assets
Segment liabilities
Borrowings
Corporation tax payable
Deferred tax liability
Total liabilities
Total net assets
10 FINANCE EXPENSE
Finance expense
Bank borrowings
Other
Profiles
2016
£000
Building
Plastics
2016
£000
Corporate
2016
£000
Total
2016
£000
127,171
(39,817)
118,148
(686)
87,354
117,462
22,657
(158)
(3,969)
18,530
8,832
(123)
(609)
8,100
–
–
–
(160)
(1,091)
(427)
245,319
(40,503)
204,816
31,329
(1,372)
(5,005)
(1,678)
24,952
(455)
(677)
23,820
Profiles
2017
£000
4,044
Building
Plastics
2017
£000
2,423
Corporate
2017
£000
Total
2017
£000
1,116
7,583
58,861
39,965
15,805
114,631
(19,274)
(13,974)
(1,540)
(34,788)
(25,851)
(2,448)
(2,170)
(65,257)
49,374
Profiles
2016
£000
5,498
Building
Plastics
2016
£000
1,105
Corporate
2016
£000
Total
2016
£000
616
7,219
53,524
27,575
18,994
100,093
(17,391)
(12,402)
(1,280)
(31,073)
(25,827)
(2,873)
(2,194)
(61,967)
38,126
2016
£000
648
29
677
2017
£000
535
18
553
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FINaNCIaL STaTEmENTS
Notes to the Financial Statements continued
For the year ended 31 December 2017
11 TAXATION
Current tax expense
Current tax on profits for the year
Adjustment in respect of prior years
Total current tax
Deferred tax expense
Origination and reversal of temporary differences
Adjustment in respect of change in rates
Adjustment in respect of prior years
Total deferred tax
Total tax expense
2017
£000
4,253
(170)
4,083
53
(15)
(102)
(64)
4,019
2016
£000
5,025
75
5,100
(174)
(385)
(323)
(882)
4,218
The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the United
Kingdom applied to profits for the year are as follows:
Profit before tax
Expected tax charge based on the standard rate of corporation tax in the UK of 19.25% (2016: 20%)
Taxation effect of:
Expenses not deductible for tax purposes
Patent Box claim in respect of prior years
Adjustments to tax charge in respect of prior years
Tax on share-based payments recognised in equity
Adjustment in respect of change in rates
Total tax expense
2017
£000
23,661
4,555
439
(738)
(272)
50
(15)
2016
£000
23,820
4,764
87
(451)
253
(50)
(385)
4,019
4,218
Changes in tax rates and factors affecting the future tax charge
The mainstream rate of UK corporation tax changed in April 2017 from 20% to 19%. This gives rise to an effective rate of 19.25%
(2016: 20%) for the year. A further reduction to 17% from 1 April 2020 has been substantively enacted. Deferred taxes at the year
end date have been measured using these enacted tax rates and reflected in the Financial Statements.
There are no material uncertain tax provisions.
Tax on non-underlying items
The tax credit arising on non-underlying items within the Comprehensive Income Statement is £70,000 (2016: £81,000).
Tax included in Other Comprehensive Income
The tax credit arising on share-based payments within Other Comprehensive Income is £50,000 (2016: charge of £50,000).
Based on the current investment plans of the Group, and assuming the rates of capital allowances on capital expenditure continue
into the future, there is little prospect of any significant part of the deferred tax liability becoming payable over the next three years.
92 EUROCELL PLC
Annual Report and Accounts 2017
12 EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the net profit for the year attributable to ordinary Shareholders by the weighted
average number of ordinary shares outstanding during the year. Diluted earnings per share is calculated by adjusting the
earnings and number of shares for the effects of dilutive options. Adjusted earnings per share excludes the impact of non-
underlying costs.
Profit attributable to ordinary Shareholders
Profit attributable to ordinary Shareholders excluding non-underlying costs
Weighted average number of shares – basic
Weighted average number of shares – diluted
Basic earnings per share
Adjusted basic earnings per share
Diluted earnings per share
Adjusted diluted earnings per share
13 DIVIDENDS
Dividends paid during the year
Interim dividend for 2017 of 3.0p per share (2016: 2.8p per share)
Final dividend for 2016 of 5.7p per share (2015: 5.2p per share)
Dividends proposed
Final dividend for 2017 of 6.0p per share (2016: 5.2p per share)
2017
£000
19,642
20,415
2016
£000
19,602
19,976
Number
Number
100,040,383 100,000,000
100,227,068
100,301,071
Pence
19.6
20.4
19.6
20.4
2017
£000
3,004
5,700
8,704
6,008
Pence
19.6
20.0
19.6
19.9
2016
£000
2,800
5,200
8,000
5,700
The parent Company and its subsidiaries have combined distributable reserves of £61,349,000 (2016: £48,259,000) from which to
make future dividend payments.
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FINaNCIaL STaTEmENTS
Notes to the Financial Statements continued
For the year ended 31 December 2017
14 PROPERTY, PLANT AND EQUIPMENT
Freehold
property
£000
Leasehold
improvements
£000
Plant and
machinery
£000
Motor
vehicles
£000
Office
equipment
and fixtures
£000
Assets under
construction
£000
Cost
Balance at 1 January 2016
Additions
Added on acquisition
Disposals
Transfer
Balance at 1 January 2017
Additions
Added on acquisition
Disposals
Transfer
Balance at 31 December 2017
Accumulated depreciation
Balance at 1 January 2016
Charge for the year
Disposals
Balance at 1 January 2017
Charge for the year
Disposals
Balance at 31 December 2017
Net book value
At 31 December 2017
At 31 December 2016
8,604
40
–
–
–
8,644
–
–
–
23
8,667
450
229
–
679
228
–
907
70
–
–
(7)
–
63
122
–
–
–
185
43
6
(6)
43
7
–
50
24,667
2,428
339
(333)
4,305
31,406
3,484
43
(103)
3,876
38,706
8,091
4,695
(248)
12,538
4,839
(88)
17,289
7,760
7,965
135
20
21,417
18,868
85
61
51
–
–
197
45
–
(30)
–
212
14
43
–
57
45
(30)
72
140
140
68
1
18
(3)
–
84
–
–
–
–
84
55
32
(3)
84
–
–
84
–
–
Included within freehold property is non-depreciable land of £2,320,000 (31 December 2016: £2,320,000).
During the year, £104,000 of assets under construction were transferred to Intangible Assets.
Total
£000
36,288
6,342
408
(343)
–
42,695
7,068
43
(133)
(104)
2,794
3,812
–
–
(4,305)
2,301
3,417
–
–
(4,003)
1,715
49,569
–
–
–
–
–
–
–
8,653
5,005
(257)
13,401
5,119
(118)
18,402
1,715
2,301
31,167
29,294
15 INTANGIBLE ASSETS
Cost
Balance at 1 January 2016
Additions
Added on acquisition
Balance at 1 January 2017
Additions
Added on acquisition
Disposals
Transfers
Balance at 31 December 2017
Accumulated amortisation
Balance at 1 January 2016
Charge for the year
Balance at 1 January 2017
Charge for the year
Disposals
Balance at 31 December 2017
Net book value
At 31 December 2017
At 31 December 2016
94 EUROCELL PLC
Annual Report and Accounts 2017
Software
£000
Technology
based
£000
Customer
related
£000
Marketing
related
£000
Goodwill
£000
Total
£000
428
317
–
745
510
–
–
104
1,359
212
117
329
158
–
487
872
416
1,612
–
–
1,612
–
–
–
–
1,612
222
95
317
95
–
412
3,449
560
1,917
5,926
5
486
(101)
–
6,316
630
713
1,343
882
(50)
2,175
1,200
1,295
4,141
4,583
4,807
–
1,531
6,338
–
–
–
–
6,338
800
447
1,247
423
–
1,670
4,668
5,091
6,085
–
2,243
8,328
–
222
–
–
8,550
–
–
–
–
–
–
16,381
877
5,691
22,949
515
708
(101)
104
24,175
1,864
1,372
3,236
1,558
(50)
4,744
8,550
8,328
19,431
19,713
16 IMPAIRMENT
For the purpose of impairment testing, goodwill is allocated to Cash Generating Units (‘CGUs’) as follows:
Eurocell Building Plastics Limited
Eurocell Profiles Limited
Vista Panels Limited
S & S Plastics Limited
Security Hardware Limited
2017
£000
2,584
3,350
2,243
151
222
8,550
2016
£000
2,584
3,350
2,243
151
–
8,328
The recoverable amounts of the CGUs have been determined from ‘value-in-use’ calculations which have been predicated on
discounted pre-tax cash flow projections based on a three year business plan approved by the Board. These projections are based
on all available information and growth rates do not exceed growth rates achieved in prior periods.
The key assumptions in preparing these forecasts are in line with our published strategy of continuing to open further branches,
developing new products, increasing our use of recycled materials and adding bolt-on acquisitions when they arise.
Period on which management approved forecasts are based (years)
Discount rate (pre-tax)
Profit growth rate in perpetuity
2017
3
10%
2%
2016
3
11%
2%
The goodwill is considered to have an indefinite useful life. The discount rate was estimated based on past experience and an
estimated industry average weighted average cost of capital.
The total recoverable amount in respect of goodwill, as assessed by the Directors using the above assumptions, is greater than the
carrying amount and therefore no impairment charge has been recorded. The Directors consider that it is not reasonably possible
for the assumptions to change so significantly as to eliminate the headroom.
17 INVENTORIES
Raw materials
Work in progress
Finished goods and goods for resale
2017
£000
1,108
1,209
18,777
21,094
2016
£000
2,184
1,495
13,725
17,404
All inventories are carried at cost less a provision to take account of slow moving and obsolete items. At 31 December 2017 the
inventory provision amounted to £1,800,000 (2016: £1,800,000).
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FINaNCIaL STaTEmENTS
Notes to the Financial Statements continued
For the year ended 31 December 2017
18 TRADE AND OTHER RECEIVABLES
Trade receivables
Less: provision for impairment of trade receivables
Less: provision for rebates payable
Trade receivables – net
Total financial assets other than cash and cash equivalents classified as loans and receivables
Prepayments
Other receivables
Total trade and other receivables
Trade receivables are non-interest bearing and are generally on 30 days credit.
2017
£000
28,833
(880)
(354)
27,599
27,599
3,876
103
31,578
2016
£000
26,500
(738)
(481)
25,281
25,281
2,836
6
28,123
The fair values of trade and other receivables classified as loans and receivables are not materially different to their carrying values.
As at 31 December 2017 trade receivables of £1,181,000 (2016: £1,113,000) were past due but not impaired. They relate to the
customers with no default history. The ageing analysis of these receivables is as follows:
Up to 3 months overdue
3 to 6 months
2017
£000
1,171
10
1,181
2016
£000
1,113
–
1,113
Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the
counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due.
Movements in the provision for impairment of trade receivables are as follows:
At 1 January
Charged during the year
Released or utilised during the year
Receivables written-off during the year as uncollectible
At 31 December
Other classes of financial assets included within trade and other receivables do not contain impaired assets.
19 BORROWINGS
The book value and fair value of borrowings are as follows:
2017
£000
738
826
(476)
(208)
880
2016
£000
715
2,533
(2,053)
(457)
738
Non-current
Bank borrowings unsecured
Current
Other borrowings
Total borrowings
Book Value
2017
£000
Fair Value
2017
£000
Book Value
2016
£000
Fair Value
2016
£000
25,851
25,851
25,785
25,785
–
–
42
42
25,851
25,851
25,827
25,827
The bank borrowings outstanding at 31 December 2017 are classified as non-current liabilities as they relate to committed facilities
available to the Group until 2020. The book value and fair value are not considered to be materially different.
96 EUROCELL PLC
Annual Report and Accounts 2017
Borrowings
The Company has a £45,000,000 committed multi-currency revolving unsecured credit facility with Barclays Bank plc and
Santander UK plc which expires in 2020.
Borrowings of £26,000,000 were drawn down at 31 December 2017 (2016: £26,000,000) less unamortised issue costs of £149,000
(2015: £215,000).
Interest is charged at an excess over base rate of between 1.25% and 2.25% per annum and is dependent upon the ratio of total
net debt to consolidated EBITDA.
Based upon current economic and market trends, management consider that the Sterling LIBOR rate will remain relatively stable
during the next reporting period to 31 December 2018, and any changes, when applied to the Group’s current bank borrowings of
£25,851,000 would not lead to a significant change in finance expense.
All of the Group’s borrowings are denominated in Sterling.
The analysis of repayments on the combined borrowings is as follows:
Within one year or repayable on demand
Between one and two years
Between two and five years
20 TRADE AND OTHER PAYABLES
Current liabilities
Trade payables
Other tax and social security
Other payables
Accruals
Total current trade and other payables
Non-current liabilities
Other payables
Book values approximate to fair value at 31 December 2017 and 2016.
2017
£000
–
–
25,851
25,851
2016
£000
42
–
25,785
25,827
2017
£000
2016
£000
23,179
4,429
429
4,974
33,011
18,398
3,837
393
6,414
29,042
718
520
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FINaNCIaL STaTEmENTS
Notes to the Financial Statements continued
For the year ended 31 December 2017
21 PROVISIONS
At 1 January 2017
Credited to Statement of Comprehensive Income
Discounting of provisions
Utilised
Added on acquisition (Note 29)
At 31 December 2017
Current
Non-current
At 31 December 2017
Dilapidations
provision
£000
1,511
(477)
(47)
(25)
97
1,059
405
654
1,059
Dilapidations provision
Under property operating lease agreements, Eurocell Building Plastics Limited and Eurocell Profiles Limited, being Group
subsidiaries, have obligations to maintain all properties to the standard that prevailed at the inception of the respective leases.
The provision represents the Directors’ best estimate of the costs associated with this obligation.
The timing of the utilisation of the provision is variable dependent on the lease expiry dates of the properties concerned, which vary
between 1 and 10 years.
22 DEFERRED TAX
The movement in the net deferred tax liability is as follows:
At 1 January
Credited to Statement of Comprehensive Income
Credited/(charged) to equity
Recognised upon acquisition
At 31 December
2017
£000
(2,194)
64
50
(90)
(2,170)
2016
£000
(2,493)
882
(50)
(533)
(2,194)
Deferred tax assets have been recognised in respect of all tax losses and other temporary differences giving rise to deferred tax
assets where the Directors believe it is probable that these assets will be recovered.
The movements in deferred tax assets and liabilities (prior to the offsetting of balances within the same jurisdiction as permitted by
IAS 12) during the year, together with amounts recognised in the Consolidated Statement of Comprehensive Income and amounts
recognised in Other Comprehensive Income are as follows:
Accelerated capital allowances/intangible fixed assets
Other temporary differences
Net tax assets/(liabilities)
Asset
2017
£000
380
117
497
* Included in the net liability is a deferred tax liability of £90,000 relating to the acquisition of Security Hardware Limited.
Liability
2017
£000
(2,742)
75
(2,362)
192
(2,667)
(2,170)
Accelerated capital allowances/intangible fixed assets
Other temporary differences
Net tax assets/(liabilities)
Asset
2016
£000
–
15
15
Liability
2016
£000
(2,209)
–
(2,209)
Net
2016
£000
(2,209)
15
(2,194)
98 EUROCELL PLC
Annual Report and Accounts 2017
Statement of
Comprehensive
Income
2017
£000
Net*
2017
£000
(63)
127
64
Statement of
Comprehensive
Income
2016
£000
929
(47)
882
Equity
2017
£000
–
50
50
Equity
2016
£000
–
(50)
(50)
23 SHARE CAPITAL
Ordinary shares of £0.001 each
Ordinary shares of £0.001 each
Share premium account
Allotted, called up
and fully paid
2017
Number
2016
Number
100,137,186 100,000,000
2017
£000
100
2,104
2016
£000
100
1,926
The ordinary shares carry the rights to attend and vote at general meetings, the right to receive payment in respect of dividends
declared and the right to participate in the distribution of capital. The ordinary shares are not redeemable.
During the year 123,864 shares vested and were issued in respect of share-based payment transactions for Directors and
13,322 shares were issued in respect of share-based payment transactions for other key management personnel.
24 SHARE-BASED PAYMENTS
The Group enters into equity-settled payment transactions with its employees. For the year ended 31 December 2017, the charge
was £260,000 (2016: £18,000). The overall Consolidated Statement of Financial Position is unchanged as a result of this.
A Save As You Earn scheme was launched in June 2017. The scheme allows employees to make monthly contributions over a
three year period which are then used to purchase Company shares at a fixed price. This price is agreed at the inception of the
scheme, and carried a discount on the market value at that date of 20%.
For details of share-based payment schemes see page 54 of the Directors’ Remuneration report.
No further disclosure has been provided on the grounds of materiality.
25 OPERATING LEASES
The Group has entered into commercial leases on certain non-current assets. There are no restrictions placed on the Group by
entering into these leases.
The total future value of minimum lease payments under non-cancellable operating leases are as follows:
Land and buildings
Not later than one year
Later than one year and not later than five years
Later than five years
Other
Not later than one year
Later than one year and not later than five years
Later than five years
2017
£000
5,062
10,169
3,443
18,674
2017
£000
6,712
8,179
38
14,929
2016
£000
3,193
11,098
6,046
20,337
2016
£000
2,425
3,933
1
6,359
The Group has for the first time included within operating lease commitments as at 31 December 2017 the total future minimum
lease payments in respect of the outsourcing of its logistics operation, which amount to £6,027,000 (2016: £9,639,000).
26 CONTINGENT ASSETS AND LIABILITIES
The Group has entered into a cross-guarantee arrangement to cover the bank borrowings of all other Group companies in the
event of default. As at 31 December 2017 the bank borrowings were £25,851,000 (2016: £25,785,000).
The Group had no other material contingent assets or liabilities (31 December 2016: £nil).
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99
FINaNCIaL STaTEmENTS
Notes to the Financial Statements continued
For the year ended 31 December 2017
27 RETIREMENT BENEFITS
The Group operates a defined contribution pension scheme. The assets of the scheme are held separately from those of the Group
in an independently administered fund. The pension cost represents contributions payable by the Group to the fund and amounted
to £1,173,000 (2016: £983,000).
28 RELATED PARTY TRANSACTIONS
The remuneration of Executive and Non-executive Directors is disclosed on pages 50 to 65.
Transactions with key management personnel
Kalverboer Management UK LLP is controlled by P H L Kalverboer, a Director of Eurocell plc. Kellmann Recruitment Limited is
controlled by T Kelly, a close family member of M Kelly who is a Director of Eurocell plc.
Kellmann Recruitment Limited – recruitment services
Kalverboer Management UK LLP – Director Remuneration
The following balances are outstanding at the balance sheet date:
Kellmann Recruitment Limited
Kalverboer Management UK LLP
2017
£000
84
40
2017
£000
13
10
2016
£000
–
40
2016
£000
–
10
29 ACQUISITION OF SUBSIDIARIES
On 24 February 2017, the Group acquired 100% of the ordinary share capital of Security Hardware Limited, a supplier of locks
and hardware primarily to the RMI market, with annual sales of approximately £3 million. Initial consideration paid was £1.5 million
(or £1.3 million net of cash acquired).
Goodwill represents potential synergies arising from the enlarged group. The amount of goodwill deductible for tax purposes is
£nil. Goodwill has been calculated as follows:
Intangible assets
Property, plant and equipment
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Provisions
Corporation tax
Deferred tax
Identifiable assets and liabilities
Cash consideration paid
Goodwill on acquisition
Book values on
acquisition
£000
Fair value
adjustments
£000
Recognised
values on
acquisition
£000
20
43
748
297
226
(453)
–
(49)
(7)
825
466
–
153
–
–
–
(97)
–
(83)
439
486
43
901
297
226
(453)
(97)
(49)
(90)
1,264
1,486
222
Cash flows arising on the acquisition were £1,260,000 comprising the consideration paid less cash acquired.
Fair value adjustments
• The adjustment to intangible assets is to recognise intangible assets in respect of customer relationships, and has been valued
using discounted cash flows.
• The adjustment to inventories is to reflect the fair value of finished goods acquired.
• Trade receivables include a bad debt provision of £nil which has not been adjusted in the fair value exercise.
• The adjustment to trade and other payables is to recognise a dilapidation provision in respect of the leased premises occupied
by Security Hardware.
• The adjustment to deferred taxation is to recognise the associated deferred tax liability arising on the intangible assets.
100 EUROCELL PLC
Annual Report and Accounts 2017
Subsequent payments
Under the terms of the acquisition agreement, the former Shareholders of Security Hardware are entitled to further cash consideration
based on financial performance for the year ended 31 December 2017 (the ‘earn out’), provided they remain employed by the Group.
The Directors estimate the total earn out payable will be £322,000, which has been recognised as a non-underlying expense in the 2017
Consolidated Statement of Comprehensive Income. The earn out is payable in equal instalments over a three-year period.
Acquisition-related costs
The Group incurred acquisition related costs of £92,000 in relation to professional fees and transaction costs arising upon acquisition.
These costs have been expensed to the Consolidated Statement of Comprehensive Income, also as a non-underlying item. The total
charge for acquisition related costs in the year is £414,000 (2016: £112,000).
Included within the Consolidated Statement of Comprehensive Income is revenue of £2,500,000 and profit before tax of £130,000 relating to
Security Hardware Limited. Had the acquisition occurred on 1 January 2017, revenue of £3,200,000 and profit before tax of £180,000 would
have been recognised by the Group.
30 RECONCILIATION OF PROFIT AFTER TAX TO CASH GENERATED FROM OPERATIONS
Profit after tax
Taxation
Finance expense
Operating profit
Adjustments for:
Depreciation of tangible fixed assets
Amortisation of intangible fixed assets
(Profit)/loss on sale of property, plant and equipment and intangible fixed assets
Share-based payments
(Increase)/decrease in inventories
(Increase) in trade and other receivables
Increase/(decrease) in trade and other payables
(Decrease) in provisions
Cash generated from operations
31 RECONCILIATION OF NET DEBT
Cash and cash equivalents
Borrowings
Total
* Non-cash movements relate to the amortisation of arrangement fees in respect of the Groups’ borrowings.
Cash and cash equivalents
Borrowings
Total
31 December 2017
Cash and cash equivalents
Borrowings
Total
31 December 2016
Cash and cash equivalents
Borrowings
Total
2017
£000
19,642
4,019
553
24,214
5,119
1,558
(51)
260
(2,789)
(3,057)
3,221
(549)
27,926
2016
£000
19,602
4,218
677
24,497
5,005
1,372
86
18
1,635
(616)
(184)
(31)
31,782
1 January
2017
£000
5,559
(25,827)
(20,268)
1 January
2016
£000
(151)
(25,720)
(25,871)
Current
assets
£000
11,361
–
11,361
Current
assets
£000
5,559
–
5,559
Cash flows
£000
Non-cash
movements*
£000
31 December
2017
£000
5,802
42
5,844
Cash flows
£000
5,710
38
5,748
–
(66)
(66)
11,361
(25,851)
(14,490)
Non-cash
movements
£000
31 December
2016
£000
–
(145)
(145)
5,559
(25,827)
(20,268)
Current
liabilities
£000
Non-current
liabilities
£000
Total
£000
–
–
–
–
(25,851)
11,361
(25,851)
(25,851)
(14,490)
Current
liabilities
£000
–
(42)
(42)
Non-current
liabilities
£000
–
(25,785)
Total
£000
5,559
(25,827)
(25,785)
(20,268)
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FINaNCIaL STaTEmENTS
Notes to the Financial Statements continued
For the year ended 31 December 2017
32 EVENTS AFTER THE BALANCE SHEET DATE
The Directors are not aware of any material events that have occurred after 31 December 2017 which would require disclosure
under IAS 10.
102 EUROCELL PLC
Annual Report and Accounts 2017
FINaNCIaL STaTEmENTS
Company Statement of Financial Position
As at 31 December 2017
Assets
Non-current assets
Investments
Total non-current assets
Current assets
Trade and other receivables
Deferred tax
Total current assets
Total assets
Liabilities
Current liabilities
Trade and other payables
Total current liabilities
Non-current liabilities
Borrowings
Total non-current liabilities
Total liabilities
Net assets
Issued capital and reserves attributable to owners of the Company
Share capital
Share premium account
Share-based payment reserve
Retained earnings
Total equity
Note
35
36
37
38
39
23
23
24
2017
£000
2016
£000
17,839
17,839
53,183
105
53,288
71,127
17,839
17,839
48,141
94
48,235
66,074
(26,419)
(26,419)
(12,892)
(12,892)
(25,851)
(25,851)
(52,270)
18,857
(25,785)
(25,785)
(38,677)
27,397
100
2,104
480
16,173
18,857
100
1,926
348
25,023
27,397
A separate Statement of Comprehensive Income for the Company is not presented, in accordance with Section 408 of the
Companies Act 2006. The Company recognised a loss of £146,000 in the year (2016: profit of £29,992,000). Dividend income from
subsidiary undertakings included in the results was £nil (2016: £30,000,000).
The Financial Statements on pages 103 to 109 were approved and authorised for issue by the Board of Directors on 8 March 2018
and were signed on its behalf by:
Mark Kelly
Director
Michael Scott
Director
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103
FINaNCIaL STaTEmENTS
Company Statement of Changes in Equity
For the year ended 31 December 2017
Share
capital
£000
Share
premium
account
£000
Share-
based
payment
reserve
£000
Retained
earnings
£000
Total
equity
£000
Balance at 1 January 2017
100
1,926
348
25,023
27,397
Comprehensive income for the year
Loss for the year
Total comprehensive income for the year
Contributions by and distributions to owners
Exercise of share options
Share-based payments
Deferred tax on share-based payments
Dividends paid
Total transactions with owners recognised directly in equity
–
–
–
–
–
–
–
–
–
178
–
–
–
178
–
–
(146)
(146)
(146)
(146)
(178)
260
50
–
–
–
–
(8,704)
–
260
50
(8,704)
132
(8,704)
(8,394)
Balance at 31 December 2017
100
2,104
480
16,173
18,857
Balance at 1 January 2016
Comprehensive income for the year
Profit for the year
Total comprehensive income for the year
Contributions by and distributions to owners
Share-based payments
Deferred tax on share-based payments
Dividends paid
Total transactions with owners recognised directly in equity
Share
capital
£000
100
Share
premium
reserve
£000
1,926
Share-based
payment
reserve
£000
380
Retained
earnings
£000
3,031
Total
equity
£000
5,437
–
–
–
–
–
–
–
–
–
–
–
–
–
–
29,992
29,992
29,992
29,992
18
(50)
–
(32)
–
–
(8,000)
18
(50)
(8,000)
(8,000)
(8,032)
Balance at 31 December 2016
100
1,926
348
25,023
27,397
104 EUROCELL PLC
Annual Report and Accounts 2017
FINaNCIaL STaTEmENTS
Notes to the Company Financial Statements
For the year ended 31 December 2017
33 ACCOUNTING POLICIES (COMPANY)
Corporate information
Eurocell plc (the ‘Company’) is a publicly listed company incorporated and domiciled in England and Wales. The registered office is
Fairbrook House, Clover Nook Road, Alfreton, Derbyshire, DE55 4RF.
The Company is principally engaged as a holding company for its subsidiaries which are engaged in the extrusion of UPVC window
and building products to the new and replacement window market and the sale of building materials across the UK.
Basis of preparation
The principal accounting policies adopted in the preparation of the Financial Statements are set out below. The policies have been
consistently applied to all the years presented, unless otherwise stated.
The Company has adequate resources to continue in operational existence for the foreseeable future and, as a result of this, the
going concern basis has been adopted in preparing the Financial Statements.
The Company Financial Statements have been prepared in accordance with Financial Reporting Standard 101, Reduced
Disclosure Framework (FRS 101). These Financial Statements have been prepared under the historical cost convention in
accordance with UK GAAP and the Companies Act 2006.
Changes in accounting policies and disclosures applicable to the Company
There were no standards or interpretations which took effect in the year which materially affect the Financial Statements.
Investments in subsidiary undertakings
Investments in subsidiaries are stated at cost less provision for impairment.
Financial assets
The Company classifies all of its financial assets as loans and receivables and has not classified any of its financial assets as held
to maturity.
Loans and receivable assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active
market. They arise principally through the provision of goods and services to customers (e.g. trade receivables), but also incorporate other
types of contractual monetary asset. They are initially recognised at fair value plus transaction costs that are directly attributable to their
acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment.
Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the
counterparty or default or significant delay in payment) that the Company will be unable to collect all of the amounts due under the
terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of
the future expected cash flows associated with the impaired receivable. For trade receivables, which are reported net, such
provisions are recorded in a separate allowance account with the loss being recognised within administrative expenses in the
Statement of Comprehensive Income. On confirmation that the trade receivable will not be collectable, the gross carrying value of
the asset is written-off against the associated provision.
From time to time, the Company elects to renegotiate the terms of trade receivables due from customers with which it has
previously had a good trading history. Such renegotiations will lead to changes in the timing of payments rather than changes to
the amounts owed and, in consequence, the new expected cash flows are discounted at the original effective interest rate and any
resulting difference to the carrying value is recognised in administrative expenses.
The Company’s loans and receivables comprise trade and other receivables and cash and cash equivalents in the balance sheet.
Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term, highly liquid investments with
original maturities of three months or less from inception, and – for the purpose of the statement of cash flows – bank overdrafts.
Bank overdrafts are shown within borrowings in current liabilities in the balance sheet.
Financial liabilities
The Company classifies its financial liabilities as other financial liabilities which include the following items:
• bank borrowings which are initially recognised at fair value net of any transaction costs directly attributable to the issue of the
instrument. Such interest-bearing liabilities are subsequently measured at amortised cost using the effective interest rate
method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability
carried in the balance sheet. Further information is provided in Note 3.
• trade payables and other short-term monetary liabilities, which are initially recognised at fair value and subsequently carried at
amortised cost using the effective interest method.
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FINaNCIaL STaTEmENTS
Notes to the Company Financial Statements continued
For the year ended 31 December 2017
33 ACCOUNTING POLICIES (COMPANY) CONTINUED
Deferred taxation
Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the balance sheet differs from
its tax base, except for differences arising on:
• the initial recognition of goodwill;
• the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the
•
transaction affects neither accounting nor taxable profit; and
investments in subsidiaries and jointly controlled entities where the Company is able to control the timing of the reversal of the
difference and it is probable that the difference will not reverse in the foreseeable future.
Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against
which the difference can be utilised.
The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the reporting
date and are expected to apply when the deferred tax liabilities/(assets) are settled/(recovered).
Deferred tax assets and liabilities are offset when the Company has a legally enforceable right to offset current tax assets and
liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either:
• the same taxable group company; or
• different group entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and
settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are
expected to be settled or recovered.
Share capital
The Company’s ordinary shares are classified as equity instruments.
Dividends
Dividends are recognised when they become legally payable. In the case of interim dividends to equity Shareholders, this is when
declared by the Directors. In the case of final dividends, this is when approved by the Shareholders at the Annual General Meeting.
Further information regarding dividends is provided in Note 13.
FRS 101 exemptions
The following exemptions from the requirements of IFRS have been applied in the preparation of the Company Financial Statements,
in accordance with FRS 101:
Paragraphs 45(b) and 46 to 52 of IFRS 2, Share-Based Payments (details of the number and weighted-average exercise prices of
share options, and how the fair value of goods or services received was determined).
Paragraph 38 of IAS 1, Presentation of Financial Statements, comparative information requirements in respect of:
(i) paragraph 79(a)(iv) of IAS 1;
(ii) paragraph 73(e) of IAS 16 Property, Plant and Equipment;
(iii) paragraph 118(e) of IAS 38 Intangible Assets (reconciliations between the carrying amount at the beginning and end of the period).
The following paragraphs of IAS 1, Presentation of Financial Statements:
• 10(d) (statement of cash flows);
• 10(f) (a statement of financial position as at the beginning of the preceding period when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its
financial statements);
• 16 (statement of compliance with all IFRS);
• 38A (requirement for minimum of two primary statements, including cash flow statements);
• 38B-D (additional comparative information);
• 40A-D (requirements for a third statement of financial position);
• 111 (cash flow statement information); and
• 134-136 (capital management disclosures).
Paragraph 30 and 31 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (requirement for the disclosure of
information when an entity has not applied a new IFRS that has been issued but is not yet effective).
106 EUROCELL PLC
Annual Report and Accounts 2017
The requirements in IFRS 7 Financial Instruments: Disclosures.
Paragraph 17 of IAS 24, Related Party Disclosures (key management compensation).
The requirements in IAS 24, Related Party Disclosures to disclose related party transactions entered into between two or more
members of a group.
34 EMPLOYEE BENEFITS EXPENSE
Staff costs (including Directors) comprise:
Wages and salaries
Social security contributions and similar taxes
The average number of monthly employees was three (2016: three).
35 INVESTMENTS
Cost
At 31 December 2017 and at 31 December 2016
2017
£000
213
27
240
2016
£000
213
27
240
Investments in
subsidiary undertakings
£000
17,839
The subsidiaries of Eurocell plc, all of which have been incorporated in the United Kingdom are included in these Consolidated
Financial Statements, as follows:
Name
Principal activity
Eurocell Holdings Limited*
Eurocell Group Limited
Eurocell Building Plastics Limited
Eurocell Profiles Limited
S&S Plastics Limited
Vista Panels Limited
Security Hardware Limited
Fairbrook Group Limited
Northampton Profiles Limited
Peninsula Plastics Limited
Sheet Plastic UK Limited
Fairbrook Limited
Fairbrook Holdings Limited
Reversible Systems Limited
Brunel Building Plastics Limited
Eurocell Window Systems Limited
Eurocell Plastics Limited
Cavalok Building Products Limited
Merritt Plastics Limited
Merritt Engineering Limited
Deeplas Limited
Deeplas Building Plastics Limited
Ampco 113 Limited
* Directly held by Eurocell plc.
Holding company
Holding company
Sale of building plastic materials
Manufacture and sale of building plastic materials
Manufacture and sale of injection moulded products
Manufacture and sale of doors
Sale of locks and security hardware products
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Holding
2017
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
2016
100%
100%
100%
100%
100%
100%
–
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
All of the above have a registered address of Fairbrook House, Clover Nook Road, Alfreton, Derbyshire, DE55 4RF.
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FINaNCIaL STaTEmENTS
Notes to the Company Financial Statements continued
For the year ended 31 December 2017
36 TRADE AND OTHER RECEIVABLES
Prepayments and other debtors
Amounts owed by Group undertakings
Total trade and other receivables
37 DEFERRED TAX
At 1 January
Credited/(charged) to equity
(Charged)/credited to Statement of Comprehensive Income
At 31 December
2017
£000
45
53,138
53,183
2016
£000
129
48,012
48,141
2017
£000
94
50
(39)
105
2016
£000
58
(50)
86
94
Deferred tax assets have been recognised in respect of all tax losses and other temporary differences giving rise to deferred tax
assets where the Directors believe it is probable that these assets will be recovered.
The movements in deferred tax assets and liabilities (prior to the offsetting of balances within the same jurisdiction as permitted by
IAS 12) during the year, together with amounts recognised in the Consolidated Statement of Comprehensive Income and amounts
recognised in other comprehensive income are as follows:
Other temporary differences
Net tax assets
Other temporary differences
Net tax assets
38 TRADE AND OTHER PAYABLES
Trade and other payables
Amount owed to Group undertakings
Total current liabilities
Asset
2017
£000
105
105
Asset
2016
£000
94
94
Liability
2017
£000
–
–
Liability
2016
£000
–
–
Statement of
Comprehensive
Income
2017
£000
(39)
(39)
Statement of
Comprehensive
Income
2016
£000
86
86
Net
2017
£000
105
105
Net
2016
£000
94
94
Equity
2017
£000
50
50
Equity
2016
£000
(50)
(50)
2017
£000
129
26,290
26,419
2016
£000
117
12,775
12,892
Book values approximate to fair value at 31 December 2017 and 2016.
Trade payables are non-interest bearing and are generally settled on 30 – 60 day terms.
39 BORROWINGS
The book value and fair value of borrowings are as follows:
Non-current
Bank borrowings unsecured
Total borrowings
108 EUROCELL PLC
Annual Report and Accounts 2017
Book Value
2017
£000
Fair Value
2017
£000
Book Value
2016
£000
Fair Value
2016
£000
25,851
25,851
25,785
25,785
25,851
25,851
25,785
25,785
Borrowings
The Company has a £45,000,000 committed multi-currency revolving unsecured credit facility with Barclays Bank plc and
Santander UK plc which expires in 2020.
Borrowings of £26,000,000 were drawn down at 31 December 2017 (2016: £26,000,000) less unamortised issue costs of £149,000
(2016: £215,000).
Interest is charged at an excess over base rate of between 1.25% and 2.25% per annum and is dependent upon the ratio of total
net debt to consolidated EBITDA.
Based upon current economic and market trends, management consider that the Sterling LIBOR rate will remain relatively stable
during the next reporting period to 31 December 2018, and any changes, when applied to the Company’s current bank borrowings
of £25,851,000 would not lead to a significant change in finance expense.
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FINaNCIaL STaTEmENTS
Company Information
For the year ended 31 December 2017
Directors
Bob Lawson
Frank Nelson
Martyn Coffey
Patrick Kalverboer
Mark Kelly
Michael Scott
Registered Number
08654028
Registered Office
Independent Auditors
Bankers
Fairbrook House
Clover Nook Road
Alfreton
Derbyshire
DE55 4RF
PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Cornwall Court
19 Cornwall Street
Birmingham
B3 2DT
Barclays Bank plc
1 Churchill Place
London
E14 5HP
Santander UK plc
2 Triton Square
Regent’s Place
London
NW1 3AN
110 EUROCELL PLC
Annual Report and Accounts 2017
Notes
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Notes
112 EUROCELL PLC
Annual Report and Accounts 2017
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For more investor information,
visit www.eurocell.co.uk/investors
Fairbrook House
Clover Nook Rd
Alfreton
Derbyshire
DE55 4RF