Hotel Chocolat
Annual Report 2018

Plain-text annual report

ANNUAL REPORT AND ACCOUNTS 2018 A better model for luxury chocolate HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts COMPANY OVERVIEW Highlights At a glance STR ATEGIC REPORT Chairman’s statement Our business model Our markets Chief Executive’s statement Our strategy Progress against strategy Financial review Risk management GOVERNANCE Corporate social responsibility Board of Directors Corporate governance statement Audit Committee report Remuneration report Directors’ report Statement of Directors’ responsibilities FINANCIAL STATEMENTS Independent Auditors’ report Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Cash Flow Consolidated Statement of Changes in Equity Notes to the financial statements Company Statement of Financial Position Company Statement of Changes in Equity Notes to the Company financial statements Company information 01 02 07 08 10 12 17 18 22 24 28 30 32 36 38 40 42 46 49 50 51 52 53 81 82 83 85 The leading UK premium chocolate company, making innovative and accessible luxury chocolates. ‘Hotel Chocolat is the nation’s favourite premium chocolate brand’ ALLEGRA 2015 Our strong British brand is based on an ethos of: ORIGINALITY We believe in being fresh, creative and innovative, doing things in a more intelligent way AUTHENTICITY We are the real thing, our focus on “more cocoa, less sugar” results in a superior taste, drawing on the invaluable knowledge from farming our own organic cocoa estate ETHICS Doing the right thing, not just saying it. Engaged Ethics: a sustainably good approach for all our stakeholders COMPANY OVERVIEW 2018 highlights 01 2018 highlights REVENUE £116.3m (2017: £105.2m) UNDERLYING EBITDA1 £18.9m (2017: £16.3m) PROFIT BEFORE TA X £12.7m (2017: £11.2m) 2018 2017 2016 2018 2017 2016 2018 2017 2016 £116.3m £105.2m £91.1m £18.9m £16.3m £12.4m £12.7m £11.2m £5.6m PROFIT AFTER TA X EARNINGS PER SHARE FINAL DIVIDEND £10.0m (2017: £8.8m) 8.8p (2017: 7.8p) 1.1p (Full year: 1.7p | 2017: 1.6p) 15 2 NEW STORES OPENED IN THE PERIOD NEW WHOLESALE ACCOUNTS ADDED SINCE THE PERIOD £6.5m CHOCOLATE BONDS REPAID IN FULL 100% OF COCOA SUPPLY NOW TO ENGAGED ETHICS STANDARD INTERNATIONAL US STORE OPENING IN FY19 JAPAN JV SIGNED STORE OPENING IN FY19 VIP ME REWARDS CARD LAUNCHED 25% INCREASE IN FACTORY CAPACITY NEW SCANDINAVIAN FRANCHISE PARTNER 1 Underlying EBITDA of £18.9m excludes share-based payment charges of £0.7m. FY17 underlying EBITDA of £16.3m excludes £0.6m of share-based payment charges. C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 02 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts At a glance The leading UK premium chocolate brand, manufacturing innovative and accessibly priced luxury chocolate. We connect our brand direct to customers via subscription, online and our 113 stores. KEY PRODUCT RANGES S E L F P U RC H A S E G I F T & O CC A S I O N R A R E & V I N TAG E OT H E R Selectors Boxed chocolates Connoisseur’s choice Drinking chocolate Over 120 flavours Seasonal specials Provenance & tasting notes Cocoa-infused alcohols Cafe drinks and ice cream Gift sets Experiences Cocoa-based beauty GEOGRAPHIC FOOTPRINT 104 UK STORES 9 INTERNATIONAL STORES 1 BOUTIQUE HOTEL & COCOA ESTATE The business began in the 1990s with online and subscription, and our first physical store followed in 2004 after creation of the Hotel Chocolat brand. Our store roll-out plan is informed and supported by a database showing the buying patterns of our loyal multi-channel customers. The physical formats range from 100 sq ft to 5,000 sq ft and trade profitably across the whole UK. We are also developing our international retail knowledge with franchises in Scandinavia, Spain and Hong Kong, and a joint venture in Japan. We have signed a lease on a store in Manhattan, due to open this winter. 3 4 28 COMPANY OVERVIEW At a glance 03 We sell our chocolate direct to customers via subscription, online and our 113 stores. WHAT SETS US APART Strong & distinctive brand Premium differentiated product Product innovation The Hotel Chocolat brand evokes escapism and contemporary luxury. Rather than copying continental chocolate traditions, Hotel Chocolat has carved out a modern British take on luxury chocolate. We ensure that strong innovation is balanced by a disciplined range architecture, ensuring only the best of the best feature in our product ranges. Vertically integrated Multi-channel retail distribution Progressive digital marketing We apply our expertise at every stage of the process to create superior products at improved margins. Trading via our own website and physical stores means we know more about our customers so we can give better service and create products and services that our customers want. We have our origins in e-commerce. Not only has this informed our store roll-out, it means that digital is always at the centre of our customer strategies. C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 04 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Our innovative and beautiful Velvetiser makes barista-grade hot chocolate at home at the touch of a button. STR ATEGIC REPORT 05 Strategic repor t Chairman’s statement Our business model Our markets Chief Executive’s statement Our strategy Progress against strategy Corporate social responsibility Financial review Our values Risk management Board of Directors Corporate governance statement 07 08 10 12 17 18 22 24 Audit Committee report Remuneration report Directors’ report Statement of Directors’ responsibilities C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t 34 35 38 40 G 43 o v e 45 r n a 48 n c e 51 F i n a n c i a l s t a t e m e n t s 06 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Chocolat Cream Liqueur We melted our chocolate into vodka and cream and built on the popularity of our Cocoa Gin and Salted Caramel Vodka. Launched September 2018. STR ATEGIC REPORT Chairman's statement 07 Chairman’s statement “ Following another good year of growth, the business is making progress with tests to develop and grow the Hotel Chocolat brand across new products and new markets.” REVENUE £116.3m (2017: £105.2m) PROFIT BEFORE TA X £12.7m (2017: £11.2m) 2018 2017 2016 £116.3m £105.2m £91.1m 2018 2017 2016 £5.6m £12.7m £11.2m A N D R E W G E R R I E Non-executive Chairman OV E RV I E W FY18 represented another good year for Hotel Chocolat and the investments in new stores and factory capacity have again driven growth and improved profitability. The Group now has the confidence and resources to test the brand in a number of significant markets including Scandinavia, Japan and the US. This growth enables ongoing return- enhancing investment opportunities in our infrastructure whilst we increase capacity and improve efficiency. The growth of the Group and improved profitability means that the business now has the bandwidth and resources to extend its tests of international markets, taking a cautious ‘test, learn, grow’ approach. R E S U LT S P E O P L E O U T LO O K Despite challenges and uncertainties in the wider economy the strength of the brand drives great customer loyalty and we are well positioned for the future, with a strong pipeline of opportunities. Trading since the end of the financial period is in line with management expectations. Andrew Gerrie Non-executive Chairman The Group achieved a pleasing result in FY18 with revenue of £116.3m and growth of 11% versus FY17. Strong cost control meant that operating margins improved with profit before tax increasing by 13% to £12.7m. S T R AT E GY The growth strategy remains unchanged and is based on proven and profitable business models; to carefully continue to open more stores, to invest in digital to make it easier for consumers to access our brand and to link with selected partners to extend our reach and accessibility. The Group continues to be led by a strong founder-led executive management team that have built a successful business. I would like to extend my thanks to the whole Hotel Chocolat team for their hard work and commitment which has delivered results to be proud of. D I V I D E N D S The Board is pleased to propose a final dividend of 1.1 pence per share bringing the full year dividend to 1.7 pence per share. If approved by shareholders at the AGM on 29 November 2018 it will be paid on 21 December 2018 to shareholders on the register at 23 November 2018. C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 08 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Our business model We believe that growth and re-investment can benefit all of Hotel Chocolat’s stakeholders. We source We seek out the best partners to supply premium ingredients to ensure that our products set us apart from the competition. Everything we do is guided by the three basic values that we started with and will always retain: We grow We own a cocoa estate in Saint Lucia called the Rabot Estate. This is the source of some of the exclusive beans used in our Rare & Vintage range and of our deep understanding of the cocoa growing process. This knowledge enables us to continuously improve our relationship with all of our cocoa growers worldwide and further our Engaged Ethics programme which now covers 100% of the cocoa we use. See page 28 We re-invest Our Engaged Ethics programme drives a progressively increasing investment in sustainability, both in the UK and worldwide. See page 28 We deliver – Customer happiness – Employee engagement – Supply sustainability – Shareholder value STR ATEGIC REPORT Our business model 09 We design All our products are developed and designed in-house and are exclusive to the brand. With the goal of being the true sector specialist, we have created a broad product range. We strive for continual innovation in a disciplined range framework. O R I G I N A L I T Y AU T H E N T I C I T Y E T H I C S We make In 2008 we established a dedicated production facility near Cambridge where we now make 95% of our products. In-house production increases control over quality, allows faster innovation, protects intellectual property and improves gross margins. See page 20 We sell We reach our customers through an invested multi- channel model. Our focus is on great service to ensure 100% happiness. See page 17 We distribute Our main Distribution Centre is near Cambridge. The majority of our products are packaged here and then distributed to stores using our own fleet of vehicles. Owning the supply chain improves responsiveness and enables high levels of product availability. DIGITAL & SUBSCRIPTION RETAIL COCOA ESTATE PREMIUM WHOLESALE PARTNERS C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 10 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Our markets We operate in four large and growing markets, all offering significant headroom. Our differentiated product offer is well placed and has the potential to increase market share. The Board believes that approximately half of products are purchased as gifts and considers that both our competitor set and growth opportunity are wider than just traditional chocolate retailing. U K G I F T I N G U K C H O CO L AT E U K C A F E S I N T E R N AT I O N A L £6bn MARKET 2 £8bn MARKET3 >£70bn MARKET <2.0% HC SHARE <0.1% HC SHARE <0.02% HC SHARE S T R AT E GY • Open more stores across the UK S T R AT E GY • Apply Shop+cafe model to selected new sites • Digital upgrades to improve • Test takeaway-only hot chocolate and ice cream in smaller stores S T R AT E GY • Prove store economics in Denmark • Gain international know- how to be equipped for larger markets later • New website brings international expansion opportunity PROGRESS UPDATE • 11 of the 15 new stores PROGRESS UPDATE • Signed franchise and opened in FY18 featured cafes • Launching a new in-home drinking chocolate maker; The Velvetiser development agreement for Denmark and wider Scandinavia • Company owned pilot store to open in Manhattan this winter • New Joint Venture created in Japan (pilot store scheduled to open this winter) £20bn MARKET1 <1.0% HC SHARE S T R AT E GY • Continuous product innovation, focused on chocolate gifting and “extension” categories including in-home drinking chocolate, cacao spirits, cacao beauty • Grow customer database, increase visit frequency across all channels PROGRESS UPDATE • Largest ever seasonal range a real success, encouraging customers to trade up • New children’s ranges at Christmas in responsible portion sizes drove incremental sales • VIP ME rewards card scheme launched September 2018 1 Mintel, 2007 2 Canadean, 2014 3 Allegra, 2016 loyalty, acquisition and conversion via smartphone optimised site • Extend dietary luxury (vegan, gluten free, “more cocoa, less sugar”) PROGRESS UPDATE • Opened 15 stores in FY18, signed leases on a further 9 due to open before Christmas 2018 • 8% increase in mobile conversion with Gift Finder and Gift by Text launching autumn 2018 • Amazon, Ocado and QVC partnerships now making it easier for consumers to access the HC brand using their preferred delivery method. Agreements signed to test capsule ranges with two further partners this Christmas STR ATEGIC REPORT Our markets 11 Customer Insight In our UK consumer research, two thirds of premium chocolate buyers said Hotel Chocolat was their favourite premium chocolate brand. They also said they would be happy to buy more Hotel Chocolat product if it were easier to access. We will address this opportunity by: 1. Opening more shops across more store formats, including smaller towns and cities 3. Developing new types of subscription to make it easier to regularly receive Hotel Chocolat products 2. Continuously improving the website to make it easier to shop whilst on the move 4. Adding more carefully selected wholesale partners, giving consumers more choices how to buy C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 12 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Chief Executive’s statement “ In the two years since IPO we have grown sales by 28% and underlying EBITDA by 53%, with many significant opportunities ahead.” I am pleased to report another year of significant progress for the Group. Revenue grew by 11% to £116.3m, underlying EBITDA1 increased by 16% to £18.9m and profit before tax increased by 13% to £12.7m. We further refined our business model and all channels achieved growth, whilst a sound grip on cost efficiency resulted in an improved EBITDA margin. The decline of sterling created pressure on raw material costs but we have been able to mitigate this by improving productivity and leveraging increased scale. ANGUS THIRLWELL Co-founder and Chief Executive Officer I would like to thank the whole team for their enthusiasm and passion, without which these results would not have been possible. Team empowerment is a key part of the culture within Hotel Chocolat and we intend to keep investing in this as we evolve. S A L E S C H A N N E L R E V I E W Our multi-channel model continues to work well: each channel supports the others and all channels are in growth. Physical Our physical stores offer a contemporary version of accessible luxury. We innovate and work hard to make our spaces exciting, relevant, friendly, experiential and fully multi-channel. The immediate gratification of self purchase is a powerful element of our physical space, augmented by carefully selected gifts for a wide spectrum of occasions and budgets. Trading eight gift-giving seasons every year means there is always something exciting happening, with Chocolate Lock-Ins and perpetual sampling generating extra levels of engagement. Our existing locations performed well over the year and we also opened in a further 15 new locations. The flexibility of our offer means that we can design the appropriate store for each location. Our hot chocolat drinks and Ice Cream of the Gods have now become a core part of the brand proposition. R E V E N U E BY C H A N N E L 2% 9% Physical Digital Wholesale Cocoa estate 69% 20% 9% 2% 20% 69% STR ATEGIC REPORT Chief Executive's statement 13 YOY SALES +11% 2018 2017 2016 UNDERLYING EBITDA1 PROFIT BEFORE TA X +16% +13% £116.3m £105.2m £91.1m 2018 2017 2016 £18.9m £16.3m £12.4m 2018 2017 2016 £5.6m £12.7m £11.2m 1 Underlying EBITDA excludes share-based payment costs of £0.7m (FY17: £0.6m). There has been much media attention regarding the future of physical retail. Whilst macro-economic trends have undoubtedly created headwinds, we obviously continually evaluate the performance of our stores. We remain confident that further new openings can deliver attractive financial returns, and improve customers’ ease of access to our brand. 3) However we are focusing all our energies on delivering a third, and better, scenario which has the scope to generate a material increase in EBITDA, by: • Increasing the rate of sales growth, driven by product innovation, gaining a deeper relationship with our customers via the recently launched VIP ME rewards card, and empowering our store teams to deliver an even better experience for our guests. • Mitigating cost pressures using a combination of better buying, further innovation in our processes, and perpetual focus on working smarter whilst never compromising on product quality or service experience. All of our established stores are profitable and the latest vintage of openings are delivering comparable EBITDA per site to that of the earliest stores. The Board have modelled 3 scenarios, based on various growth rates and cost inflation for our physical store estate: 1) A continuation of the FY18 growth rates for sales and for overhead costs would mean that store estate profitability would rise in future years. 2) A more pessimistic scenario, reflecting a drop to negative sales growth, and with externally driven cost inflation at rates in excess of FY18, would still mean that the retail estate would continue to generate significant EBITDA profit in 5 years’ time. (Our average lease length is 5 years). The warmth and knowledge of our team is a competitive advantage C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 14 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Chief Executive’s statement continued Digital Being ‘born digital’, means that it is always at the centre of our strategies, giving Hotel Chocolat an unusually high proportion of digital sales compared to other chocolate brands. Sales through our own website increased by 14%. Since the end of the year, we have developed innovations to make the digital Hotel Chocolat experience as slick as possible: – – The Gift Finder poses 3 quick questions before serving up bespoke solutions. The Whoosh Instant Gifts by Text service makes it fun and easy to get a gift to someone’s smartphone. It is easier for the sender as there is no postcode searching or delivery angst, whilst the recipient benefits from delivery option control, discrete swapping and quick thanking. Over the year we deliberately paused new customer recruitment into our subscription model leading to a sales decline of 14%. Over the last 10 years, we have made it progressively easier for customers to access our brand, particularly through physical stores, and this has challenged us to sharpen the appeal of our chocolate subscriptions and to innovate new ways to acquire subscribers. Members of our Tasting Club continue to form the bedrock of our relationship with our customers. They are the most engaged of all our customers and continue to play an active role in developing new products. Since the end of the year, we launched the Velvetiser in-home hot chocolat making system, a major plank of our future subscription plans. Wholesale Market research has shown that UK consumers cite “lack of access” as the main barrier to purchasing more from Hotel Chocolat. We acted to reduce this barrier by entering carefully selected wholesale relationships with new partners including Amazon, Ocado and QVC. We have achieved very encouraging growth in the first part-year and are excited to begin tests with two further partners that will VIP ME All about loyalty – promoting it, rewarding it. launch in time for Christmas 2018. Each partner is selected on a careful balance of attributes and customer demographics, then matched with a specific capsule collection from our product range. International Our international aspirations continue to follow our strategy of a careful ‘test, learn, grow’ approach. Our experience in Hong Kong and Denmark has shown that customers are receptive to the brand and product range. Supply chains are evolving and becoming more cost-effective for the relatively small volumes at start-up scale, allowing us to adopt a competitive price position, mirroring our affordable luxury position in the UK. Since the end of the period we have moved to extend our international tests: 1) In July 2018 we signed a franchise development agreement covering the whole of Scandinavia and transferred our 2 Danish stores to our new partner, who brings deep experience of retail operations in the region and has already opened 2 new stores in Aarhus and Roskilde in Denmark. 2) In September 2018 Hotel Chocolat Inc. a wholly owned subsidiary of the Group, signed a lease to open a Hotel Chocolat store on Lexington Avenue, New York, which is anticipated to open this winter. Greg Hodder, Non-executive Director will be very involved in overseeing our US strategy, leveraging his wealth of experience growing British brands in the US including Charles Tyrwhitt shirts. STR ATEGIC REPORT Chief Executive's statement 15 3) Also in September 2018 we signed a franchise Joint Venture Development Agreement for Japan. Hotel Chocolat initially has a 20% stake with local management holding 80%. Goods will be supplied wholesale with a royalty paid on sales. It is anticipated the first store will open in Tokyo this winter in advance of the peak Japanese gift- giving seasons in February and March. Chris Horobin is CEO of the joint venture. Chris has extensive retail experience and was previously the CEO of QVC Japan. O P E R AT I O N A L R E V I E W The key seasonal ranges traded strongly and our ability to create imaginative and desirable products continues to be a carefully nurtured asset. Our vertically integrated business infrastructure is well invested and as the business grows we remain focused on controlling overheads which as a result reduced from 52.4% of sales to 52.2%. Chocolate Bonds We were delighted to reach a stage as a business where we were able to fully repay the £6.5m of Chocolate Bonds. The bonds were initially raised from our customers in 2010 and 2014 to finance capital expenditure projects and the monthly “interest” was paid in the form of boxes of chocolate. I would like to personally thank our amazing bond holders, with their support we were able to invest in ethical cocoa, British manufacturing, create hundreds of jobs, and repay them in full, as planned. Manufacturing Investment In January we completed a £1.4m project to increase our molten chocolate handling capacity by 190%. The capital project, combined with improved planning of production and a focus on waste reduction supported a 50 basis points improvement in gross margin and enables the next stage of our expansion plans. We have identified the opportunity to further increase our factory capacity by adding a fourth chocolate making line within the existing factory roofline. We anticipate completing this project by 2021, increasing our capacity by over 30%. This plan means that the extension of the factory roofline previously planned for 2020 can now take place at a later date, bringing with it the potential to add up to a further three chocolate making lines to synchronise with our future demand growth. B R A N D R E V I E W We continue to invest in our most valuable asset, the Hotel Chocolat brand, at many levels. Our culture of constant innovation is crucial in ensuring the brand remains fresh and relevant. The pipeline of future excitements is reassuringly healthy. Those that we launch will have made it through our disciplined testing and trialling approach. Recent highlights included our unique take on the patisserie macaron in chocolate form and a sculpted bulldog puppy in 40% milk chocolate. Key launches for Christmas 2018 include our Chocolat Cream Liqueur and the Velvetiser in-home drinking chocolate maker. Wellness Consumers increasingly want delicious and hedonistic chocolate that’s also made with responsible amounts of sugar. Hotel Chocolat’s 15-year track record of “more cocoa, less sugar” is applied to every grade of chocolate, from our whites, through milks and darks. This makes us virtually unique amongst premium chocolate brands. Flip over and read the ingredients of other milk and white brands and you will find it quite revealing! Sugar will most often be the number one ingredient even with premium pricing. In our view, if cocoa isn’t the number one ingredient, it really should not be called chocolate. Super Slim Truffles with Tasmanian peppermint C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 16 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Chief Executive’s statement continued New ventures with wholesale partners and new international market developments offer the potential to create significant new avenues for growth. The defensive attributes of the business are well-honed and include the strength and integrity of our brand and the agility of vertical integration. The market and wider economy may not be without challenges, however I remain confident that our plan for the coming year will deliver growth. Our capital investments are prudent, going into proven store formats and digital channels, as well as in known production methods and technology. Angus Thirlwell Co-founder and Chief Executive Officer 2) The planet: whilst we have always taken a responsible approach to packaging, we have now decided to explicitly state a target to challenge ourselves to further reduce our impact: 100% of our packaging will be compostable, reuseable or recyclable by 2021. 3) People: We know that our team culture is the essential ingredient in making all our plans come true. We have solid plans to increase diversity in our team at all levels, to increase employee representation in the boardroom, to foster more empowered behaviour, and to create clear career development opportunities for our teams. O U T LO O K Continued innovation and a relentless focus on customer happiness aims to generate sales growth. By combining this with a tight control of costs, we aim to improve returns. Successful growth channels in large UK markets with significant headroom leaves lots of scope for continued success. All our chocolate grades meet this ‘cocoa first’ requirement, even our whites and milks. When you consider that sugar is about 20 times cheaper than cocoa, the reason why other brands take a different route becomes clear. Experiences Experiences are becoming increasingly popular as a new luxury and consumers are seeking to go beyond the purely transactional, but only with brands they love. We are well positioned to grow with this trend. Our 2 Schools of Chocolate and 40 Chocolate Lock-In locations are popular with customers and give our team an opportunity to share their knowledge with like-minded enthusiasts. We see experiences playing a steadily stronger role in our physical spaces as we develop our skills and learning and the market develops. Engaged Ethics Consumers expect brands they love to do the right thing, using their resources and influence to make the world a better place when they can. This has always been a central element of the Hotel Chocolat DNA and we challenge ourselves to progressively strengthen our programmes and initiatives year-on-year. The 3 areas we focus on are cocoa, the planet and people: 1) Cocoa: A real milestone was reached midway through 2018 when for the first time we were able to fully connect our Engaged Ethics scheme to 100% of our cocoa supplies. The additional costs of achieving this is something we are very happy to invest in, with the funds used to pay farmers a premium, encourage sustainable farming practices and support productivity and community projects. STR ATEGIC REPORT Our strategy 17 Our strategy We maintain a disciplined approach to capital investment to deliver improved returns and contain risk. A focus on proven formats and channels in the UK provides a strong platform to step up the level of tests in international markets: Our strategy has four pillars 1 GROW UK PHYSICAL SPACE OPENING NEW STORES AND TESTING NEW FORMATS AND CATCHMENT TYPES 2 GROW DIGITAL SALES INCLUDING WHOLESALE WORKING WITH CAREFULLY SELECTED PARTNERS TO MAKE IT EASIER FOR CUSTOMERS TO ACCESS THE BR AND 3 INCREASE MANUFACTURING EFFICIENCY AND CAPABILITY CAPITAL INVESTMENT TO INCREASE CAPACITY AND IMPROVE EFFICIENCY 4 TESTS IN NEW INTERNATIONAL MARKETS CAUTIOUS ‘TEST, LEARN, GROW’ APPROACH C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 18 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Progress against strategy 1 GROW UK PHYSICAL SPACE In the period we increased the pace of openings and reduced capital expenditure per square foot by 10% without compromising the brand’s look and feel. All established UK stores are EBITDA profitable. Recent openings continue to deliver comparable EBITDA to earlier vintages: A D T I B E e r o t S e g a r e v A 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year of opening We have achieved successful openings across a number of formats including city centres (3), designer outlets (2), smaller towns and cities (9) and edge of town retail parks (1). C U S TO M E R S E RV I C E & E X P E R I E N C E S Our retail strategy is focused on developing our teams, empowering all team members to make more decisions locally and promoting team diversity to best match the diversity of our customers. Our unique internal School of Chocolate training programme creates a depth of knowledge that has allowed us to roll out Chocolate Lock-Ins. A ticketed after-hours event where guests can taste a wider range of chocolates and learn about cocoa from our knowledgeable team. STR ATEGIC REPORT Progress against strategy 19 C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 2 GROW DIGITAL SALES INCLUDING WHOLESALE The strong shift towards mobile-use continues and we are focused on delivering the best possible experience on smartphones. W E B S I T E S U B S C R I P T I O N Website sales grew by 14%. Over half of traffic is now on smartphones which industry-wide have a lower conversion. We increased mobile conversion by 8%. Innovations to create an ever-better digital experience launching this autumn include: • The Gift Finder serves up bespoke gift solutions after a 3-question routine. • The Whoosh, Instant Gifts by Text service makes it fun and easy to send a last minute gift using just a mobile phone number via SMS. Existing members remain highly engaged and loyal. Wider distribution of Hotel Chocolat products has meant profitable new customer acquisition using our usual methods has become more challenging. We have paused new customer recruitment and sales declined 14%. Further new subscription formats are in development, including the Velvetiser in-home hot chocolat maker, supported by easy subscription for the convenient single-serve sachets. NE W DIGITAL WHOLESALE PARTNE RS The performance of our new partners exceeded our sales target in their first part-year. Customers are now able to choose their preferred delivery method to access capsule collections of HC products. Two new wholesale partnerships in autumn 2018. 20 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Progress against strategy continued 3 INCREASE MANUFACTURING EFFICIENCY AND CAPABILITY A combination of capital investment, improved asset utilisation and intelligent planning delivered a 25% increase in production capacity. We have identified significant scope for further investment to increase capacity and unlock efficiencies. C A P I TA L P RO J E C T S W I T H I N E X I S T I N G FAC TO RY £1.4m of investments to increase storage and handling capacity were completed on time and on budget. A 3-year project has commenced to add a fourth production line inside the existing factory roofline which will deliver over 30% more production capacity from 2021. O P T I M I S I N G P RO D U C T I O N A key feature of the operation is the high level of flexibility which enables us to produce over 400 different recipes. However this flexibility means that production runs are relatively short and downtime and changeover costs have previously been relatively high as a proportion of output. Consolidation of manufacture into fewer production runs delivered significant additional capacity, increased efficiency and reduced wastage. F U RT H E R I N V E S T M E N T S Further increases in capacity will be achieved by extending the existing factory roofline to add up to three more chocolate making lines. The process of planning applications has begun with a target implementation after 2021 on a phased basis with each additional line only being added when required. STR ATEGIC REPORT Progress against strategy 21 C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 4 TESTS IN NEW INTERNATIONAL MARKETS The positive customer response in Denmark and Hong Kong has encouraged us to extend our tests in new markets of scale. S C A N D I N AV I A J A PA N U S A In July 2018 the Group transferred its Danish retail business to Retail Brands, a Danish multi-brand franchise operator. The aim is to combine the Hotel Chocolat brand allure with local operational knowledge and grow a sustainable business across Scandinavia. The partner has already opened two more stores in Denmark. If they deliver against the development agreement this triggers an option to extend the franchise to other Scandinavian markets. Market research suggests that Japan may present an exciting opportunity, with strong demographics and a gift- giving culture centred on the spring seasons of Valentines and White Day. The Group has taken a 20% stake in a joint venture and will supply goods on a wholesale basis under a development agreement. A cautious ‘test, learn, grow’ approach will be taken with the first store expected to open in Tokyo this winter. A lease has been signed on a pilot store in Lexington Avenue, Manhattan and is expected to open this winter. The Group has been carefully evaluating the potential of the US market. Tests of a store in Boston in 2010 showed that consumers were attracted to the brand, but at that time the Group did not have the capital resources to achieve an economic scale. Since 2010 third party supply chain economics have improved and the Group intends to test one or two locations in FY19. 22 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Financial review “ Strong sales growth coupled with rising margins have resulted in further improvement in profitability.” M AT T P R I TC H A R D Chief Financial Officer Revenue Gross profit Operating expenses Underlying EBITDA Share-based payments Depreciation & amortisation Impairment (non-recurring) (Profit)/loss on disposal Operating profit Finance income Finance expense Profit before tax Tax Profit for the period FY18 £m 116.3 79.6 60.7 18.9 0.7 4.8 0.3 (0.1) 13.2 0.0 0.6 12.7 2.7 10.0 FY17 £m 105.2 71.5 55.2 16.3 0.6 3.7 – 0.1 11.9 0.0 0.7 11.2 2.4 8.8 R E V E N U E U N D E R LY I N G E B I T DA Reported revenue for 52 weeks ending 1 July 2018 was £116.3m. Revenue increased by 11% compared to the 53 weeks ending 2 July 2017 and by 12% compared to the comparable 52 week period in constant currency. G RO S S M A RG I N Gross profit as a percent of sales improved from 67.9% to 68.4%, supported by the increased efficiency of production and better buying, partially offset by increased investments in Engaged Ethics cocoa sustainability, and the impact of foreign exchange on the euro- denominated purchase of ingredients. O P E R AT I N G E X P E N S E S A focus on efficiency and cost control meant that externally driven cost inflation was mitigated and as a result operating expenses as a percentage of sales fell from 52.4% to 52.2%. Whilst EBITDA is not a statutory measure the Board believe it is helpful to investors to include it as an additional metric. Underlying EBITDA as reported excludes non-cash share-based payment expenses of £0.7m. (FY17: £0.6m). On this basis, underlying EBITDA as a percent of sales increased from 15.5% to 16.3%. F I N A N C E I N CO M E A N D E X P E N S E Finance expense relates to a working capital overdraft and the interest paid on Chocolate Bonds. All £6.5m of bonds were repaid in full in June 2018. The Board intends to finance its ongoing working capital requirements using a £20m overdraft facility arranged with Lloyds bank. Capital expenditure projects will be financed from operating cashflow. STR ATEGIC REPORT Financial review 23 REVENUE GROWTH UNDERLYING EBITDA MARGIN P E R F O R M A N C E I N D I C ATO R S +11% 2018 2017 2016 GROSS MARGIN 68.4% Gross margin improved from 67.9% to 68.4% 16.3% Underlying EBITDA margin improved from 15.5% to 16.3% £116.3m £105.2m £91.1m 2018 2017 2016 £18.9m £16.3m £12.4m The Group monitors its performance using a number of key indicators which are agreed at Board meetings and monitored at operational and Board level. PROFIT AFTER TA X MARGIN 8.6% Profit after tax margin increased from 8.3% to 8.6% 2018 2017 2016 68.4% 67.9% 66.8% 2018 2017 2016 £4.1m £10.0m £8.8m D E P R E C I AT I O N & A M O RT I S AT I O N Depreciation increased as a result of additional capital expenditure. Capital expenditure of £11m comprised investments in 15 new stores, 2 re-sites, a number of IT projects and operational projects including upgrades to factory capacity and capability. I M PA I R M E N T In July 2018 the Group’s Danish operations were transferred to Retail Brands, a Danish franchise operator. The fixed asset values as at the balance sheet date were impaired to reflect the agreed sale price. As such this impairment charge is non-recurring. P RO F I T B E F O R E TA X Profit before tax increased from £11.2m to £12.7m. Excluding the non-recurring impairment charge profit before tax increased from £11.2m to £13.0m. TA X AT I O N C A S H P O S I T I O N The effective rate of taxation is 21.5% (FY17: 21.8%). This is higher than the standard rate of 19% mainly due to permanent timing differences between depreciation charges and capital allowances. E A R N I N G S P E R S H A R E ( E P S ) A N D D I V I D E N D S Diluted and undiluted earnings per share were 8.8p (FY17: 7.8p). Profit after tax increased by 14%. The weighted average number of shares in FY18 was 113m (FY17: 113m). The number of shares in issue is unchanged since the IPO in May 2016. Having delivered a year of strong growth the Board is pleased to propose a final dividend of 1.1 pence per share, bringing the total dividend for the year to 1.7 pence per share (FY17: 1.6 pence per share). The Group had £0.2m of cash at period- end, a reduction of £8.2m primarily as a result of the £6.5m repayment to Chocolate Bond holders. WO R K I N G C A P I TA L Closing inventories increased by £2.7m driven by a change to the frequency of production which improves factory capacity and gross margin, but means stock will be manufactured sooner in advance of each trading season. This change increased stock cover from approximately 12 weeks cover in FY17 to 13 weeks in FY18. Matt Pritchard Chief Financial Officer C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 24 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Risk management The Board is responsible for reviewing risks to ensure that the business is not exposed to unnecessary or poorly-managed risks. Whilst review of the risk register is a scheduled item on the annual calendar of Board agenda items, the Board’s consideration of risk matters is not limited to those occasions. Risks and opportunities are factors which are continually considered when the Board is making decisions about the business and strategy. The Audit Committee assists the Board in this process by reviewing the risk register as well as the effectiveness of internal controls, including financial controls. Risk category Potential impact I N C R E A S E D CO M P E T I T I O N A N D C H A N G E S I N CO N S U M E R TA S T E S Changes to competition and/or consumer preferences may reduce demand for the Group’s products. Increased competition could make it more difficult or more costly to acquire new store leases. E CO N O M I C A N D P O L I T I C A L FAC TO R S B E YO N D T H E G RO U P ’ S D I R E C T CO N T RO L A downturn in the macro-economy may reduce consumer demand generally. Costs may be increased by changes to government policy, including tax changes or other legislation. F O R E I G N E XC H A N G E The Group purchases many of its ingredients and capital items in currencies other than sterling. A fall in the value of sterling would increase the cost of imports. Revenues from the hotel in Saint Lucia are denominated in US dollars. K E Y M A N AG E M E N T Loss of key personnel could impact the Group’s ability to implement strategy and the intended pace of growth. D I S RU P T I O N TO S U P P LY O R P RO D U C T I O N O F G O O D S , O R TO I T S YS T E M S Disruption to supply or production of goods, or to IT systems, could limit availability of products and consequently reduce sales. I N CO N S I S T E N T Q UA L I T Y O R CO N TA M I N AT I O N O F T H E G RO U P ’ S P RO D U C T S Inconsistent quality or contamination of the Group’s products could reduce demand for the Group’s products. N E G AT I V E P U B L I C I T Y A F F E C T I N G T H E B R A N D Negative publicity affecting the brand could reduce consumer demand for the Group’s products. I N T E R N AT I O N A L E X PA N S I O N Operating in new territories may give rise to increased complexity and costs. STR ATEGIC REPORT Risk management 25 Change to residual risk in FY 2018 Commentary Mitigation • The business adheres to core values of originality, authenticity and ethics which result in a strong brand. • The Board strives for continuous improvement to products and services to increase sales and customer happiness. • The Board seeks to ensure the brand retains its position as affordable luxury in order to appeal to a broad range of consumers and at price points that are appropriate. • Ongoing focus on cost efficiency assists in mitigating individual cost increases. • The Group forecasts its requirement for foreign exchange purchases and hedges these purchases 18 months ahead. • Business plans and initiatives are documented and prepared with cross-functional input to reduce reliance on single individuals. • The Remuneration Committee seeks to ensure rewards are commensurate with performance and aid retention. • The Group maintains a business continuity plan which is updated annually and tested quarterly with the incident management team. • The business applies strict quality controls and seeks independent validation of these controls by the British Retail Consortium (BRC). • The business adheres to core values of originality, authenticity and ethics which result in a strong brand. Brexit has increased macro-economic uncertainty, however trading in FY18 and since period-end has remained in line with the Board’s expectations. Whilst sterling has fallen, the Group extends its currency hedges on a quarterly basis and is currently hedged for the whole of FY19. The IPO has enabled the business to launch share-based incentives to assist in retaining key personnel. The business undertakes risk assessments on an ongoing basis. Production facilities achieved ‘A grade’ accreditation from the BRC in 2018. • The business adopts a cautious ‘test, learn, grow’ approach to each new market. • Due diligence undertaken to ensure appropriate local partner. • New position of Chief Marketing Officer recruited to increase executive team bandwidth. The business adopts a ‘test, learn, grow’ approach to international expansion, combining careful research and planning with small-scale tests before making significant investments. This strategic report and information referred to herein was approved on behalf of the Board on 25 September 2018. Matt Pritchard Chief Financial Officer C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 26 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Our cocoa estate in Saint Lucia, where we first developed our Engaged Ethics approach to cocoa growing, now applied to 100% of our cocoa supply. GOVERNANCE 27 C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Governance Corporate social responsibility Board of Directors Corporate governance statement Audit Committee report Remuneration report Directors’ report Statement of Directors’ responsibilities 28 30 32 36 38 40 42 28 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Corporate social responsibility The Group strives to ensure that the business’ activities positively benefit all stakeholders including customers, growers, suppliers, employees, shareholders and local communities. E N G AG E D E T H I C S The experience gained by revitalising the cocoa sector around our cocoa estate in Saint Lucia has shown us that there are a number of ways to assist in ensuring cocoa growing is sustainable: 1) Engage directly with farmers and pay a premium for cocoa grown to sustainable standards of stewardship. 100% of the cocoa purchased by Hotel Chocolat is sourced in accordance with our Engaged Ethics standards. 2) Help farmers improve yields by providing knowledge, tools and materials to improve productivity. Hotel Chocolat has partnered with a local NGO, Green Tropic Group, for over 15 years to support higher productivity in Ghana. In 2018, our investments delivered 3 new model farms and seedling nurseries increasing the number of farmers that can benefit from materials, training and development of better practices. 3) Support local communities. Hotel Chocolat and the Tasting Club members have funded the construction of a health centre in Osuben, Ghana, which received certification in 2017 and is now providing care such as emergency medicine, midwifery services and preventative healthcare. 4) Continuous Improvement. Whilst we are proud that 100% of our cocoa is sourced to our Engaged Ethics standard we believe there will always be ways to further improve. We are working with University of Ghana to better understand where we should prioritise our next investments to support the sustainability of cocoa growing communities and independently assess the impact. C U S TO M E R S The business is committed to a philosophy of “more cocoa, less sugar”, designed to ensure that the product offers a differentiated cocoa-rich taste with lower sugar content than many premium chocolate products. Over 95% of all products meet Public Health England’s 2018 target for sugar per gram. In order to ensure that all products achieve the more stringent target for 2020 a project is underway to ensure accurate portion size guidance is included on all products. E M P LOY E E S We strongly believe that our team are a key ingredient in the business, and are undertaking a business-wide review to improve communication, encourage everyone to share their views, and feel empowered to make decisions for the good of the business. The business regularly measures employee engagement in every team with a focus on ensuring that all team members are listened to and any concerns are addressed. We are committed to actively promoting diversity in our workforce, by encouraging the greatest possible breadth of experience we can best meet the diverse needs of our customers. The Board are committed to ensuring that employees can have a voice in the boardroom with a standing agenda item to discuss this at every meeting. Sophie Tomkins, one of the Non-executive Directors has been given a special remit to ensure employee views and concerns are fully represented. Employees have the opportunity to meet in person with the Board to discuss key issues or alternatively topics can be presented on their behalf. The Group operates an all-employee annual performance bonus and a share- save scheme which launched in August 2016. Career progression is supported and targets are set to ensure as high a proportion of vacancies as possible are filled via internal promotions. The School of Chocolate diploma is available to all employees and provides a detailed understanding of all aspects of cocoa growing and chocolate making. E N V I RO N M E N T The majority of our packaging is currently recycled or recyclable, and we have made a commitment that by 2021, 100% of our packaging will be recyclable. We have recently implemented an initiative within the supply chain to make smarter use of packaging that we anticipate will reduce our transit packaging cardboard usage by 75% in FY19. 100% of our electricity is obtained from renewable sources. Energy efficiency is a high priority in every capital investment decision that we make, including in-store lighting, distribution vehicles and our factory operation. GOVERNANCE Corporate social responsibility 29 100% OF COCOA SOURCED TO ENGAGED ETHICS STANDARD 168 YOUNG FARMERS GROWING THE NEXT GENERATION 60,000 COCOA SEEDLINGS SUPPLIED THIS YEAR BY FUNDED NURSERIES OVER 1,200 FARMERS ENROLLED IN SCHEME 3 MODEL FARMS EDUCATING IN BEST PRACTICE TO INCREASE YIELDS CLEAN WATER FUNDING 5 COMMUNITY BOREHOLES C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 30 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Board of Directors Experienced founder-led team. Andrew Gerrie (55) Non-executive Chairman Angus Thirlwell (55) Co-founder and Chief Executive Officer Peter Harris (63) Co-founder and Development Director Matt Pritchard (44) Chief Financial Officer Andrew joined Hotel Chocolat as Non-executive Chairman in June 2015 and has extensive retail experience, having served as CEO of Lush Cosmetics from 1994 to 2014. During this period Lush grew to over 900 stores across 49 countries, with sales in excess of £450m. Andrew holds a B.Com degree from Auckland University. Angus co-founded Hotel Chocolat with Peter Harris in 1993 and has a particular focus on brand strategy, product and channel models, marketing and creative. Angus attended Cranfield School of Management and is a committee member for The Academy of Chocolate. Peter Harris co-founded Hotel Chocolat with Angus Thirlwell in 1993 and is responsible for real estate, legal and intellectual property. Matt joined Hotel Chocolat as Chief Financial Officer in 2014 and is responsible for the finance function, retail operations and IT. Peter qualified as a Chartered Accountant in 1979. He has over 20 years of experience of finance gained in blue chip retail organisations. Matt qualified as a Certified Accountant in 1998. Audit Committee member Highlight: Highlight: Highlight: Highlight: Our progress with developing international tests Building confidence in our teams that they can be empowered and make decisions Accelerating the store rollout and testing new catchments whilst reducing capex cost per square foot The pipeline of product innovation, including the Velvetiser hot chocolat system GOVERNANCE Board of Directors 31 C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Matt Margereson (47) Chief Operating Officer Sophie Tomkins (49) Independent Non-executive Director Greg Hodder (66) Independent Non-executive Director Matt joined Hotel Chocolat in 2006 and is responsible for product development, manufacturing, supply chain and HR. He has over 20 years of experience in operations and supply chain management. Matt completed an MBA in 2013 and is a member of the Chartered Institute of Logistics and Transport. Sophie has considerable public markets experience gained through a 17-year career in the City. Sophie is Non-executive Director and Chair of the Audit Committee at CloudCall Group plc and Non-executive Director and Audit Committee member at System1 Group plc. Sophie qualified as a Chartered Accountant in 1994 and is a fellow of the Chartered Institute for Securities and Investment. Greg was CEO of Charles Tyrwhitt from 2008 to 2017 and previously CEO of Direct Wines including Laithwaites and The Sunday Times Wine Club. He is currently Chairman of Majestic Wine plc. Greg has considerable experience of growth through digital and international retail. Audit Committee Chair Remuneration Committee member Remuneration Committee Chair Audit Committee member Highlight: Highlight: Highlight: Seeing improvement in teamwork translate into new ideas that improve performance Launching the “employee voice” in the boardroom with immediate engagement from the team The launch of the VIP ME scheme, which develops a stronger link with our customers 32 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Corporate governance statement The Chairman is responsible for leading the Board, setting its agenda and monitoring its effectiveness. There is a clear division of responsibility between the Chairman and the Chief Executive Officer. • Effective communication with shareholders • Any changes to Board membership or structure. H OW T H E B OA R D O P E R AT E S The Board is responsible for the Group’s strategy and for its overall management. The strategic report on pages 17 to 21 summarises the Board’s approach to promote sustainable long-term growth and value for shareholders. The operation of the Board is documented in a formal schedule of matters reserved for its approval, which is reviewed annually. These include matters relating to: • The Group’s strategic aims and objectives • The structure and capital of the Group • Financial reporting, financial controls and dividend policy • Setting budgets and forecasts • Internal control, risk and the Group’s risk appetite • The approval of significant contracts and expenditure B OA R D M E E T I N G S Non-executive Directors communicate directly with Executive Directors and senior management between formal Board meetings. The Board met eleven times in the period. In addition the Board held strategy days in July 2017 and July 2018 specifically to review growth opportunities and priorities across the medium to longer term. Directors are expected to attend all meetings of the Board, and of the Committees on which they sit, and to devote sufficient time to the Group’s affairs to enable them to fulfil their duties as Directors. In the event that Directors are unable to attend a meeting, their comments on papers to be considered at the meeting will be discussed in advance with the Chairman so that their contribution can be included in the wider Board discussion. The following table shows Directors’ attendance at scheduled Board and Committee meetings during the period: Andrew Gerrie Sophie Tomkins Greg Hodder Angus Thirlwell Peter Harris Matt Pritchard Matt Margereson Board Remuneration Audit 10/11 11/11 11/11 11/11 11/11 11/11 11/11 – 4/4 4/4 – – – – 3/3 3/3 3/3 – – – – A N I N T RO D U C T I O N F RO M O U R C H A I R M A N The Directors recognise the value and importance of good corporate governance and are fully accountable to the Group’s stakeholders including shareholders, customers, suppliers and employees. In this section of our report we have set out our approach to governance and provided further information on how the Board and its committees operate. This is our third annual report as an AIM-listed entity. The Board believes that it complies with all of the principles of the QCA Corporate Governance Code for growing Companies (“QCA code”). The corporate governance framework which the Group operates, including Board leadership and effectiveness, Board remuneration, and internal control is based upon practices which the Board believes are proportional to the size, risks, complexity and operations of the business and reflective of the Group’s values. T H E CO M P O S I T I O N O F T H E B OA R D The Board is responsible to the shareholders and sets the Group’s strategy for achieving long-term success. It is also ultimately responsible for the management, governance, controls, risk management, direction and performance of the Group. The Board comprises three Non-executive Directors and four Executive Directors. Sophie Tomkins has no connections with the business and is fully independent. To leverage Greg Hodder’s considerable experience of launching and growing businesses in the US, the Board has recently approved him taking on additional leadership responsibilities relating to the development of the Group’s new business there. The Board is satisfied that this does not compromise his independence of thought or judgement and therefore Greg Hodder continues to be considered by the Board to be fully independent. GOVERNANCE Corporate governance statement 33 B OA R D D E C I S I O N S A N D AC T I V I T Y D U R I N G T H E P E R I O D The Board has a schedule of regular business, financial and operational matters, and each Board Committee has compiled a schedule of work to ensure that all areas for which the Board has responsibility are addressed and reviewed during the course of the year. The Chairman, aided by the Company Secretary, is responsible for ensuring that, to inform decision-making, Directors receive accurate, sufficient and timely information. The Company Secretary compiles the Board and Committee papers which are circulated to Directors prior to meetings. The Company Secretary also ensures that any feedback or suggestions for improvement on Board papers is fed back to management. The Company Secretary provides minutes of each meeting and every Director is aware of the right to have any concerns minuted and to seek independent advice at the Group’s expense where appropriate. The Board reviews its AIM obligations with its Nominated Advisor annually, and endeavours to keep up with best practice governance via seminars, conferences and training material. B OA R D CO M M I T T E E S The Board has delegated specific responsibilities to the Audit and Remuneration Committees, details of which are set out below. Each Committee has written terms of reference setting out its duties, authority and reporting responsibilities. Copies of all the Committee terms of reference are available on the Group’s website. These terms of reference are kept under review to ensure they remain appropriate and reflect any changes in legislation, regulation or best practice. Each Committee comprises Non-executive Directors of the Group. No new independent external advice was sought by the Board or its Committees during the period. AU D I T CO M M I T T E E The Audit Committee is chaired by Sophie Tomkins and its other members are Andrew Gerrie and Greg Hodder. Sophie Tomkins and Greg Hodder are fully independent. The Audit Committee has primary responsibility for monitoring the quality of internal controls and ensuring that the financial performance of the Group is properly measured and reported on. It receives and reviews reports from the Group’s management and auditor relating to the annual accounts and the accounting and internal control systems in use throughout the Group. It also advises the Board on the appointment of the auditor, reviews their fees and discusses the nature, scope and results of the audit with the auditor. The Audit Committee meets at least twice a year and has unrestricted access to the Group’s auditor. The Chief Financial Officer attends the Committee meetings by invitation. R E M U N E R AT I O N CO M M I T T E E The Remuneration Committee is chaired by Greg Hodder. Its other member is Sophie Tomkins. The Remuneration Committee reviews the performance of the Executive Directors and makes recommendations to the Board on matters relating to their remuneration and terms of employment. The Remuneration Committee also makes recommendations to the Board on proposals for the granting of share options and other equity incentives pursuant to any share option scheme or equity incentive scheme in operation from time to time. The remuneration and terms and conditions of appointment of the Non-executive Directors of the Group are set by the Board. The Chief Executive Officer and Chief Financial Officer are invited to attend for some parts of the Committee meetings where their input is required, although they do not take part in any discussion on their own benefits and remuneration. The Remuneration report on pages 38 and 39 contains more detailed information on the Committee’s role and the Directors’ remuneration and fees. N O M I N AT I O N S CO M M I T T E E It is the view of the Board that a separate Nominations Committee is not required at present. In the event that the needs of the business change, a Nominations Committee will be formed. It has been agreed that the main Board will undertake the activities of Board appointments, re-election and succession, with a view to ensuring that the Board is composed of individuals with the necessary skills and to promote a culture that fosters diversity. As part of the annual Board evaluation and strategic review processes, the Board considered matters relating to Board composition and succession planning during the period. B OA R D E F F E C T I V E N E S S The Board has undertaken an evaluation of its effectiveness. Input was obtained from every Board member on a number of key topics including: • The effectiveness of the Board in setting strategy • Confirmation that rigorous and wide ranging debate of issues was taking place • That decision making was balanced and objective • That the Board was responsive to new events and new information • That the Board had the appropriate composition and skill to discharge its duties. The Board identified specific actions which are being implemented. C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 34 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Corporate governance statement continued B OA R D E F F E C T I V E N E S S C O N T I N U E D The skills and experience of the Board are set out in their biographical details on pages 30 to 31. The experience and knowledge of each of the Directors gives them the ability to constructively challenge strategy and to scrutinise performance. All Directors take part in a thorough induction process on joining the Board, tailored to the existing knowledge and experience of the Director concerned. Consistent with the Board’s commitment to active succession planning, a senior management development programme is being implemented. B U S I N E S S C U LT U R E , VA LU E S A N D B E H AV I O U R S The brand and the business have been guided from the beginning by the principles of authenticity, originality and ethics. This informs every aspect of business operation and decision making from the agreement of strategy to the operational implementation of the business plan. The business conducts regular engagement surveys with all employees and also operates a number of confidential hotlines to allow employees to feed back on culture and behaviours. T I M E CO M M I T M E N T S All Directors recognise the need to commit sufficient time to fulfil the role. This requirement is included in their letters of appointment. The Board is satisfied that the Chairman and Non- executive Directors are able to devote sufficient time to the Group’s business. There has been no significant change in the Chairman’s other time commitments since his appointment. D E V E LO P M E N T E L E C T I O N O F D I R E C TO R S The Company Secretary ensures that all Directors are kept abreast of changes in relevant legislation and regulations, with the assistance of the Group’s advisers where appropriate. Executive Directors are subject to the Group’s performance review process through which their performance against predetermined objectives is reviewed and their personal and professional development needs considered. It is intended that an annual performance appraisal of Non-executive Directors will be undertaken by the Chairman as part of the Board evaluation process, at which time any training or development needs will be addressed. E X T E R N A L A P P O I N T M E N T S As appropriate, the Board may authorise Executive Directors to take Non- executive positions in other companies and organisations, provided the time commitment does not conflict with the Director’s duties to the Group, since such appointments should broaden their experience. The acceptance of appointment to such positions is subject to the approval of the Chairman. All Directors of the Group will offer themselves for election or re-election at the Annual General Meeting (see note overleaf). I N T E R N A L CO N T RO L S & R I S K M A N AG E M E N T The Board has ultimate responsibility for the Group’s system of internal control and for reviewing its effectiveness. However, any such system of internal control can provide only reasonable, but not absolute, assurance against material misstatement or loss. The Board considers that the internal controls in place are appropriate for the size, complexity and risk profile of the Group. The principal elements of the Group’s internal control system include: • Close management of the day-to-day activities of the Group by the Executive Directors; • An organisational structure with defined levels of responsibility, which promotes entrepreneurial decision making and agile implementation whilst mitigating risks; CO N F L I C T S O F I N T E R E S T • A comprehensive annual budgeting At each meeting the Board considers Directors’ conflicts of interest. The Group’s Articles of Association provide for the Board to authorise any actual or potential conflicts of interest. D I R E C TO R S ’ A N D O F F I C E R S ’ L I A B I L I T Y I N S U R A N C E The Group has purchased Directors’ and Officers’ liability insurance during the period as allowed by the Group’s articles. process, producing a detailed integrated profit and loss, balance sheet and cash flow, which is approved by the Board; • Detailed monthly reporting of performance against budget; and • Central control over key areas such as capital expenditure authorisation and banking facilities. The Group continues to review its system of internal control to ensure adherence to best practice, whilst also having regard to its size and the resources available. The Board considers that the introduction of an internal audit function is not appropriate at this juncture. The Board conducts annual reviews of its register of key risks and on a bi-annual basis seeks independent third party support to review the risk landscape in detail, including a consideration of risks, likelihood, scale of potential impact and the existence of assurance, mitigation or appropriate contingencies. R E L AT I O N S W I T H S TA K E H O L D E R S The Group maintains communication with a wide range of stakeholders to ensure that their needs, interests and expectations are understood and reflected within the Group’s strategy. Customer feedback is collected from stores, online reviews and via social media. We work with cocoa growers and other agricultural producers, and with organisations that promote their interests to understand their needs. We meet with existing and potential suppliers and visit trade fairs. We also meet with charities, other activist groups, academics and specialists to keep abreast of developments in fields such as sustainability, recycling and nutrition. Employee feedback is sought via regular anonymous surveys, with the opportunity to discuss topics directly with the Board. R E L AT I O N S W I T H S H A R E H O L D E R S The Group maintains communication with institutional shareholders through individual meetings with Executive Directors, particularly following publication of the Group’s interim and full period results. Private shareholders are encouraged to attend the Annual General Meeting at which the Group’s activities are considered and questions answered. General information about the Group is also available on the Group’s website (www.hotelchocolat.com). The Non-executive Directors are available to discuss any matter stakeholders might wish to raise, and the Chairman and independent Non-executive Directors will attend meetings with investors and analysts as required. Investor relations activity and a review of the share register are standing items on the Board’s agenda. In the period the feedback from shareholders did not give rise to any material change in business strategy. A N N UA L G E N E R A L M E E T I N G (AG M ) The Annual General Meeting of the Group will take place on 29 November 2018. The Notice of Annual General Meeting and the ordinary and special resolutions to be put to the meeting are included in the Notice of AGM accompanying this Annual Report. GOVERNANCE Corporate governance statement 35 C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 36 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Audit Committee repor t Sophie Tomkins Chair of the Audit Committee On behalf of the Board, I am pleased to present the Audit Committee report for the period ended 1 July 2018. The Audit Committee is responsible for ensuring that the financial performance of the Group is properly reported and reviewed. Its role includes monitoring the integrity of the financial statements (including annual and interim accounts and results announcements), reviewing internal control and risk management systems, reviewing any changes to accounting policies, reviewing and monitoring the extent of the non-audit services undertaken by external auditors and advising on the appointment of external auditors. M E M B E R S O F T H E AU D I T CO M M I T T E E The Committee consists of two independent Non-executive Directors: myself, Sophie Tomkins (as Chair) and Greg Hodder. Andrew Gerrie is also a member but is not considered independent because of his involvement as a shareholder in Rabot 1745 Limited, a joint venture with the Group. Matt Pritchard, Chief Financial Officer, and other Executive Directors may attend Committee meetings by invitation. The Committee met three times in the period. The Board is satisfied that I, as Chair of the Committee, have recent and relevant financial experience. I am a Chartered Accountant and I am Chair of the Audit Committee at CloudCall Group plc and a member of System1 Group plc Audit Committee. A Chartered Secretary from Chadwick Corporate Consulting acts as Secretary to the Committee. I report the Committee’s deliberations at the next Board meeting and the minutes of each meeting are made available to all members of the Board. D U T I E S The main duties of the Audit Committee are set out in its terms of reference, which are available on the Group’s website (www.hotelchocolat.com). The main items of business considered by the Audit Committee during the year included: • Review of the FY18 audit plan and audit engagement letter; • Consideration of key audit matters and how they are addressed; • Review of suitability of the external auditor; • Review of the financial statements and Annual Report; • Consideration of the external audit report and management representation letter; • Going concern review; • Review of the risk management and internal control systems; • Meeting with the external auditor without management present; and • Review of whistleblowing and anti- bribery arrangements. RO L E O F T H E E X T E R N A L AU D I TO R The Audit Committee monitors the relationship with the external auditor, BDO LLP, to ensure that auditor independence and objectivity are maintained. Noting the tenure of BDO LLP (since FY12), the Committee will keep under review the need for external tender. As part of its review the Committee monitors the provision of non-audit services by the external auditor. The breakdown of fees between audit and non-audit services is provided in Note 6 of the Group’s financial statements. The non-audit fees primarily relate to tax advice for the Group. The Audit Committee also assesses the auditor’s performance. Having reviewed the auditor’s independence and performance, the Audit Committee recommends that BDO LLP be reappointed as the Group’s auditor at the next AGM. AU D I T P RO C E S S The auditor prepares an audit plan for the review of the full period financial statements. The audit plan sets out the scope of the audit, areas to be targeted and audit timetable. This plan is reviewed and agreed in advance by the Audit Committee. Following the audit, the auditor presented its findings to the Audit Committee for discussion. No major areas of concern were highlighted by the auditor during the period, however areas of significant risk and other matters of audit relevance are regularly communicated. I N T E R N A L AU D I T A N T I - B R I B E RY The Group has in place an anti-bribery and anti-corruption policy which sets out its zero-tolerance position and provides information and guidance to those working for the Group on how to recognise and deal with bribery and corruption issues. The Committee is comfortable that the current policy is operating effectively. Sophie Tomkins Chair of the Audit Committee At present the Group does not have an internal audit function and the Committee believes that management is able to derive assurance as to the adequacy and effectiveness of internal controls and risk management procedures without one. R I S K M A N AG E M E N T A N D I N T E R N A L CO N T RO L S As described on page 34 of the corporate governance report, the Group has established a framework of risk management and internal control systems, policies and procedures. The Audit Committee is responsible for reviewing the risk management and internal control framework and ensuring that it operates effectively. During the period, the Committee has reviewed the framework and the Committee is satisfied that the internal control systems in place are currently operating effectively. W H I S T L E B LOW I N G The Group has in place a whistleblowing policy which sets out the formal process by which an employee of the Group may, in confidence, raise concerns about possible improprieties in financial reporting or other matters. Whistleblowing is a standing item on the Committee’s agenda. The Committee is comfortable that the current policy is operating effectively. GOVERNANCE Audit Commit tee repor t 37 C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 38 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Remuneration repor t CO M P O S I T I O N A N D RO L E The Remuneration Committee’s members are Greg Hodder (as Chair), and Sophie Tomkins. The Committee operates under the Group’s agreed terms of reference and is responsible for reviewing all senior executive appointments and determining the Group’s policy in respect of the terms of employment, including remuneration packages of Executive Directors. The Remuneration Committee met four times during the period and plans to meet at least twice a year going forward. R E M U N E R AT I O N P O L I C Y The objective of the Group’s remuneration policy is to attract, motivate and retain high quality individuals who will contribute fully to the success of the Group. To achieve this objective, the Group provides competitive salaries and benefits to all employees. Executive Directors’ remuneration is set to create an appropriate balance between both fixed and performance-related elements. Remuneration is reviewed each year in light of the Group’s business objectives. It is the Remuneration Committee’s intention that remuneration should reward achievement of objectives and that these are aligned with shareholders’ interests over the medium-term. Remuneration consists of the following elements: • Basic salary; • Performance-related annual bonus; • Long-Term Incentive Plan; and • Pension contribution. E X E C U T I V E D I R E C TO R S ’ S E RV I C E CO N T R AC T S The Executive Directors signed new service contracts with the Group on admission to AIM in May 2016. These are not of fixed duration. Angus Thirlwell and Peter Harris’ contracts are terminable by either party giving twelve months’ written notice. Matt Pritchard and Matt Margereson’s contracts are terminable by either party giving six months’ written notice. NON - E XECUTIVE DIRECTORS The Non-executive Directors signed letters of appointment with the Group for the provision of Non-executive Directors’ services, which may be terminated by either party giving three months’ written notice. The Non-executive Directors’ fees are determined by the Board. Greg Hodder Chair of the Remuneration Committee I am pleased to present this remuneration report, which sets out the remuneration policy and the remuneration paid to the Directors for the period. Hotel Chocolat Group plc is listed on the Alternative Investment Market (AIM) and, as such, the following disclosures are prepared on a voluntary basis for the Group. D I R E C TO R S ’ R E M U N E R AT I O N The following table summarises the total gross remuneration of the Directors who served during the period to 1 July 2018. Bonus payments in FY18 represent 20% of the maximum amount payable under the rules of the scheme. Matt Pritchard and Matt Margereson were eligible for an annual bonus relating to FY18 profit growth. Achieving stretch profit growth would have given rise to a bonus of 40% of base pay. Actual profit performance resulted in a bonus of 8% of base pay. 2018 2017 Basic salary/fee Bonus Pension Total Basic salary/fee Bonus Pension Total Executive Angus Thirlwell Peter Harris Matt Pritchard Matt Margereson Non-executive Andrew Gerrie Sophie Tomkins Greg Hodder 235,000 215,000 215,000 215,000 50,000 40,000 40,000 – – 17,200 17,200 5,937 5,688 2,688 2,688 240,937 220,688 234,888 234,888 235,000 215,000 215,000 215,000 70,500 64,500 64,500 64,500 5,350 4,792 2,150 1,792 310,850 284,292 281,650 281,292 – – – – – – 50,000 40,000 40,000 50,000 35,833 6,667 – – – – (29) – 50,000 35,804 6,667 GOVERNANCE Remuneration repor t 39 The remuneration policy for 2019 will operate as follows: Executive Angus Thirlwell Peter Harris Matt Pritchard Matt Margereson Non-executive Andrew Gerrie Sophie Tomkins Greg Hodder Basic salary/fee Maximum bonus £235,000 £215,000 £215,000 £215,000 £50,000 £40,000 £40,000 Waived – nil Waived – nil 40% 40% – – – Pension £5,350 £3,000 £2,150 £2,150 – – – Maximum bonus opportunities for the 2019 financial period are disclosed in the table above. The 2019 bonus will be assessed against Group profit. The bonus will adjust from zero at a threshold profit growth, up to 40% for a stretch profit growth. Challenging performance targets have been set such that maximum award would represent outperformance to current market expectations. The actual performance targets are not disclosed as they are considered to be commercially sensitive. Angus Thirlwell and Peter Harris have requested not to participate in the FY19 bonus scheme, in order to enable re-investment in entrepreneurial growth projects. LO N G -T E R M I N C E N T I V E P L A N Annual awards to Executive Directors under this plan are underpinned by financial performance measures. Angus Thirlwell and Peter Harris are not part of the Long-Term Incentive Plan. Matt Pritchard and Matt Margereson have been granted options under the Group’s Long-Term Incentive Plan. The proportion of the total option shares vesting is subject to testing against a performance condition, being the audited net profit after tax for the financial periods in question. The performance thresholds are not disclosed as they are considered to be commercially sensitive but represent outperformance to current market consensus. At the time of grant, achieving market consensus profit expectations for FY19 of £11.1m would lead to the vesting of 3% of the shares under option. Matt Pritchard Matt Margereson Performance condition Date of grant FY19 Profit after tax FY20 Profit after tax FY19 Profit after tax FY20 Profit after tax 04.05.16 16.03.17 04.05.16 16.03.17 Number of ordinary shares under option 800,000 200,000 800,000 200,000 Exercise price 148p 292p Exercise period 04.05.19–03.05.26 16.03.20–15.03.27 148p 04.05.19–03.05.26 292p 16.03.20–15.03.27 If you have any comments or questions on anything contained within this remuneration report, I will be available at the AGM. Greg Hodder Chair of the Remuneration Committee C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 40 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Directors’ repor t The Directors present their report together with the audited financial statements for the period ended 1 July 2018. The corporate governance statement on pages 32 to 35 also forms part of this Directors’ report. R E V I E W O F B U S I N E S S The Chairman’s statement on page 7 and the strategic report on pages 17 to 21 provide a review of the business, the Group’s trading for the period ended 1 July 2018, key performance indicators and an indication of future developments. R E S U LT A N D D I V I D E N D The Group has reported its Consolidated Financial Statements in accordance with International Financial Reporting Standards as adopted by the European Union. The Group’s results for the period are set out in the Consolidated Statement of Comprehensive Income on page 49. The Company has applied FRS 101: Reduced Disclosure Framework to the Company accounts for the period ended 1 July 2018. The Group’s revenue of £116.3m (FY17: £105.2m), gross margin of 68.4% (FY17: 67.9%) and profit after tax of £10.0m (FY17: 8.8m) represent a successful period for the business. The Group continued to strengthen its position. Reported IFRS 1 July 2018 2 July 2017 116.3 68.4% 10.0 105.2 67.9% 8.8 Period ended Revenue (£m) Gross margin % Profit after tax (£m) The Board is recommending a final dividend of 1.1 pence per share. D I R E C TO R S The Directors of the Group during the period were: Executive Angus Thirlwell Peter Harris Matt Pritchard Matt Margereson Non-executive Andrew Gerrie Sophie Tomkins (Independent) Greg Hodder (Independent) The names of the Directors, along with their brief biographical details are given on pages 30 and 31. D I R E C TO R S ’ I N T E R E S T S No Director has any beneficial interest in the share capital of any subsidiary undertaking. As at 1 July 2018, the Group owned 34.5% of a joint venture called Rabot 1745 Limited, in which Andrew Gerrie held 53.5%, with the balance being held by non-related parties. The Group also purchased and maintained throughout the financial period Directors’ and Officers’ liability insurance in respect of itself and its Directors. P O L I T I C A L D O N AT I O N S The Group made no political donations in the financial period. GOVERNANCE Directors’ repor t 41 G O I N G CO N C E R N AU D I TO R D I S C LO S U R E O F I N F O R M AT I O N TO AU D I TO R As far as the Directors are aware, there is no relevant audit information (that is, information needed by the Group’s auditor in connection with preparing their report) of which the Group’s auditor is unaware, and each Director has taken all reasonable steps that he or she ought to have taken as a Director in order to make himself or herself aware of any relevant audit information and to establish that the Group’s auditor is aware of that information. After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements. P O S T B A L A N C E S H E E T E V E N T S The Board considers that no material post balance sheet events occurred between the end of the period and the date of publication of this report. F I N A N C I A L I N S T RU M E N T S F U T U R E D E V E LO P M E N T S The financial risk management objectives of the Group, including credit risk, interest rate risk and foreign exchange risk, are provided in Note 31 to the Consolidated Financial Statements on pages 79 and 80. E X I S T E N C E O F B R A N C H E S The Group has two branches outside the United Kingdom. They are located in Denmark and the Republic of Ireland. S H A R E C A P I TA L S T RU C T U R E At 1 July 2018, the Company’s issued share capital was £112,838 divided into 112,837,828 ordinary shares of 0.1p each. The holders of ordinary shares are entitled to one vote per share at the general meetings of the Company. S H A R E O P T I O N S C H E M E S Details of employee share schemes are set out in Note 9 to the Consolidated Financial Statements. P U RC H A S E O F OW N S H A R E S There was no purchase of own shares in the period. The Board intends to continue to pursue the business strategy as outlined in the strategic report on pages 17 to 21. E M P LOY E E I N VO LV E M E N T P O L I C I E S The Directors believe that the involvement of employees is an important part of the business culture and contributes to the successes achieved to date (view our corporate social responsibility statement on page 28). E Q UA L O P P O RT U N I T I E S The Group is committed to eliminating discrimination and encouraging diversity. Its aim is that its people will be truly representative of all sections of society and that each person feels respected and is able to perform to the best of their ability. The Group aims for people to reflect the diverse customer base that it enjoys. The Group won’t make assumptions about a person’s ability to carry out their work, for example on their ethnic origin, gender, sexual orientation, marital status, religion or other philosophical beliefs, age or disability. Likewise it won’t make general assumptions about capabilities, characteristics and interests of particular groups that may influence the treatment of individuals, the assessment of their abilities and their access to opportunities for training, development and promotion. BDO LLP has expressed its willingness to continue in office as auditor and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting. A N N UA L G E N E R A L M E E T I N G The Annual General Meeting will be held on 29 November 2018. The ordinary business comprises receipt of the Directors’ report and audited financial statements for the period ended 1 July 2018, the re-election of Directors, approval of the final proposed dividend, the reappointment of BDO LLP as auditor and authorisation of the Directors to determine the auditor’s remuneration. Special resolutions are also proposed to authorise the Directors, to a limited extent consistent with Pre- Emption Group guidelines, to allot new shares, to disapply statutory pre-emption rights, and to make market purchases of the Company’s shares. The Notice of Annual General Meeting sets out the ordinary and special resolutions to be put to the meeting. A P P ROVA L This Directors’ report was approved on behalf of the Board on 25 September 2018. Matt Pritchard Chief Financial Officer C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 42 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Statement of Directors’ responsibilities The Directors are responsible for preparing the strategic report, the Annual Report and the financial statements in accordance with applicable law and regulations. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They 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. W E B S I T E P U B L I C AT I O N The Directors are responsible for ensuring the Annual Report and the financial statements are made available on a website. Financial statements are published on the Group’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Group’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein. Company law requires the Directors to prepare financial statements for each financial period. Under that law the Directors have elected to prepare the Group’s Consolidated Financial Statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union, and the Company Financial Statements in accordance with FRS 101: Reduced Disclosure Framework. 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 for that period. The Directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business. “ Our team culture is the essential ingredient” A N G U S T H I R LW E L L Chief Executive Officer GOVERNANCE 43 C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 44 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts FINANCIAL STATEMENTS 45 C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s Financial statements Independent Auditors’ report Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Cash Flow Consolidated Statement of Changes in Equity Notes to the financial statements Company Statement of Financial Position Company Statement of Changes in Equity Notes to the Company financial statements Company information 46 49 50 51 52 53 81 82 83 85 46 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Independent Auditors’ repor t to the members of Hotel Chocolat Group plc O P I N I O N B A S I S F O R O P I N I O N K E Y AU D I T M AT T E R S We have audited the financial statements of Hotel Chocolat Group plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) for the period ended 1 July 2018 which comprise the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of cash flow, the consolidated statement of changes in equity, the Company statement of financial position, the Company statement of cash flow, the Company statement of changes in equity and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent Company financial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 101 Reduced Disclosure Framework (United Kingdom Generally Accepted Accounting Practice). In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 1 July 2018 and of the Group’s profit for the period then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. CO N C LU S I O N S R E L AT I N G TO G O I N G CO N C E R N We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: • the Directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or • the Directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group’s or the Parent Company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. Key audit matters are those matters that, in our professional judgment, were of most significance in our 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) we identified, 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 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. Carrying value of inventory The accounting policy in Note 2 states that inventories are carried at the lower of cost or net realisable value. The costs of raw materials, consumables, work in progress and finished goods are determined using standard costing techniques. The cost of finished goods comprises direct production costs such as raw materials, consumables, utilities and labour, and production overheads such as employee costs, maintenance and indirect factory costs. Standard costs are reviewed regularly in order to ensure relevant measures of utilisation, production lead-time and appropriate levels of manufacturing expense are reflected in the standards. Net realisable value is calculated based on the revenue from sale in the normal course of business less any costs to sell. Due allowance is made for obsolete and slow moving items. The Group holds significant levels of inventory and determination of the cost of manufactured goods is considered to be a significant risk area due to the nature and complexity of the estimates involved, including determination and attribution of production costs to individual product lines. Furthermore, given the stock includes FINANCIAL STATEMENTS Independent Auditors’ Repor t 47 perishable items there is a risk over the net realisable value and sufficiency of provisions against slow moving items or items nearing their best before end date. We used profit before tax as a benchmark given the importance of profit as a measure for shareholders in assessing the performance of the Group. Our procedures to address this risk included substantively testing the consistency of application of the standard costing calculations to production runs across the period and challenging and substantively testing the Company’s determination and allocation of variances from standard to actual costs. In addition to the above, we have substantively tested a sample of line items against post year end sales prices to ensure the net realisable value is greater than recorded cost and substantively tested the level of inventory provisions at the period end by reviewing stock write offs in the period for indications of obsolescence, and considering slow moving items. O U R A P P L I C AT I O N O F M AT E R I A L I T Y The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality which, together with qualitative considerations, help us to determine the nature, timing and extent of our audit procedures on the individual financial statement areas and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. We determined materiality for the financial statements as a whole to be £633,000 (2017: £550,000) which represents 5% of profit before tax. We agreed with the Audit committee that we would report to them misstatements identified during our audit above £31,500 (2017: £27,500). We also agreed to report differences below these thresholds that, in our view, warranted reporting on qualitative grounds. Performance materiality is the application of materiality at the individual account or balance level set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. Performance materiality was set at £474,750 (2017: £412,500) which represents 75% (2017: 75%) of the above materiality levels. Whilst materiality for the financial statements of a whole was £633,000, each component of the Group was audited to a lower level of materiality. Component materiality ranged from £4,000 to £580,000. Materiality in respect of the audit of the Parent Company has been set at £360,000 (2017: £312,000) using a benchmark of 2% of gross assets. We consider gross assets to be the most appropriate measure for the basis of materiality as the Parent Company is a holding company of various subsidiaries of the group. OV E RV I E W O F T H E S CO P E O F O U R AU D I T The group consists of trading entities incorporated in three jurisdictions; the UK, Rest of Europe and St Lucia. Statutory audits are required for the UK entities and these are carried out by the Group audit team. The entities in the Rest of Europe and St Lucia are not a significant part of the Group, and so procedures are carried out by the Group audit team on a number of judgemental areas including the Group audit risk areas applicable to those components. The Group audit team obtained an understanding of the internal control environment related to the financial reporting process and assessed the appropriateness, completeness and accuracy of Group journals and other adjustments performed on consolidation. OT H E R I N F O R M AT I O N The directors are responsible for the other information. The other information comprises the information included in the annual report other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion 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 such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in 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 in this regard. O P I N I O N S O N OT H E R M AT T E R S P R E S C R I B E D BY T H E CO M PA N I E S AC T 2 0 0 6 In our opinion, based on the work undertaken in the course of the audit: • the information given in the strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements. C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 48 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Independent Auditors’ repor t continued to the members of Hotel Chocolat Group plc M AT T E R S O N W H I C H W E A R E R E Q U I R E D TO R E P O RT BY E XC E P T I O N In the light of the knowledge and understanding of the Group and the Parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the Directors’ report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or • the Parent Company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. R E S P O N S I B I L I T I E S O F D I R E C TO R S As explained more fully in the Directors’ responsibilities statement (set out on page 42), the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors 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 Parent 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 Parent Company or to cease operations, or have no realistic alternative but to do so. AU D I TO R’ S R E S P O N S I B I L I T I E S F O R T H E AU D I T O F T H E F I N A N C I A L S TAT E M E N T S 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 auditor’s 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 Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. U S E O F O U R R E P O RT This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Mark RA Edwards Senior Statutory Auditor For and on behalf of BDO LLP, Statutory Auditor London 25 September 2018 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). FINANCIAL STATEMENTS Consolidated Statement of Comprehensive Income 49 Consolidated Statement of Comprehensive Income For the period ended 1 July 2018 Revenue Cost of sales Administrative expenses Finance income Finance expenses Share of joint venture profit/(loss) Profit before tax Tax expense Profit for the period Other comprehensive (loss)/income: Derivative financial instruments Deferred tax charge on derivative financial instruments Currency translation differences arising from consolidation Total other comprehensive (loss)/income for the period Total comprehensive income for the period Earnings per share – Basic Earnings per share – Diluted 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ Notes 4 5 10 10 11 12 17 16 13 13 116,331,566 (36,740,859) 79,590,707 (66,360,796) 13,229,911 22,113 (578,760) 35,501 105,240,130 (33,757,943) 71,482,187 (59,554,041) 11,928,146 3,230 (725,865) (300) 12,708,765 11,205,211 (2,729,123) 9,979,642 (2,441,362) 8,763,849 (106,001) 20,561 (168,661) (254,101) 9,725,541 8.8p 8.8p (316,658) 64,039 696,095 443,476 9,207,325 7.8p 7.8p C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 50 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Consolidated Statement of Financial Position As at 1 July 2018 ASSETS Non-current assets Intangible assets Property, plant and equipment Deferred tax asset Derivative financial assets Prepayments Investment in JV Current assets Derivative financial assets Inventories Trade and other receivables Cash and cash equivalents Total assets LIABILITIES Current liabilities Trade and other payables Corporation tax payable Derivative financial liabilities Borrowings Non-current liabilities Other payables and accruals Derivative financial liabilities Borrowings Provisions Total liabilities NET ASSETS EQUITY Share capital Share premium Retained earnings Translation reserve Merger reserve Capital redemption reserve Other reserves Total equity attributable to shareholders Notes As at 1 July 2018 £ As at 2 July 2017 £ 14 15 16 17 19 11 17 18 19 21 22 17 23 22 17 23 24 25 26 26 26 26 26 2,788,152 36,408,775 623,961 68,721 1,643 35,501 39,926,753 14,925 12,555,517 7,486,894 235,936 20,293,272 60,220,025 15,545,845 1,328,673 54,691 201,732 17,130,941 2,581,044 – 16,811 879,808 3,477,663 20,608,604 2,338,041 31,397,582 213,819 – 7,250 – 33,956,692 306,526 9,878,122 6,020,954 8,470,178 24,675,780 58,632,472 16,632,717 1,104,746 137,480 3,371,444 21,246,387 1,934,057 33,970 3,504,544 750,629 6,223,200 27,469,587 39,611,421 31,162,885 112,838 11,749,487 24,348,409 880,560 223,251 6,301 2,290,575 39,611,421 112,838 11,749,487 16,851,199 1,049,221 223,251 6,301 1,170,588 31,162,885 The financial statements of Hotel Chocolat Group plc, registered number 08612206 were approved by the Board of Directors and authorised for issue on 25 September 2018. They were signed on its behalf by: Matt Pritchard Chief Financial Officer 25 September 2018 FINANCIAL STATEMENTS Consolidated Statement of Cash Flow 51 Consolidated Statement of Cash Flow For the period ended 1 July 2018 Profit before tax for the period Adjusted by: Depreciation of property, plant and equipment Impairment loss on fixtures and equipment Amortisation of intangible assets Net interest expense Share-based payments (Profit)/loss on disposal of property, plant and equipment 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ Notes 12,708,765 11,205,211 15 15 14 10 9 5 4,247,550 3,302,776 284,681 509,892 556,647 726,585 (88,253) – 442,071 722,635 562,256 111,880 Operating cash flows before movements in working capital 18,945,867 16,346,829 Increase in inventories Increase in trade and other receivables Increase in trade and other payables and provisions Cash inflow generated from operations Interest received Income tax paid Interest paid on: – finance leases and hire purchase loans – bank loans and overdraft – derivative financial liabilities Cash flows from operating activities Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Purchase of intangible assets Cash flows used in investing activities Dividends paid Buy back of Chocolate bonds Capital element of hire purchase and finance leases repaid Cash flows used in financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Foreign currency movements Cash and cash equivalents at end of period (2,931,781) (1,460,333) 277,219 14,830,972 22,113 (2,466,051) (1,192) (28,802) (147,747) (3,438,589) (485,906) 905,022 13,327,356 3,230 (1,831,913) (14,306) (248,232) (181,134) 12,209,293 11,055,001 (10,645,621) 340,737 (949,229) (11,254,113) (2,482,432) (6,505,500) (237,195) (9,225,127) (8,269,946) 8,470,178 35,704 235,936 (7,505,141) 14,210 (893,296) (8,384,227) – (217,500) (610,465) (827,965) 1,842,809 6,475,446 151,923 8,470,178 21 21 C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 52 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Consolidated Statement of Changes in Equity For the period ended 1 July 2018 Share capital £ Share premium £ Retained earnings £ Translation reserve £ Merger reserve £ Capital redemption reserve £ Other reserves £ Total £ As at 26 June 2016 112,838 11,749,487 8,087,350 353,126 223,251 6,301 532,155 21,064,508 Profit for the period Share-based payments Deferred tax charge on share based payments Other comprehensive income: Derivative financial instruments Deferred tax charge on derivative financial instruments Currency translation differences arising from consolidation – – – – – – – – – – – – 8,763,849 – – – – – – – – – – 696,095 – – – – – – – – – – 8,763,849 562,256 562,256 328,796 328,796 – (316,658) (316,658) – – 64,039 64,039 – 696,095 Equity as at 2 July 2017 112,838 11,749,487 16,851,199 1,049,221 223,251 6,301 1,170,588 31,162,885 Profit for the period Dividends Share-based payments Deferred tax charge on share based payments Other comprehensive income: Derivative financial instruments Deferred tax charge on derivative financial instruments Currency translation differences arising from consolidation – – – – – – – – 9,979,642 – (2,482,432) – – – – – – – – – – – – – – – – (168,661) – – – – – – – – – – – – 9,979,642 – (2,482,432) 726,585 726,585 478,842 478,842 – (106,001) (106,001) – – 20,561 20,561 – (168,661) Equity as at 1 July 2018 112,838 11,749,487 24,348,409 880,560 223,251 6,301 2,290,575 39,611,421 FINANCIAL STATEMENTS Notes to the f inancial statements 53 Notes to the f inancial statements For the period ended 1 July 2018 1. G E N E R A L I N F O R M AT I O N Hotel Chocolat Group plc (the Company, and together with its subsidiaries, the Group) is a company incorporated in the United Kingdom under the Companies Act. The registered office of the Company is Mint House, Newark Close, Royston, Hertfordshire, SG8 5HL, United Kingdom. The registered company number is 08612206. A list of all of the Company’s subsidiaries is presented in Note 20. The Group’s principal activities are that of the manufacture and retail of chocolate in the United Kingdom and overseas. 2 . ACCO U N T I N G P O L I C I E S The principal accounting policies applied in the preparation of the consolidated financial information are set out below. These policies have been consistently applied to all periods presented, unless otherwise stated. Basis of preparation The consolidated financial information has been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRSs), as adopted by the European Union. The financial statements have been prepared on the historical cost basis, except for the revaluation of derivative financial instruments that are measured at fair values at the end of each reporting period, as explained in the accounting policies below. At the date of authorisation of this financial information, certain new standards, amendments and interpretations to existing standards applicable to the Group have been published but are not yet effective, and have not been adopted early by the Group. These are listed below: Standard/interpretation Content IFRS 9 Financial Instruments (2014) and amendment IFRS 9 ‘Financial instruments’ is a replacement for IAS 39 ‘Financial instruments’ and will be effective for the period ending 30 June 2019 onwards. IFRS 9 introduces: IFRS 15 Revenue from Contracts with Customers IFRS 16 Leases • new requirements for the classification and measurements of financial assets and financial liabilities, • a new model for recognising provisions based on credit losses, and • simplified hedge accounting by aligning hedge accounting more closely with an entity’s risk management methodology. The impact of the adoption of the Standard has not yet been completed, however it is expected that the adoption will not have a material impact. IFRS 15 ‘Revenue from contracts with customers’ is a replacement for IAS 18 ‘Revenues’ and will be effective for the period ending 30 June 2019 onwards. IFRS 15 introduces a five-step approach to revenue recognition based on performance obligations in customer contracts. The impact of the adoption of the Standard has not yet been completed, however it is expected that the adoption will not have a material impact. IFRS 16 ‘Leases’ is a replacement for IAS 17 ‘Leases’ and will be effective for the period ending 28 June 2020 onwards. IFRS 16 requires lessees to recognise a lease liability reflecting future lease payments and a right-of-use asset for lease contracts. The Group is currently assessing the impact of IFRS 16 on its existing lease portfolio and it is expected to impact the majority of their operating lease commitments. This includes a significant impact on the balance sheet, as both assets and liabilities will increase, and it is also expected to have a significant impact on key components on the income statement, such as depreciation on the right-of-use asset and interest recognised on the lease liability. This will result in a change to the profile of the income statement over the life of the lease and will consequently impact profit before tax. There will be no impact on cashflows, although the presentation of the cash flow statement will change significantly. Management has begun to review and quantify the expected impact using the current lease portfolio. However, it is not possible to provide an accurate assessment of the further effect of this standard until a detailed review has been completed on a lease by lease basis. The impact of this will also depend upon the facts and circumstances as at the time of adoption and the transition choices adopted. The Group’s current operating lease commitments as at 1 July 2018 under the current leasing standard are disclosed in Note 27. The impact of the adoption of the Standards listed above, have not yet been assessed. C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 54 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Notes to the f inancial statements continued For the period ended 1 July 2018 2 . ACCO U N T I N G P O L I C I E S C O N T I N U E D Basis of consolidation The consolidated financial information incorporates the financial statements of the Group and all of its subsidiary undertakings. The financial statements of all Group companies are adjusted, where necessary, to ensure the use of consistent accounting policies. Acquisitions are accounted for under the acquisition method from the date control passes to the Group. On acquisition, the assets and liabilities of a subsidiary are measured at their fair values. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. As allowed under IFRS 1, any acquisitions or group reorganisations which occurred before the transition date to IFRS have not been restated but instead the previous accounting treatment has been adopted. During the period ended 29 June 2014, Hotel Chocolat Group Limited (now plc) was incorporated and undertook a share for share exchange with the direct subsidiaries listed in Note 20 excluding Hotel Chocolat (St Lucia) Holdings Limited. This has been accounted for under the basis of merger accounting given that the ultimate ownership before and after the transaction remained the same. Merged subsidiaries undertakings are treated as if they had always been a member of the Group. Any difference between the nominal value of the shares acquired by the Company and those issued by the Company to acquire them is taken to the merger reserve. Going concern The Directors have prepared a cash flow forecast covering a period extending beyond 18 months from the financial information presented as at 1 July 2018. The Directors have taken into account the historic positive cash flows, growth in business and the inherent risks and uncertainties facing the business, and have derived forecast assumptions that are the Directors’ best estimate of the future development of the business. The forecasts and projections, which take into account the projected trading performance of companies within the Group’s combined bank facilities, show that the Group will be able to operate within the level of its current facilities. On this basis, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis of accounting in preparing the consolidated financial information. Revenue recognition Revenue is the total amount receivable by the Group for goods and services supplied, excluding VAT and trade discounts. Revenue arising from the sale of goods and services is recognised when the goods have been despatched or services delivered. Revenue is recognised when the amount of revenue can be reliably measured and it is probable that the future economic benefit will flow to the entity. Operating profit Operating profit is stated after all expenses, but before finance income or expenses. Foreign currency translation The Group’s consolidated financial information is presented in sterling, which is also the parent company’s functional currency. a) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions are recognised in the Consolidated Statement of Comprehensive Income. Foreign exchange gains and losses resulting from the translation of monetary assets and liabilities denominated in foreign currencies at the reporting period end exchange rates are also recognised in the Consolidated Statement of Comprehensive Income. FINANCIAL STATEMENTS Notes to the f inancial statements 55 2 . ACCO U N T I N G P O L I C I E S C O N T I N U E D b) Group companies The results and financial position of Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities at each period end are translated at the prevailing closing rate at the date of the Consolidated Statement of Financial Position; • income and expenses for each period within the Consolidated Statement of Comprehensive Income are translated at the rate of exchange at the transaction date. Where this is not possible, the average rate for the period is used; and • on consolidation, exchange differences arising from the translation of the net investment in foreign entities are recognised in other comprehensive income and accumulated in the translation reserve as a separate component of equity. Employee benefits (i) Short-term benefits Wages, salaries, paid annual leave and sick leave, bonuses and non-monetary benefits are accrued in the period in which the associated services are rendered by employees of the Group. (ii) Defined contribution plans The Group operates a defined contribution pension scheme for employees. The assets of the scheme are held separately from those of the Group. The annual contributions payable are charged to the Consolidated Statement of Comprehensive Income. The Group also contributes to the personal pension plans of some Directors at the Group’s discretion. Share-based payments A transaction is accounted for as a share-based payment where the Group receives services from employees, Directors or third parties and pays for these in shares or similar equity instruments. The Group makes equity-settled share-based payments to certain employees and Directors. Equity-settled share-based schemes are measured at fair value (excluding the effect of non-market-based vesting conditions) at the date of grant, measured by use of an appropriate valuation model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the period services are received, based on the Group’s estimate of shares that will eventually vest. Share options are forfeited when an employee ceases to be employed by the Group unless determined to be a ‘Good Leaver’. A ‘Good Leaver’ is a participant who ceases employment by reason of death, injury, ill-health or disability. The Company is not liable for employer’s National Insurance on the difference between the market value at date of exercise and exercise price and therefore this expense is not accrued for. Leases Operating leases Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Rentals applicable to operating leases are charged against profits on a straight line basis over the period of the lease. Onerous lease provisions relate to the present value of the obligation under a lease where the unavoidable costs of the lease exceed the economic benefit expected to be received from it. Dilapidation provisions relate to potential rectification costs expected should the Group vacate its head office, distribution site or retail locations. Hire purchase agreements and finance leases Leases where the lessee retains substantially all the risks and benefits of ownership of the asset are classified as finance leases. Assets held under hire purchase agreements and finance leases are capitalised and disclosed under property, plant and equipment at cost. The capital element of the future payments is treated as a liability and the interest element is charged to the Consolidated Statement of Comprehensive Income on a straight line basis. C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 56 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Notes to the f inancial statements continued For the period ended 1 July 2018 2 . ACCO U N T I N G P O L I C I E S C O N T I N U E D Property, plant and equipment Property, plant and equipment is stated at historic cost, including expenditure that is directly attributable to the acquired item, less accumulated depreciation and impairment losses. Management estimates that the useful life of assets is as follows: Leasehold property Plant and machinery Fixtures, fittings, equipment and hardware Freehold property – Over the remaining lease term – 5 to 10 years on a straight line basis – 5 to 10 years on a straight line basis – 50 years on a straight line basis Land held by the Group is not depreciated. The carrying value of the property, plant and equipment is compared to the higher of value in use and the fair value less costs to sell on an annual basis. If the carrying value exceeds the higher of the value in use and fair value less the costs to sell the asset then the asset is impaired and its value reduced by recognising an impairment provision. Intangible assets Goodwill arising on the acquisition of a subsidiary undertaking is the difference between the fair value of the consideration paid and the fair value of the assets and liabilities acquired. Positive goodwill is capitalised. Impairment tests on the carrying value of goodwill are undertaken: • at the end of the first full financial period following acquisition and at the end of every subsequent financial period; and • in other periods if events or changes in circumstances indicate that the carrying value may not be recoverable. Website development costs where Group companies’ websites are expected to generate future revenues in excess of the costs of developing those websites, together with expenditure on the functionality of the website is capitalised and treated as an intangible asset. Expenditure incurred on maintaining websites and expenditure incurred on developing websites used only for advertising and promotional purposes is written off as incurred. Management estimates that the useful life of assets is as follows: Software Website development costs Inventories – 3 to 5 years on a straight line basis – 3 to 5 years on a straight line basis Inventories are carried at the lower of cost or net realisable value. The costs of raw materials, consumables, work in progress and finished goods are measured by means of weighted average cost using standard costing techniques. The cost of finished goods comprises direct production costs such as raw materials, consumables, utilities and labour, and production overheads such as employee costs, maintenance and indirect factory costs. Standard costs are reviewed regularly in order to ensure relevant measures of utilisation, production lead-time and appropriate levels of manufacturing expense are reflected in the standards. Net realisable value is calculated based on the revenue from sale in the normal course of business less any costs to sell. Due allowance is made for obsolete and slow moving items. Interest in other entities The Group’s joint ventures are entities over which the Group shares joint control and has an interest in the net assets of the entity. The Group applies equity accounting for joint ventures. FINANCIAL STATEMENTS Notes to the f inancial statements 57 2 . ACCO U N T I N G P O L I C I E S C O N T I N U E D Impairment (i) Impairment of financial assets All financial assets (other than those categorised at fair value charged through the Consolidated Statement of Comprehensive Income), are assessed at the end of each reporting period as to whether there is any objective evidence of impairment as a result of one or more events having an impact on the estimated future cash flows of the asset. An impairment loss in respect of loans and receivables financial assets is recognised in the Consolidated Statement of Comprehensive Income and is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate. In a subsequent period, if the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through the Consolidated Statement of Comprehensive Income to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. (ii) Impairment of non-financial assets Impairment tests on goodwill are undertaken at each reporting period. The carrying values of both tangible and intangible assets are reviewed at the end of each reporting period for impairment when there is an indication that the assets might be impaired. Impairment is measured by comparing the carrying values of the assets with their recoverable amounts. The recoverable amount of the assets is the higher of the assets’ fair value less costs to sell and their value in use, which is measured by reference to discounted future cash flow. An impairment loss is recognised in the Consolidated Statement of Comprehensive Income immediately. In respect of assets other than goodwill, and when there is a change in the estimates used to determine the recoverable amount, a subsequent increase in the recoverable amount of an asset is treated as a reversal of the previous impairment loss and is recognised to the extent of the carrying amount of the asset that would have been determined (net of amortisation and depreciation) had no impairment loss been recognised. The reversal is recognised in the Consolidated Statement of Comprehensive Income immediately. Deferred taxation Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the Consolidated Statement of Financial Position 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 or taxable profit; and • investments in subsidiaries 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 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 balance sheet date and are expected to apply when the deferred tax liabilities or assets are settled or recovered. Deferred tax balances are not discounted. 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 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 and liabilities are expected to be settled or recovered. C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 58 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Notes to the f inancial statements continued For the period ended 1 July 2018 2 . ACCO U N T I N G P O L I C I E S C O N T I N U E D Operating segments Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker has been identified as the management team including the Chief Executive Officer and Chief Financial Officer. The Board considers that the Group’s activity constitutes one operating and one reporting segment, as defined under IFRS 8. The total profit measures are operating profit and profit for the period, both disclosed on the face of the Consolidated Statement of Comprehensive Income. No differences exist between the basis of preparation of the performance measures used by management and the figures in the Group financial information. Cash and cash equivalents Cash and cash equivalents include cash in hand and deposits held on call, together with other short-term highly liquid investments which are not subject to significant changes in value and have original maturities of less than three months. The Group’s bank facilities are provided under a group facility. Equity Equity comprises the following: • Share capital: the nominal value of equity shares • Share premium • Retained earnings • Translation reserve • Merger reserve • Capital redemption reserve • Other reserves Chocolate Bonds The Chocolate Tasting Club plc, a subsidiary of the Group, has issued two chocolate bonds which pay a return in boxes of luxury chocolates or, for one of the bonds, a Hotel Chocolat gift card. For the bonds with a return in the form of boxes of luxury chocolates, the coupon is fixed by number of boxes and can only be settled by the delivery of chocolate. At inception, the net cash proceeds received for these bonds were recognised as a liability. Each year, the cost value of the chocolates is recognised as an interest expense. For the bond with a return paid by the way of a Hotel Chocolat gift card which is redeemable for any of Hotel Chocolat’s goods or services, there is a fixed rate of interest. At inception, the net cash proceeds received for these bonds were recognised as a liability. Each year the fixed interest rate paid is recognised as an interest expense. The appropriate treatment in accordance with IFRS, would be to allocate a portion of the consideration received at date of bond issuance to deferred revenue, recognising revenue and cost of sales when the chocolate is delivered, and initially recognise the remaining balance as a financial liability at its fair value (i.e. at a discount to its par value given that no cash interest is paid). As with other financial liabilities measured at amortised cost, the effective interest rate would be calculated on this latter component and an interest expense recognised as it accretes over time up to its par value and the bond is redeemed. The difference between this treatment and the Group’s simplified approach has been assessed and is not material. FINANCIAL STATEMENTS Notes to the f inancial statements 59 2 . ACCO U N T I N G P O L I C I E S C O N T I N U E D Financial instruments Financial instruments are classified according to the substance of the contractual arrangements into which the Group enters. An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all of its financial liabilities. Financial assets On initial recognition, financial assets are classified as either financial assets at fair value through income statement, held-to-maturity investments, loans and receivables financial assets, or available-for-sale financial assets, as appropriate. The classification depends on the purpose for which the financial assets were acquired. Trade receivables and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables financial assets. Loans and receivables financial assets are measured at amortised cost using the effective interest method, less any impairment loss. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. Fair value through the income statement category comprises financial assets that are either held for trading or are designated to eliminate or significantly reduce a measurement or recognition inconsistency that would otherwise arise. Derivatives are also classified as held for trading unless they are designated as hedges. Foreign currency forward contracts were designated as hedges and are included in the Group’s financial statements at fair value with the changes in fair value recognised in the Consolidated Statement of Comprehensive Income. Financial liabilities Financial liabilities are recognised when, and only when, the Group becomes a party to the contractual provisions of the financial instrument. All financial liabilities excluding chocolate bonds are recognised initially at fair value plus directly attributable transaction costs and subsequently measured at amortised cost using the effective interest method other than those categorised as fair value through income statement. Fair value through the income statement category comprises financial liabilities that are either held for trading or are designated to eliminate or significantly reduce a measurement or recognition inconsistency that would otherwise arise. Derivatives are also classified as held for trading unless they are designated as hedges. Foreign currency forward contracts were designated as hedges and are included in the Group’s financial statements at fair value with the changes in fair value recognised in the Consolidated Statement of Comprehensive Income. A financial liability is de-recognised when the obligation under the liability is discharged, cancelled or expires. When an existing financial liability is replaced by another from the same party on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement. Hedge accounting Hedge accounting is applied to financial assets and financial liabilities only where all of the following criteria are met: • At the inception of the hedge there is formal designation and documentation of the hedging relationship and the Group’s risk management objective and strategy for undertaking the hedge. • For cash flow hedges, the hedged item in a forecast transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect profit or loss. • The cumulative change in the fair value of the hedging instrument is expected to be between 80–125% of the cumulative change in the fair value or cash flows of the hedged item attributable to the risk hedged (i.e. it is expected to be highly effective). • The effectiveness of the hedge can be reliably measured. • The hedge remains highly effective on each date tested. Effectiveness is tested at each reporting date. C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 60 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Notes to the f inancial statements continued For the period ended 1 July 2018 2 . ACCO U N T I N G P O L I C I E S C O N T I N U E D Cash flow hedges The effective part of forward contracts designated as a hedge of the variability in cash flows of foreign currency risk arising from firm commitments, and highly probable forecast transactions, are measured at fair value with changes in fair value recognised in other comprehensive income and accumulated in the hedging reserve, within other reserves. The Group uses such contracts to fix the cost of foreign currency transactions in the functional currency of the Group entity concerned. If a highly probable forecast transaction results in the recognition of a non-monetary asset, the cumulative loss/(gain) is added to/ (subtracted from) the cost of the asset acquired (“basis adjustment”). Otherwise the cumulative gain or loss recognised in other comprehensive income is reclassified from the hedging reserve to profit or loss at the same time as the hedged transaction affects profit or loss. The two transactions are recognised in the same line item. If a forecast transaction is no longer considered highly probable but the forecast transaction is still expected to occur, the cumulative gain or loss recognised in other comprehensive income is frozen and recognised in profit or loss in accordance with the policy set out in the paragraph above. Subsequent changes in the fair value of the derivative are recognised in profit or loss. If the Group closes out its position before the transaction takes place (even though it is still expected to take place) the cumulative gain or loss on changes in fair value of the derivative is similarly recognised in accordance with the policy set out in the paragraph above. If, at any point, the hedged transaction is no longer expected to occur, the cumulative gain or loss is reclassified from the hedging reserve to profit or loss immediately. Equity instruments Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from proceeds within share premium. Dividends on ordinary shares are recognised as liabilities when approved for distribution. 3 . S U M M A RY O F C R I T I C A L ACCO U N T I N G E S T I M AT E S A N D J U D G E M E N T S The preparation of financial information in conformity with IFRS requires the use of certain critical accounting estimates. It also requires the Directors to exercise their judgement in the process of applying the accounting policies which are detailed above. These judgements are continually evaluated by the Directors and management and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The key estimates and underlying assumptions concerning the future and other key sources of estimation uncertainty at the statement of financial position date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The estimates which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are discussed below: • Useful lives of depreciable assets Management reviews the useful lives of depreciable assets at each reporting date to ensure that the useful lives represent a reasonable estimate of likely period of benefit to the Group. Actual useful lives however, may vary due to unforeseen events. FINANCIAL STATEMENTS Notes to the f inancial statements 61 4 . R E V E N U E Sale of goods and services Total revenue Segmental analysis 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 116,331,566 116,331,566 105,240,130 105,240,130 The Group operates in three main geographic areas: UK, Europe and Rest of World. The Board of Directors monitors revenue on this basis. Revenue for each of the geographical areas is as follows: Revenue by location United Kingdom Europe Rest of World Total revenue 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 112,177,419 2,316,328 1,837,819 116,331,566 101,253,605 2,060,937 1,925,588 105,240,130 Non-current assets held in the Rest of World amount to £10,314,200 in the period ended 1 July 2018 (2 July 2017: £10,185,564). 5 . P RO F I T F RO M O P E R AT I O N S Profit from operations is arrived at after charging/(crediting): Staff cost (see Note 7) Depreciation of property, plant and equipment (see Note 15) Impairment of property, plant and equipment (see Note 15) Amortisation of intangible assets (see Note 14) (Profit)/Loss on disposal of property, plant and equipment Operating leases: – Property – Plant and equipment Exchange differences Bad debt expense 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 30,658,433 4,247,550 284,681 509,892 (88,253) 10,582,822 148,949 106,760 57,940 28,310,135 3,302,776 – 442,071 111,880 9,260,982 176,831 249,567 58,782 C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 62 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Notes to the f inancial statements continued For the period ended 1 July 2018 6 . AU D I T A N D N O N - AU D I T F E E S An analysis of auditors’ remuneration is as follows: Audit fees Audit related assurance services Taxation compliance services Other taxation advisory services Non-audit fees 7. S TA F F CO S T S 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 115,000 10,000 25,652 17,688 53,340 94,150 10,340 120,031 7,440 137,811 The average number of employees (including Directors) during the period was made up as follows: Production staff Administrative staff Total The cost of employees (including Directors) during the period was made up as follows: Wages and salaries Share-based payments Social security costs Pension costs Total 52 weeks ended 1 July 2018 53 weeks ended 2 July 2017 242 1,006 1,248 235 823 1,058 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 27,433,753 726,585 2,209,489 288,606 30,658,433 25,404,249 562,256 2,153,230 190,400 28,310,135 8 . R E M U N E R AT I O N O F K E Y M A N AG E M E N T P E R S O N N E L Key management personnel represent those personnel which hold a statutory directorship of a company within the Group. Directors’ remuneration and benefits include: Short-term employee benefits Share-based payments Social security costs Post-employment benefits Total 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 1,114,577 344,984 185,258 17,000 1,661,819 1,279,278 277,685 168,481 14,054 1,739,498 Further information about the remuneration of individual Directors, including the highest paid Director, is provided in the Remuneration report on pages 38 and 39. FINANCIAL STATEMENTS Notes to the f inancial statements 63 9. S H A R E - B A S E D PAY M E N T S The Hotel Chocolat Group plc Long-Term Incentive Plan Under the Hotel Chocolat Group plc Long-Term Incentive Plan, the Group gives awards to Directors and staff subject to the achievement of a pre-agreed net profit figure for the financial year of the Group, three financial years subsequent to the date of the award. These shares vest after the delivery of the audited net profit figure for the relevant financial year has been announced. Awards are forfeited if the employee leaves the Group before the awards vest, except under circumstances where the employee is considered a ‘Good Leaver’. Details of the share awards outstanding are as follows: 52 weeks ended 1 July 2018 53 weeks ended 2 July 2017 Number of share options Weighted average exercise price £ Number of share options Weighted average exercise price £ Outstanding at beginning of the period 3,692,000 Granted during the period Exercised during the period Forfeited during the period Outstanding at the end of the period – – (35,000) 3,657,000 Exercisable at the end of the period – 1.83 – – 2.92 1.82 – 2,972,000 890,000 – (170,000) 3,692,000 – 1.48 2.92 – 1.48 1.83 – The awards outstanding at the end of 1 July 2018 have a weighted average remaining contractual life of 1.48 years (2 July 2017: 2.41 years), a weighted average exercise price of £1.82 (2 July 2017: £1.83) and a range of exercise prices between £1.48 and £2.92. The Group recognised total expenses related to the above equity-settled share-based payment transactions in the form of options during the period ended 1 July 2018 of £559,149 (2 July 2017: £430,032). There were no options granted during the period ended 1 July 2018 (2 July 2017: the aggregate fair value of options granted was £714,670). The fair values were calculated using a Black Scholes model. The inputs used for fair valuing awards granted during the period were as follows: Weighted average share price (£) Exercise price (£) Expected volatility (%) Option life (years) Risk free interest rate (%) 52 weeks ended 1 July 2018 53 weeks ended 2 July 2017 – – – – – 2.92 2.92 32.0% 10.0 0.6% In the absence of any historical volatility data for Hotel Chocolat Group plc, the expected volatility was determined by reviewing the volatility of the share price of similar entities which are currently traded on AIM. C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 64 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Notes to the f inancial statements continued For the period ended 1 July 2018 9. S H A R E - B A S E D PAY M E N T S C O N T I N U E D The Hotel Chocolat Group plc Save As You Earn Plan Under the Hotel Chocolat Group plc Save As You Earn Plan, all employees of the Group who have been employed for a minimum period set by the Remuneration Committee are eligible to join. In order to participate in the scheme, employees must make a regular monthly contribution up to an agreed maximum, for a three-year period, after which time employees can utilise the lump sum to purchase Ordinary Shares in the Group, at a pre-agreed price. The option to purchase shares is forfeited if the employee leaves the Group before the awards vest, except under circumstances where the employee is considered a ‘Good Leaver’. Details of the share awards outstanding are as follows: 52 weeks ended 1 July 2018 53 weeks ended 2 July 2017 Number of share options Weighted average exercise price £ Number of share options Weighted average exercise price £ Outstanding at beginning of the period Granted during the period Exercised during the period Forfeited during the period Outstanding at the end of the period Exercisable at the end of the period 553,165 136,863 – (64,891) 625,137 – 1.48 2.47 – 1.65 1.68 – – 621,622 – (68,457) 553,165 – – 1.48 – 1.48 1.48 – The awards outstanding at the end of 1 July 2018 have a weighted average remaining contractual life of 1.45 years (2 July 2017: 2.17 years) and a weighted average exercise price of £1.68 (2 July 2017: £1.48). The Group recognised total expenses related to the above equity-settled share-based payment transactions in the form of the employee share plan during the period ended 1 July 2018 of £167,436 (2 July 2017: £132,224). The aggregate of the fair value of these shares granted during the period ended 1 July 2018 was £170,805 (2 July 2017: £499,784). The fair values were calculated using a Black Scholes model. The inputs used for fair valuing awards granted during the period were as follows: Weighted average share price (£) Exercise price (£) Expected volatility (%) Option life (years) Risk free interest rate (%) 52 weeks ended 1 July 2018 53 weeks ended 2 July 2017 2.47 2.47 32.0% 3.5 0.6% 1.48 1.48 32.0% 3.5 0.2% In the absence of any historical volatility data for Hotel Chocolat Group plc, the expected volatility was determined by reviewing the volatility of the share price of similar entities which are currently traded on AIM. FINANCIAL STATEMENTS Notes to the f inancial statements 65 10 . F I N A N C E I N CO M E A N D E X P E N S E S Interest on bank deposits Finance income Interest on bank borrowings Unrealised interest on derivative financial instruments Realised interest on derivative financial instruments Finance leases and hire purchase contracts Finance charges on Chocolate bonds Finance expenses 11. I N V E S T M E N T S I N J O I N T V E N T U R E S 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 22,113 22,113 92,373 121 147,747 1,192 337,327 578,760 3,230 3,230 253,430 130,252 65,779 14,306 262,098 725,865 During the period ended 1 July 2018, Hotel Chocolat Group plc increased its ownership of its joint venture, Rabot 1745 Limited, from 30% to 34.5%. The Group recognised a profit from its share in this joint venture of £35,501 (2 July 2017: £300 loss). Detail of Rabot 1745 Limited are as follows: Country of Incorporation: England. Registered address: 2nd Floor Heathmans House, 19 Heathmans Road, London, SW6 4TJ. Principal Activity: Sale of beauty products. 12 . TA X AT I O N UK corporation tax Adjustment in respect of previous periods Overseas corporation tax Total current tax charge Deferred tax: Adjustment in respect of previous periods Origination and reversal of timing differences Total tax expense 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 2,695,564 (85,126) 29,406 2,639,844 10,273 79,006 2,729,123 2,395,714 (70,695) 16,316 2,341,335 31,620 68,407 2,441,362 C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 66 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Notes to the f inancial statements continued For the period ended 1 July 2018 12 . TA X AT I O N C O N T I N U E D Factors affecting current tax charge: The tax assessed on the profit for the period is different to the standard rate of corporation tax in the UK. The differences are explained below: Profit on ordinary operations before income tax Weighted average standard rate of corporation tax Profit for the year multiplied by the standard rate of corporation tax Effects of: Expenses not deductible for tax purposes Permanent depreciation Adjustment in respect of prior years Adjust closing deferred tax in respect of change in future rate of taxation Adjust opening deferred tax in respect of change in future rate of taxation Movement (from)/to unrecognised deferred tax Overseas tax Tax expense 52 weeks ended 1 July 2018 £ 12,708,765 19.00% 2,414,665 53 weeks ended 2 July 2017 £ 11,205,211 19.75% 2,213,029 68,077 246,908 (74,853) (9,105) 2,499 45,197 35,735 2,729,123 93,539 195,128 (39,075) 9,387 (7,926) (22,720) – 2,441,362 The Group’s effective tax rate for the period ended 1 July 2018 was 21.5% (2 July 2017: 21.8%). The effective rate is an amalgamation of UK and European rates for the periods reported. At 1 July 2018 the Group has tax losses to carry forward against future profits of £103,000 (2 July 2017: £6,000). The tax value of such losses amounted to approximately £13,000 (2 July 2017: £1,000), have no expiry date and have not been recognised as a deferred tax asset. 13 . E A R N I N G S P E R S H A R E Profit for the period used in the calculation of the basic and diluted earnings per share: Profit after tax for the period 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 9,979,642 8,763,849 The weighted average number of shares for the purposes of diluted earnings per share reconciles to the weighted average number of shares used in the calculation of basic earnings per share as follows: Weighted average number of shares in issue used in the calculation of earnings per share (number) – Basic Effect of dilutive potential shares: 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 112,837,828 112,837,828 Share-based payments – Hotel Chocolat Group plc Save as You Earn Plan 244,987 145,187 Weighted average number of shares in issue used in the calculation of earnings per share (number) – Diluted Earnings per share (pence) – Basic Earnings per share (pence) – Diluted 113,082,815 112,983,015 8.8 8.8 7.8 7.8 As at 1 July 2018, the total number of potentially dilutive shares issued under the Hotel Chocolat Group plc Long-Term Incentive Plan was 3,657,000 (2 July 2017: 3,692,000). Due to the nature of the options granted under this scheme, they are considered contingently issuable shares and therefore have no dilutive effect. For further information on the movements in the share capital, please refer to Note 25. FINANCIAL STATEMENTS Notes to the f inancial statements 67 14 . I N TA N G I B L E A S S E T S Goodwill arising on consolidation (Note (a)) Computer software and website costs (Note (b)) (a) Goodwill arising on consolidation At beginning of period Translation differences At end of period 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 934,918 1,853,234 2,788,152 938,408 1,399,633 2,338,041 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 938,408 (3,490) 934,918 914,098 24,310 938,408 The goodwill figure has been derived from two separate corporate transactions; the first for £683,534, for the corporate business and the second, for £251,384, for the acquisition of Hotel Chocolat Estates Limited, St Lucia. The Group has estimated the value in use of these businesses and their respective cash generating units based on a discounted cashflow model which adjusts for risks associated with the assets. The discount rate applied is a pre-tax rate of 10%. The forecasts for the corporate business are based over a 5-year projection period, use past experience and apply an annual growth rate of 2%. The key assumptions used in the discounted cashflow were the sales and EBITDA figures (based on Board approved plans), the future growth rate and the discount rate. Management consider that reasonably possible changes in assumptions would be an increase in the discount rate of 1% point or a reduction in the growth rate of 1% point. As an indication of sensitivity, when applied to the value in use calculation a 1% point increase in discount rate, 1% point reduction in growth rate or a 10% decrease in sales or EBITDA, would not have resulted in any impairment of goodwill in the period. (b) Computer software and website costs Cost: At beginning of period Additions Disposals At end of period Amortisation: At beginning of period Amortisation charge Disposals At end of period Net book value 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 1,994,322 963,492 – 2,957,814 594,689 509,892 – 1,104,581 2,393,335 899,002 (1,298,015) 1,994,322 1,450,633 442,071 (1,298,015) 594,689 1,853,233 1,399,633 C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 68 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Notes to the f inancial statements continued For the period ended 1 July 2018 15 . P RO P E RT Y, P L A N T A N D E Q U I P M E N T Freehold property £ Leasehold property £ Furniture & fittings, equipment & hardware £ Plant & machinery £ Total £ 11,469,455 540,751 – 578,649 12,588,855 408,612 160,387 – (1,768) 567,231 734,999 – – – 22,899,192 5,877,065 (447,863) 90,410 14,662,588 49,766,234 1,662,108 8,079,924 (5,345) – (453,208) 669,059 734,999 28,418,804 16,319,351 58,062,009 732,306 950 – – 14,013,001 2,070,722 (322,573) 35,412 8,501,204 1,070,717 (4,543) – 23,655,123 3,302,776 (327,116) 33,644 733,256 15,796,562 9,567,378 26,664,427 12,021,624 1,743 12,622,242 6,751,973 31,397,582 12,588,855 734,999 28,418,804 606,892 (236,084) (122,296) – – – 6,735,380 (259,713) (4,029) 16,319,351 2,576,577 – – 58,062,009 9,918,849 (495,797) (126,325) 12,837,367 734,999 34,890,442 18,895,928 67,358,736 567,231 156,847 – – 607 733,256 15,796,562 950 2,918,523 9,567,378 1,171,230 26,664,427 4,247,550 – – – (151,603) 284,681 (95,701) – – – (151,603) 284,681 (95,094) 724,685 734,206 18,752,462 10,738,608 30,949,961 12,112,682 793 16,137,980 8,157,320 36,408,775 53 weeks ended 2 July 2017 Cost: As at 26 June 2016 Additions Disposals Translation differences As at 2 July 2017 Accumulated depreciation: As at 26 June 2016 Depreciation charge Disposals Translation differences As at 2 July 2017 Net book value As at 2 July 2017 52 weeks ended 1 July 2018 Cost: As at 2 July 2017 Additions Disposals Translation differences As at 1 July 2018 Accumulated depreciation: As at 2 July 2017 Depreciation charge Disposals Impairment Translation differences As at 1 July 2018 Net book value As at 1 July 2018 As at 1 July 2018, the net book value of freehold property includes land of £2,817,709 (2 July 2017: £2,867,081), which is not depreciated. Included above are assets held under finance leases and hire purchase agreements. As at 1 July 2018, the net book value of such assets within plant & machinery is £ nil (2 July 2017: £359,172) and within computer hardware is £395,586 (2 July 2017: £516,626). FINANCIAL STATEMENTS Notes to the f inancial statements 69 16 . D E F E R R E D I N CO M E TA X A S S E T A N D L I A B I L I T Y Deferred taxation asset Reconciliation of deferred tax balances: Balance at beginning of period Deferred tax charge for the period through income statement Deferred tax charge for the period through other comprehensive income Deferred tax charge for the period through Statement of Changes in Equity Balance at end of period 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 623,961 623,961 213,819 213,819 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 213,819 (89,261) 20,561 478,842 623,961 (78,989) (100,027) 64,039 328,796 213,819 The provision for deferred taxation consists of the tax effect of timing differences in respect of: Fixed asset differences Short-term differences Derivative financial instruments Share-based payments Unused trade losses 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ (533,939) 121,272 (29,846) 1,053,580 12,894 623,961 (278,887) 101,703 (50,407) 441,410 – 213,819 At 1 July 2018, the Group has unrecognised deferred tax assets amounting to £64,000 (2 July 2017: £19,000). Deferred tax is calculated using the rate that is expected to be in force on the date the temporary differences are expected to reverse. For temporary differences expected to reverse before 30 June 2019 a rate of 19.0% has been used. For those temporary differences expected to reverse in the 52 week period ending 28 June 2020 a rate of 18.5% has been used. For any remaining temporary differences expected to reverse after 28 June 2020 a rate of 17.0% has been used. C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 70 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Notes to the f inancial statements continued For the period ended 1 July 2018 17. D E R I VAT I V E F I N A N C I A L I N S T RU M E N T S Derivative financial assets: Current Foreign currency forward contracts Non-current Foreign currency forward contracts Derivative financial liabilities: Current Foreign currency forward contracts Non-current Foreign currency forward contracts 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 14,925 14,925 68,721 68,721 54,691 54,691 – – 306,526 306,526 – – 137,480 137,480 33,970 33,970 The fair value of the derivative financial liabilities are split between current and non-current depending on the remaining maturity of the derivative contract and its contractual cash flows. The fair value of foreign currency forward contracts are based on observable information on exchange and interest rates. The hedged forecast transactions denominated in foreign currency are expected to occur at various dates within the next 18 months. Gains and losses on foreign currency forward contracts which have been recognised in the hedging reserve, within other reserves in equity as at 1 July 2018, will be recognised in the Consolidated Statement of Comprehensive Income in the periods during which the hedged forecast transaction occurs. The maximum exposure to credit risk at the reporting date is the fair value of the derivative assets in the Consolidated Statement of Financial Position. The gross contractual cash flows for the forward contracts as at 1 July 2018 was £17,446,374 (2 July 2017 £15,652,171). The movement in the fair value on forward contracts in the period of £106,001 loss (2 July 2017: £316,658 loss) has been included within other comprehensive income in the Consolidated Statement of Comprehensive Income. There are no forecast transactions for which hedge accounting had previously been used, but which are no longer expected to occur. 18 . I N V E N TO R I E S Raw materials Finished goods 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 3,592,960 8,962,557 12,555,517 3,320,248 6,557,874 9,878,122 Total inventory recognised as an expense in the Statement of Comprehensive Income during the period was £36,341,318 (2 July 2017: £32,540,621). FINANCIAL STATEMENTS Notes to the f inancial statements 71 19. T R A D E A N D OT H E R R E C E I VA B L E S There were no material receivables which were past due but not impaired at the end of any period. 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ Current Trade receivables Other receivables Prepayments Non-current Prepayments 2 0 . I N V E S T M E N T I N S U B S I D I A R I E S The Group’s operating subsidiaries as at 1 July 2018 are as follows: Name Direct Holding HOTC Limited Hotel Chocolat Limited Principal activities Holding Company Manufacturer and Distributer of chocolates Country of business / incorporation England & Wales1 England & Wales1 The Chocolate Tasting Club plc Chocolate Retailer England & Wales1 HC International Limited Hotel Chocolat USA Inc Hotel Chocolat (St Lucia) Holdings Limited Indirect Holdings Holding Company Holding Company Holding Company Malta2 USA3 St Lucia4 Hotel Chocolat Retail Limited Chocolate Retailer and Restaurateur England & Wales1 Hotel Chocolat Stores Limited Chocolate Distributor Rabot Estate UK Limited Property Holding Company Hotel Chocolat Europe Limited Chocolate Retailer Hotel Chocolat EU Retail Limited Chocolate Retailer Hotel Chocolat Corporate Limited Dormant HCIP Limited HC Sales Limited Trademark Holder Holding Company England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 Malta2 Malta2 CTC Distribution GmbH Chocolate Distributor Switzerland5 Chocolate Tasting Club Inc Chocolate Distributor Hotel Chocolat Inc Chocolate Retailer Hotel Chocolat Estates Limited Hotel & Cocoa Plantation HCRF Inc Property Holding Company USA3 USA3 St Lucia6 USA3 Almondhill Properties Limited Property Holding Company Apricothill Properties Limited Property Holding Company England & Wales1 England & Wales1 1,053,758 419,544 6,013,592 7,486,894 1,643 1,643 542,673 352,381 5,125,900 6,020,954 7,250 7,250 Proportion of ordinary shares directly held by parent Proportion of ordinary shares held by the Group 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 72 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Notes to the f inancial statements continued For the period ended 1 July 2018 2 0 . I N V E S T M E N T I N S U B S I D I A R I E S C O N T I N U E D Name Principal activities Indirect Holdings continued Applehill Properties Limited Property Holding Company Bananahill Properties Limited Property Holding Company Braeburnhill Properties Limited Property Holding Company Bramleyhill Properties Limited Property Holding Company Brazilnuthill Properties Limited Property Holding Company Cashewhill Properties Limited Property Holding Company Chestnuthill Properties Limited Property Holding Company Colanuthill Properties Limited Property Holding Company Crispinhill Properties Limited Property Holding Company Croftonhill Properties Limited Property Holding Company Datehill Properties Limited Property Holding Company Gingerhill Properties Limited Property Holding Company Grapehill Properties Limited Property Holding Company Groundnuthill Properties Limited Property Holding Company Guavahill Properties Limited Property Holding Company Hazelnuthill Properties Limited Property Holding Company Hotel Chocolat DK Limited Property Holding Company Lemonhill Properties Limited Property Holding Company Limehill Properties Limited Property Holding Company Macadamiahill Properties Limited Property Holding Company Mandarinhill Properties Limited Property Holding Company Mangohill Properties Limited Property Holding Company Melonhill Properties Limited Property Holding Company Olivehill Properties Limited Property Holding Company Orangehill Properties Limited Property Holding Company Papayahill Properties Limited Property Holding Company Peachhill Properties Limited Property Holding Company Peanuthill Properties Limited Property Holding Company Pearhill Properties Limited Property Holding Company Pearmainhill Properties Limited Property Holding Company Pecanhill Properties Limited Property Holding Company Pinenuthill Properties Limited Property Holding Company Pippinhill Properties Limited Property Holding Company Plumhill Properties Limited Property Holding Company Russethill Properties Limited Property Holding Company Satsumahill Properties Limited Property Holding Company Sloehill Properties Limited Property Holding Company Walnuthill Properties Limited Property Holding Company Country of business / incorporation England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 England & Wales1 Proportion of ordinary shares directly held by parent Proportion of ordinary shares held by the Group 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% FINANCIAL STATEMENTS Notes to the f inancial statements 73 2 0 . I N V E S T M E N T I N S U B S I D I A R I E S C O N T I N U E D Registered addresses: 1 2 3 4 5 6 Mint House, Newark Close, Royston, Herfordshire, SG8 5HL, United Kingdom Suite 3, Tower Business Centre, Tower Street, Swatar, BKR4013, Malta c/o Ruberto, Israel & Weiner, PC, 7th Floor, 255 State Street, Boston, MA 02109, USA Foster Capital Inc, Robin Kelton Building, Choc Bay, Castries, St Lucia Bahnhofstrasse 23, 6301 Zug, Switzerland #20 Micoud Street, Castries, St Lucia 21. C A S H A N D C A S H E Q U I VA L E N T S For the purpose of the statements of cash flows, cash and cash equivalents comprise the following: Cash and cash equivalents 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 235,936 235,936 8,470,178 8,470,178 On 3 May 2017, the Group converted its bilateral revolving credit facility (RCF) into an overdraft facility. The interest rate is charged at 1.25% over base rate. 2 2 . T R A D E A N D OT H E R PAYA B L E S Current Trade payables Other payables Other taxes payable Accruals Non-current Other payables and accruals 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 6,800,747 2,574,971 761,544 5,408,583 15,545,845 2,581,044 2,581,044 6,825,958 2,988,090 1,303,810 5,514,859 16,632,717 1,934,057 1,934,057 C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 74 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Notes to the f inancial statements continued For the period ended 1 July 2018 2 3 . B O R ROW I N G S Current Finance lease and hire purchase liabilities Chocolate bonds Unamortised costs of issue Total current borrowings Non-current Finance lease and hire purchase liabilities Chocolate bonds Total non-current borrowings 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 201,732 – 201,732 – 201,732 16,811 – 16,811 237,194 3,208,500 3,445,694 (74,250) 3,371,444 218,544 3,286,000 3,504,544 Total borrowings 218,543 6,875,988 During the period under review the Group repaid in full all outstanding “chocolate bonds” which had been issued in 2010 and 2014. Maturity of debt 53 weeks ended 2 July 2017 In one year or less or on demand In more than one year but not more than two years In more than two years but not more than five years Total non-current borrowings Unamortised costs of issue Total borrowings 52 weeks ended 1 July 2018 In one year or less or on demand In more than one year but not more than two years Total non-current borrowings Total borrowings Finance lease and hire purchase liabilities £ Chocolate bonds £ Bank loans overdrafts £ Total £ 237,194 3,208,500 201,732 16,812 218,544 – 3,286,000 – 3,286,000 – 455,738 6,494,500 201,732 16,811 16,811 218,543 – – – – – – – – (74,250) (74,250) – – – – 3,445,694 3,487,732 16,812 3,504,544 (74,250) 6,875,988 201,732 16,811 16,811 218,543 FINANCIAL STATEMENTS Notes to the f inancial statements 75 2 3 . B O R ROW I N G S C O N T I N U E D Chocolate bonds paid a return either in boxes of luxury chocolates or by way of a Hotel Chocolat gift card. For those bonds with a return in the form of chocolate, the coupon was fixed by number of boxes. For bonds where there was a return paid by way of a Hotel Chocolat gift card, there was a fixed rate of interest. The interest as stated on issue of the bonds ranged between 6.7% and 7.3%. Chocolate bonds were repayable subject to formal notice given six months prior to a redemption note. In order to redeem the bond, bondholders needed to give notice by January and payment would have been made in July of the same year. For all chocolate bonds, where notice had been given, the amount repayable was shown within current liabilities. The remaining bonds for which notice had not yet been given were shown within non-current liabilities. Both bonds had matured and were unsecured. All bonds were repaid by the Group prior to period end. On 3 May 2017, the Group converted its bilateral revolving credit facility (RCF) into an overdraft facility. The bank overdraft is secured by a charge over the Group’s assets and cross guarantees. The interest rate is charged at 1.25% over base rate. The existing hire purchase and finance leases are secured by a charge over the related fixed assets and have incurred interest at an effective annual rate of 0%. 24 . P ROV I S I O N S Non-current Lease dilapidations provision 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 879,808 879,808 750,629 750,629 The dilapidations provision relates to potential rectification costs expected should the Group vacate its head office, distribution site or retail locations. The movement in dilapidations provision is summarised below: 53 weeks ended 2 July 2017 At beginning of period Released through profit and loss Amounts capitalised during the period At end of period 52 weeks ended 1 July 2018 At beginning of period Released through profit and loss Amounts capitalised during the period At end of period Lease dilapidation provision £ 464,486 (8,857) 295,000 750,629 750,629 (20,057) 149,236 879,808 Provisions for dilapidations are inherently uncertain in terms of quantum and timing, not least because they involve negotiations with landlords at future dates. The figures provided in the financial statements represents management’s best estimate of the likely outflows to the Group. C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 76 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Notes to the f inancial statements continued For the period ended 1 July 2018 2 5 . S H A R E C A P I TA L Allotted, called up and fully paid: Ordinary shares of £0.001 each As at 1 July 2018 As at 2 July 2017 Shares £ Shares £ 112,837,828 112,837,828 112,838 112,838 112,837,828 112,837,828 112,838 112,838 The Board proposes a final dividend of 1.1p per share (2 July 2017: 1.6p per share) being a total of £1,241,216 (2 July 2017: £1,805,405), for approval at the next AGM. Period ending 1 July 2018: There were no movements in the Ordinary shares of Hotel Chocolat Group plc during the period ending 1 July 2018. Period ending 2 July 2017: There were no movements in the Ordinary shares of Hotel Chocolat Group plc during the period ending 2 July 2017. 2 6 . R E S E RV E S This note explains material movements recorded in shareholders’ equity that are not explained elsewhere in the financial statements. The movements in equity and the balance sheet at 1 July 2018 are presented in the Consolidated Statement of Changes in Equity. The share premium represents the amounts subscribed for share capital in excess of the nominal value of the shares. During the year the Group paid a dividend of 2.2p per share (£2,482,432) out of retained earnings, being a final dividend of 1.6p per share in relation to the period ended 2 July 2017 and an interim dividend of 0.6p per share in relation to the period ended 1 July 2018. The translation reserve represents cumulative foreign exchange differences arising from the translation of the financial statements of foreign subsidiaries and is not distributable by way of dividends. The merger reserve arose when the Company undertook a share for share exchange with the companies listed in Note 20 and is not distributable by way of dividends. The capital redemption reserve represented the aggregate nominal value of all the ordinary shares repurchased and cancelled by the Group. Other reserves includes the movements in share-based payments and derivative financial instruments. For further details, refer to Notes 9 and 17 respectively. FINANCIAL STATEMENTS Notes to the f inancial statements 77 27. L E A S E CO M M I T M E N T S At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: Land and buildings Operating leases which expire: Within one year In two to five years In over five years Other Operating leases which expire: Within one year In two to five years 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 9,842,294 27,895,009 17,888,405 55,625,708 315,797 356,605 672,402 8,698,227 25,985,274 17,192,437 51,875,938 391,091 608,387 999,478 2 8 . C A P I TA L CO M M I T M E N T S There were no amounts contracted for but not provided for as at 1 July 2018 (2 July 2017: £ nil). 29. R E L AT E D PA RT Y T R A N S AC T I O N S The remuneration of the key management personnel of the Group are disclosed in Note 8. Interests and related party transactions are disclosed below. The Group rents property in the ordinary course of business from Harwell Management, a company in which Peter Harris and Angus Thirlwell have a material interest. The rentals (inclusive of building insurance) totalled £182,920 in the period ended 1 July 2018 (2 July 2017: £183,914). There were no amounts due at either period end. During the period family members of the Directors stayed at the Group’s hotel in St Lucia. Total amounts paid equalled $16,209 (2 July 2017: $15,935) and there are no amounts outstanding at the balance sheet date (2 July 2017: £ nil). The Group hold a joint venture with Rabot 1745 Limited. The Group owns 34.5% (increased during the period from 30%) and Andrew Gerrie holds 53.5%, with the balance being held by non-related parties. During the period, the Group purchased goods from Rabot 1745 Limited with a value of £366,935 (2 July 2017: £ nil). There were no amounts outstanding at the period end (2 July 2017: £ nil). On 31 May 2018, Hotel Chocolat Estates Limited, a subsidiary located in St Lucia, sold and transferred the freehold titles of two plots, one each to Angus Thirlwell and Peter Harris for a price of £170,368 per plot. This resulted in a total profit on disposal of £98,029. There were no amounts outstanding at the period end (2 July 2017: £ nil). No other amounts were due to Directors (2 July 2017: £ nil). C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 78 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Notes to the f inancial statements continued For the period ended 1 July 2018 3 0 . C AT E G O R I E S O F F I N A N C I A L I N S T RU M E N T S Financial assets At amortised cost Trade and other receivables (excluding prepayments) Cash and cash equivalents At fair value Derivative financial assets Financial liabilities At amortised cost Trade and other payables Total borrowings Accruals At fair value Derivative financial liabilities 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 1,473,301 235,936 1,709,237 902,304 8,470,178 9,372,482 83,646 306,526 9,183,573 218,543 5,152,399 14,554,515 9,465,274 6,875,988 5,238,653 21,579,915 54,691 171,450 In the Directors’ view, the fair value of the Group’s borrowings is considered to be equal to their carrying value. Fair value hierarchy The financial instruments on the Hotel Chocolat Group plc Consolidated Statement of Financial Position are measured at either fair value or amortised cost. Cash and cash equivalents, trade and other receivables, trade and other payables, accruals and borrowings have been excluded from this analysis as they are recognised in the financial statements at their carrying value which also approximates the fair values of those financial instruments; therefore, no separate disclosure for fair value hierarchy is required. The financial instruments are grouped into Levels based on the degree to which the inputs used to calculate the fair value are observable. – Level 1 fair value measurements are those derived from quoted process (adjusted) in active markets for identical assets and liabilities. – Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from process). The Group measures its derivative financial liabilities relating to foreign currency forward contracts at fair value and these are grouped as Level 2 instruments. Movements on the underlying value of financial instruments of foreign exchange contracts have been measured versus market rates and therefore are easily identifiable. Refer to Note 17 for further information. There have been no transfers between levels in the period. FINANCIAL STATEMENTS Notes to the f inancial statements 79 31. F I N A N C I A L R I S K M A N AG E M E N T The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, fair value interest rate risk and price risk), credit risk and liquidity risk. Market risk Foreign exchange risk The Group enters into foreign currency forward contracts in order to manage the exposure to foreign exchange risk which arises on transactions denominated in foreign currencies. Refer to Note 17 for further information about the Group’s foreign currency forward contracts. Interest Risk The Group is exposed to interest rate risk on its overdraft facility, which carries interest at variable rates on amounts which are overdrawn. The overdraft facility is typically used on a short-term basis to fund working capital. Price risk Price risk is the risk that oscillation in the price of key input costs will affect the profitability of the business. The Group manages this risk by agreeing long–term prices with suppliers where possible. Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. In order to minimise this risk the Group endeavours only to deal with companies which are demonstrably creditworthy. In addition, a significant proportion of revenue results from cash transactions. The aggregate financial exposure is continuously monitored. The maximum exposure to credit risk is the value of the outstanding amount of trade receivables. The management do not consider that there is any concentration of risk within trade receivables. Ageing analysis: Trade receivables Up to three months Three to six months Above six months Impairment provision Total These receivables are not secured by any collateral or credit enhancement. The exposure of credit risk for trade receivables by geographical region is as follows: United Kingdom Europe Rest of World Total 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 931,760 73,181 67,430 (18,613) 1,053,758 524,407 35,980 – (17,714) 542,673 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 1,045,823 2,236 5,699 1,053,758 525,970 786 15,917 542,673 C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 80 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Notes to the f inancial statements continued For the period ended 1 July 2018 31. F I N A N C I A L R I S K M A N AG E M E N T C O N T I N U E D Liquidity risk The Group currently holds cash balances to provide funding for normal trading activity. The Group also has access to both short-term and long-term borrowings to finance individual projects. Trade and other payables are monitored as part of normal management routine. Borrowings and other liabilities mature according to the following schedule: 53 weeks ended 2 July 2017 Trade and other payables Derivative financial instruments Borrowings 52 weeks ended 1 July 2018 Trade and other payables Derivative financial instruments Borrowings Within one year £ One to two years £ Two to five years £ 14,594,367 9,450,827 3,553,539 27,598,733 13,933,676 11,265,218 201,732 25,400,626 109,560 6,201,344 3,851,469 10,162,373 402,296 6,181,156 16,811 6,600,263 – – 17,805 17,805 – – – – The amounts detailed within derivative financial instruments relate to the gross contractual cash flows of the Group’s forward contracts. Capital risk management The Group’s capital management objectives are: • to ensure the Group’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and • to provide an adequate return to shareholders by pricing products and services commensurate with the level of risk. To meet these objectives, the Group reviews the budgets and forecasts on a regular basis to ensure there is sufficient capital to meet the needs of the Group. The capital structure of the Group consists of shareholders’ equity as set out in the Consolidated Statement of Changes in Equity. All working capital requirements are financed from existing cash resources and borrowings. 32 . E V E N T S S U B S E Q U E N T TO T H E R E P O RT I N G DAT E – G RO U P A N D CO M PA N Y There have been no material events subsequent to the period end and up to 25 September 2018, the date of approval of the financial statements by the Board. 33 . U LT I M AT E CO N T RO L L I N G PA RT Y The Directors believe that there is no ultimate controlling party of the Group. FINANCIAL STATEMENTS Company Statement of Financial Position 81 Company Statement of Financial Position As at 1 July 2018 ASSETS Non-current assets Investments Current assets Trade and other receivables Cash and cash equivalents Total assets LIABILITIES Current liabilities Trade and other payables Total liabilities NET ASSETS EQUITY Share capital Share premium Retained earnings Capital redemption reserve Total equity attributable to shareholders Notes As at 1 July 2018 £ As at 2 July 2017 £ 35 36 37 38 39 39 39 9,064,727 9,064,727 8,728,097 192,578 8,920,675 17,985,402 458,956 458,956 458,956 9,064,727 9,064,727 2,727,891 3,672,518 6,400,409 15,465,136 460,238 460,238 460,238 17,526,446 15,004,898 112,838 11,749,487 5,657,820 6,301 17,526,446 112,838 11,749,487 3,136,272 6,301 15,004,898 As permitted by section 408(3) of the Companies Act 2006, a separate Statement of Comprehensive Income, dealing with the results of the Parent Company, has not been presented. The Parent Company profit for the period ended 1 July 2018 is £5,003,980 (2 July 2017: profit £3,699,981). The financial statements of Hotel Chocolat Group plc, registered number 08612206 were approved by the Board of Directors and authorised for issue on 25 September 2018. They were signed on its behalf by: Matt Pritchard Chief Financial Officer 25 September 2018 C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 82 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Company Statement of Changes in Equity For the period 1 July 2018 As at 26 June 2016 Profit for the period Equity as at 2 July 2017 Profit for the period Dividends paid Share capital £ Share premium £ 112,838 11,749,487 – – 112,838 11,749,487 – – – – Equity as at 1 July 2018 112,838 11,749,487 Retained earnings £ (563,709) 3,699,981 3,136,272 5,003,980 (2,482,432) 5,657,820 Capital redemption reserve £ 6,301 – Total £ 11,304,917 3,699,981 6,301 15,004,898 – – 5,003,980 (2,482,432) 6,301 17,526,446 FINANCIAL STATEMENTS Notes to the Company f inancial statements 83 Notes to the Company f inancial statements For the period 1 July 2018 3 4 . ACCO U N T I N G P O L I C I E S To the extent that an accounting policy is relevant to both Hotel Chocolat Group and Company financial statements, refer to the Group financial statements for disclosure of the accounting policy. Basis of preparation The financial statements have been prepared in accordance with Financial Reporting Standard 100 (FRS 100): Application of Financial Reporting Requirements and Financial Reporting Standard 101 (FRS 101): Reduced Disclosure Framework. 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 periods presented, unless otherwise stated. The financial statements have been prepared on a historical cost basis. The presentation currency used is Sterling. Disclosure exemptions adopted in preparing these financial statements the Company has taken advantage of all disclosure exemptions conferred by FRS 101. Therefore these financial statements do not include: • certain comparative information as otherwise required by EU-endorsed IFRS; • the effect of future accounting standards not yet adopted; and • disclosure of related party transactions with other wholly owned members of the Group headed by Hotel Chocolat Group plc. In addition, and in accordance with FRS 101 further disclosure exemptions have been adopted because equivalent disclosures are included in the company’s consolidated financial statements. These financial statements do not include certain disclosures in respect of: • share-based payments; • financial instruments (other than certain disclosures required as a result of recording financial instruments at fair value); or • fair value measurement (other than certain disclosures required as a result of recording financial instruments at fair value). 35 . S U B S I D I A RY U N D E RTA K I N G S Investments in subsidiaries held by the Company as non-current assets are stated at cost less any provision for impairment. Cost At beginning of period At end of period Carrying amount 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 9,064,727 9,064,727 9,064,727 9,064,727 9,064,727 9,064,727 A list of the significant investments in subsidiaries, including the name, proportion of ownership interest, country of operation and country of registration can be found in Note 20. C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s 84 HOTEL CHOCOL AT GROUP PLC Annual Repor t and Accounts Notes to the Company f inancial statements continued For the period 1 July 2018 3 6 . T R A D E A N D OT H E R R E C E I VA B L E S There were no material receivables which were past due but not impaired at the end of any period. Other receivables Amounts due from related parties 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 288,030 8,440,067 8,728,097 288,030 2,439,861 2,727,891 37. C A S H A N D C A S H E Q U I VA L E N T S To the extent a disclosure is relevant to both the Hotel Chocolat Group and Company financial statements, refer to the Group financial statements. 3 8 . T R A D E A N D OT H E R PAYA B L E S Accruals Amounts due to related parties Total trade and other payables 39. S H A R E C A P I TA L A N D R E S E RV E S 52 weeks ended 1 July 2018 £ 53 weeks ended 2 July 2017 £ 300 458,656 458,956 300 459,938 460,238 The share capital, share premium and the capital redemption reserve are consistent with Hotel Chocolat Group plc financial statements. Refer to Notes 25 and 26 of the Group financial statements. 4 0 . C A P I TA L CO M M I T M E N T S There were no amounts contracted for but not provided for as at 1 July 2018 (2 July 2017: £ nil). 41. R E L AT E D PA RT Y T R A N S AC T I O N S Amounts owed by and to subsidiaries are disclosed in Notes 36 and 38 respectively, of the Company financial statements. There are no employees during either period. The remuneration of the Directors of the Company are disclosed within the Remuneration report on pages 38 and 39. Interests and related party transactions are disclosed in Note 29 of the Group financial statements. Company information R E G I S T E R E D O F F I C E Mint House Newark Close Royston Hertfordshire SG8 5HL CO M PA N Y W E B S I T E www.hotelchocolat.com CO M PA N Y S E C R E TA RY Peter M Harris A DV I S E R S Nominated Adviser and Broker Liberum Capital Limited Ropemaker Place 25 Ropemaker Street London EC2Y 9LY Legal Advisers to the Company Stephenson Harwood LLP 1 Finsbury Circus London EC2M 7SH AU D I TO R S BDO LLP 55 Baker Street London W1U 7EU R E G I S T R A R S Capita Registrars Limited The Registry 34 Beckenham Road Beckenham Kent BR3 4TU FINANCIAL STATEMENTS Company information 85 C o m p a n y o v e r v i e w S t r a t e g i c r e p o r t G o v e r n a n c e F i n a n c i a l s t a t e m e n t s BRITISH COCOA GROWER R E G I S T E R E D O F F I C E Hotel Chocolat Group plc Mint House Newark Close Royston Hertfordshire SG8 5HL 

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