Portmeirion Group PLC Annual Report 2016

Plain-text annual report

Report and Accounts for the year ended 31 December 2016 Heritage and innovation P o r t m e i r i o n G r o u p P L C R e p o r t a n d A c c o u n t s f o r t h e y e a r e n d e d 3 1 D e c e m b e r 2 0 1 6 Stock code: PMP Strategic Report Highlights Revenue (£’000) £76,677 +11.7% Pre-tax profit (£’000) £7,806 -9.7% Basic EPS (p) 59.60p -9.7% Dividends paid & proposed (p) 32.25p +7.5% 2016 2015 2014 2013 2012 76,677 68,669 61,370 58,295 55,525 2016 2015 2014 2013 2012 7,806 8,649 7,611 7,009 6,595 2016 2015 2014 2013 2012 59.60 66.02 57.64 53.26 47.28 2016 2015 2014 2013 2012 32.25 30.00 26.50 24.00 21.80 Financial Highlights • Eighth consecutive year of record Group revenue which increased by 11.7% to £76.7 million (2015: £68.7 million). • EBITDA is level at £9.7 million (2015: £9.7 million). • Profit before tax down by 9.7% to £7.8 million (2015: £8.6 million). • Total dividends paid and proposed for 2016 increased by 7.5% to 32.25p (2015: 30.00p). Operational Highlights • Completed £17.5 million acquisition of Wax Lyrical Limited, the UK’s largest manufacturer of home fragrances. • Received the Queen’s Award for Enterprise in the category of International Trade, which recognises the Company’s continuous growth in overseas sales and overall outstanding achievement in international trade over the last six years. • Long-standing Group Finance Director, Brett Phillips, to retire from the Group in 2017. • Appointed Michael Knapper as Operations Director and Moira MacDonald as Group Company Secretary. Pictured on front cover (left to right): Spode Blue Italian, Portmeirion Botanic Garden and Sophie Conran for Portmeirion. Pictured left (clockwise from top left): Sophie Conran for Portmeirion, Pimpernel Holiday Nostalgia, Wax Lyrical Lakes and Portmeirion Choices. Strategic Report 01 Highlights 02 At a Glance 04 Chairman and Chief Executive’s Review 08 Business Model and Strategy 10 Snapshot of 2016 11 Our Brands 16 Key Performance Indicators 17 Principal Risks and Uncertainties 18 Corporate and Social Responsibility 21 Going Concern and Outlook Corporate Governance 22 Board of Directors 24 Corporate Governance Statement 28 Directors’ Remuneration Report 36 Report of the Directors 40 Statement of Directors’ Responsibilities 41 Independent Auditors’ Report Financial Statements 42 Consolidated Income Statement 43 Consolidated Statement of Comprehensive Income 44 Consolidated Balance Sheet 45 Company Balance Sheet 46 Consolidated Statement of Changes in Equity 47 Company Statement of Changes in Equity 48 Consolidated Statement of Cash Flows 49 Company Statement of Cash Flows 50 Notes to the Financial Statements 83 Five-year Summary 84 Company Information and Financial Calendar 85 Retail Outlets 01 Portmeirion Group PLCAnnual Report and Accounts 2016At a Glance A significant force in the homewares industry Portmeirion Group PLC is a British company, based in Stoke-on-Trent. We are a market leader in high quality and innovatively designed tableware, home fragrance, cookware, giftware and tabletop accessories. Who we are Our brands Portmeirion Group encompasses five high quality brands: Portmeirion, Spode, Wax Lyrical, Royal Worcester and Pimpernel, and has a long track record of creating value for our shareholders. Our aim is for our Group to be as successful and as profitable as possible. To achieve this we need to conduct ourselves in an efficient manner to maintain high levels of customer service, and drive forward targeted product development to grow our sales. We need to have a focused commitment to operational excellence, innovation and quality and work towards our vision with energy, integrity and a sense of purpose. We have 788 valued employees in the UK and the US and sell into over 60 countries around the world where our brands and products are enjoyed by millions of consumers. A Business Model and Strategy page 08 Product design and development Our value lies with our strong brands and the patterns which underpin these. Some of our major tableware patterns are also brand names in their own right such as the classic Botanic Garden range, which has a worldwide following. Our oldest continuous pattern, Spode Blue Italian, celebrated its 200th anniversary in 2016. Design is key to our business. We continue to develop, extend, refresh and refine our existing patterns, and to launch new patterns and products, so as to retain and improve customer appeal. Working closely with our major customers, our design studio in Stoke-on-Trent is the creative hub for new designs and extensions to existing ranges. Design talent comes from a strong in-house team working together with freelance artists and designers to deliver a broad portfolio. Our product offering is complemented by licensed designs such as the fashionable Ted Baker Portmeirion collections and popular Royal Worcester Wrendale Designs range. 02 Fashionable yet timeless collections of tableware and gifts Tableware and cookware rich in history and heritage The UK’s largest manufacturer of home fragrance Established in 1751 and celebrated for prestigious tableware and cookware The premier brand for placemats and coasters A Our Brands pages 11–15 Portmeirion Group PLCAnnual Report and Accounts 2016Strategic ReportRetail Concessions Online Trade Distributors Production and sourcing Where we operate We manufacture finest English earthenware from our factory in Stoke-on-Trent and home fragrances at our factory in Ulverston, as well as sourcing bone china, porcelain products and other associated homeware. All are produced to the same exacting quality standards. The mix between own manufactured and sourced product was 48:52 for 2016. Production from our Stoke-on-Trent factory is well placed to produce in line with anticipated demand and our facility in Ulverston has sufficient capacity to grow as product is launched through Portmeirion’s existing distribution channels. Routes to market Portmeirion Group sells its products to a worldwide marketplace through a variety of channels including to trade customers such as large high street retailers and independent stores, via a network of agents and distributors as well as from our own retail shops and websites. We serve our customers from our warehouses in the UK, the US and China. Group revenue 35% United Kingdom 32% United States 13% South Korea 20% Rest of the World United Kingdom Portmeirion: Stoke-on-Trent incorporating head office, manufacturing operation, warehouse and retail outlets Wax Lyrical: Lindal-in-Furness, Cumbria incorporating head office, manufacturing operation, warehouse and retail outlet UK sales of £27.1 million represent 35% of Group revenue. Our routes to market include major department stores, over 500 independent retailers, 12 retail outlets, nationwide mail order companies and UK-based websites dedicated to each of the five Portmeirion Group brands. United States Connecticut warehouse, New York showroom and New Jersey office US sales of £24.2 million represent 32% of Group revenue. We sell to major department stores, over 1,200 independent retailers, major internet retailers of both general and home goods merchandise, national chains of ‘big box’ retailers, warehouse club merchandisers and via a growing website. South Korea Exclusive distributor South Korea sales of £9.7 million represent 13% of Group revenue. We sell through an exclusive distributor, with routes to market via wholesale outlets, over 100 retail stores, major department stores, TV home shopping channels and third-party websites. Other markets Other markets accounted for £15.7 million of sales which represent 20% of Group revenue. Other markets around the world are serviced either via a distributor or agent, directly to retail stores or from our international e-shop stores. 03 Portmeirion Group PLCAnnual Report and Accounts 2016Chairman and Chief Executive’s Review “ We are delighted to be reporting an eighth consecutive year of record revenue, notwithstanding the challenges faced by the Group during the period which have affected profits. Our core values of innovation, targeted product development and operational excellence remain unchanged, and we are pleased to report on the success experienced by the continued integration of Wax Lyrical. Trading in the first two months of the current year is ahead of the comparative period in 2016 on a like-for-like basis. The outlook for 2017 is positive and the issues experienced are being overcome by proactive management.” The year under review has been challenging for Portmeirion, largely because of factors external to the business. The United Kingdom referendum on EU membership which resulted in a leave vote in June 2016 and the presidential election in the United States in November 2016 were major uncertainties in our two largest markets; uncertainty leads to caution within business and for consumers, albeit the presidential elections are regular four yearly uncertainties. These uncertainties have not yet fully played out and we are vigilant as to any future effects on international trade. South Korea, our third largest market, continued to suffer economic problems particularly in demand for luxury products. Following a huge sales increase in India in 2015, the region unfortunately did not perform as well in 2016, and returning sales to prior high levels in India will take time. Despite these problems our diversified product range, supply base, wide market access and first-class people enabled us to keep Portmeirion on a steady course. Additionally, the strategic acquisition in the year of Wax Lyrical, the UK’s largest manufacturer of home fragrances, provides us with excellent growth prospects. Dividend The Board is recommending a final dividend of 25.25p per share bringing the total paid and proposed for the year to 32.25p per share, an increase of 7.5% over the total amounts paid in respect of 2015. This is a 5.6% increase over the final dividend for 2015. The dividends paid and proposed for 2016 are covered 1.85 times by earnings (2015: 2.2 times). The Board continues to consider that a level of dividend being twice covered is an appropriate and sustainable level for the business, although it believes a marginal fall for the 2016 dividend cover below this guideline can be temporarily accommodated. Over the last eight years we have increased our total dividends by 10.3% per annum compound. Our share price has grown by 430% since our flotation price of £1.80 in 1988, and our total dividends paid have amounted to £3.97 per share during that period. We have never cut or withheld our dividend as a listed company. The Board is committed to a progressive dividend policy; we believe that this is what our shareholders expect of us. We aim to maintain a sustainable and fair level of dividend cover, having regard to the immediate past and our view forward, and to increase our dividends whenever our results, cash balances and prudent views of future prospects and business investment needs allow us so to do. Our policy is to increase the interim dividend each year by the same percentage as the final dividend of the preceding year, subject of course to prevailing conditions. Revenues Revenues were £76.7 million for the year, an increase of 11.7% over the previous year (2015: £68.7 million). This represents the eighth consecutive year of record revenues for the Group. At a constant US dollar exchange rate our revenue increase would have been lower at 6.5%. The part-year sales for Wax Lyrical consolidated within the total revenues of £76.7 million were £10.4 million (2015: £nil), which represent 8 months of the financial year. The United Kingdom became our largest market in 2016 due to the majority of Wax Lyrical’s sales being in the United Kingdom. Excluding Wax Lyrical, sales in the United Kingdom from original Portmeirion businesses increased by 2.1% over 2015. Total United Kingdom sales were £27.1 million in 2016 (2015: £17.9 million). We remain cautious about the effect on our sales of the United Kingdom leaving the EU although it may be some time before the actual effect is known. Dick Steele Non-executive Chairman Lawrence Bryan Chief Executive 04 Strategic ReportThe United States provided a revenue uplift of 8.7% in translated figures, which is equivalent to a decrease of 3.7% in local currency. There are hopeful signs in the United States that the economy remains on the upswing, but some doubt remains about how Government policy will affect importers. Our own internet based sales in the UK and the US totalled £3.3 million in 2016, a 31.8% increase over 2015. This sales channel provides good margins and greater visibility of and contact with our end consumer, offering a great opportunity for growth. Sales into South Korea fell by a further 21.2% in 2016 over 2015 to £9.7 million, meaning that on a two year basis our sales to South Korea have fallen by £5.4 million. We were hopeful at the end of 2015 that this market was stabilising for us, and we remain hopeful but chastened. We are working closely with our exclusive distributor in South Korea to rebuild sales. In 2015 our sales into India were £5.8 million, which we had planned to grow in 2016, however the performance of our Indian distributor was extremely disappointing, as we announced in July 2016, and, despite immediate proactive management, sales in India in 2016 were £1.1 million. Accordingly we have changed our distribution arrangements in India so as to target specific distribution channels. Despite the sales shortfalls in South Korea and India, we continued to increase total Group sales. Wax Lyrical was the most important contributor to this increase, supported by improved sales into Europe and some Asian markets such as Hong Kong and Taiwan. We continue to be well served by our strategy of diversifying products, customers, geographic markets and routes to market. These strategies enable us to exploit opportunities as and when they appear and to mitigate shortfalls in other areas. Profits Earnings before interest, taxation, depreciation and amortisation (EBITDA) were level with 2015 at £9.7 million. Profit before taxation was £7.8 million, a reduction of £0.8 million or 9.7% on the previous year. The difference in the proportions arises because of increased amortisation and depreciation as a consequence of the Wax Lyrical acquisition and a full year’s depreciation of our new kiln. Basic earnings per share decreased by 9.7% to 59.60p per share, while dividends have increased by 7.5%, with dividend cover remaining at a reasonable level, in the Board’s opinion. The Group’s EBITDA has not increased despite the acquisition of Wax Lyrical, due to the sales shortfalls in India and South Korea, which are of UK manufactured product and so have a disproportionate adverse effect on our profits. This is a key area of focus. Our corporate profits are subject to taxation in either the United States or the United Kingdom and are paid in accordance with statutory and ethical practices. The corporate taxation which we paid in 2016 amounted to £1.6 million (2015: £2.0 million). Assets and liabilities Inventories are a continuing focus for us: we finished the year with £16.3 million of stock compared to £12.7 million at the previous year end. Most of this increase is attributable to stock holdings of Wax Lyrical, which was acquired during the year. Stocks have reduced by £3.7 million from 30 June 2016. The valuation of our stock balances is a critical accounting judgement in our figures; our methodology for providing against obsolete and slow-moving stock is rigorous and unchanged from previous years. Net borrowings were £2.3 million at the year end (2015: £11.1 million cash) after a net outflow of £13.5 million for the year. Major elements causing the net outflow include the acquisition of Wax Lyrical at £16.7 million, dividends paid of £3.2 million and tax paid of £1.6 million. Portmeirion remains a business which is cash generative and is soundly financed. Our committed bank facilities from Lloyds Bank amount to £21.0 million and consist of a £2.0 million overdraft on an annual renewal cycle, a £10.0 million loan repayable equally over five years from May 2016, of which £9.0 million was outstanding at the year end, and a £10.0 million revolving credit facility repayable in full in May 2019. We experience a large working capital swing during the year; it is not unreasonable to assume a cash swing of about £10 million in 2017. In light of this our year end position plus committed bank facilities show a conservative approach to funding. During the year we have paid £1.4 million into our long-closed defined benefit pension scheme. Largely due to the reduction in the discount rate applied, the accounting deficit recorded in these accounts has increased from £3.1 million at the end of 2015 to £7.1 million in 2016. Many companies carry defined pension scheme deficits, we are fortunate in that we were an early mover in closing our scheme and so our deficit is comparatively light. We continue to keep this under review. Goodwill and intangible assets are major elements on our balance sheet compared to the previous year totalling £13.8 million (2015: £1.0 million). The increase is mainly due to the acquisition of Wax Lyrical during the year. As at the period end, we held treasury shares with a book value of £448,000 to satisfy employee share schemes. These treasury shares were originally bought at an average price of £1.87 each, amounting to 239,477 shares, of which we used 3,303 during the year. We also hold 307,048 shares in the Portmeirion Employees’ Share Trust (“ESOP shares”) to satisfy employees’ share options. These ESOP shares have a book value of £2,488,000, having been bought in the market at a blended cost of £8.10 each. We have used 32,000 during the year. No treasury shares or ESOP shares were acquired during the year. 05 Portmeirion Group PLCAnnual Report and Accounts 2016Chairman and Chief Executive’s Review continued Wax Lyrical We acquired Wax Lyrical on 4 May 2016 for a headline cash price of £17.5 million which, taking account of cash in the acquired business, reduced to £16.7 million. This acquisition cost was well within our cash and borrowing capabilities, indeed it would not have been in shareholders’ interests to issue shares for the acquisition. Wax Lyrical is the UK’s largest manufacturer of home fragrances and is based in Cumbria, England. Joanne Barber, the continuing Managing Director of Wax Lyrical, oversees all aspects of this business following the acquisition and reports directly to the Group Board. Wax Lyrical’s sales of £10.4 million and operating profits of £1.5 million generated from the date of acquisition to the year end have been included in the Group’s consolidated results. As we continue to integrate the new business the break-out of Wax Lyrical’s figures will become less meaningful. We are delighted with this acquisition; future integration benefits will be significant. Products and brands We have five major brand names: Portmeirion, Spode, Wax Lyrical, Royal Worcester and Pimpernel. Brands are germane to our business model and investing in our brands, by product development, marketing, trade shows, public relations and intellectual property protection is what we do as daily business; that investment is a revenue expense and so does not show on our balance sheet. Portmeirion Botanic Garden is a major pattern with worldwide recognition; it is hard to identify any other tableware pattern with such a level of sales. On an ongoing basis Botanic Garden generates nearly £30 million of sales per annum and there are over 50 million pieces of Botanic Garden in use worldwide today. We are ever-vigilant of imitators to Botanic Garden, or indeed any of our other patterns, and hard-nosed in legal protection. Botanic Garden was launched in 1972. Spode Christmas Tree, launched in 1938, is our second largest pattern and, on an ongoing basis, generates sales of over $10 million per annum mainly from the US. It is the dominant Christmas tableware pattern in the North American market and is supported by a number of other Christmas patterns which we sell including The Holly and The Ivy and Christmas Wish. Spode Blue Italian is our oldest continuously produced pattern having been extant for over two centuries. It is hard to identify any other tableware pattern with such a continuous history. Cobalt blue pattern on finest English earthenware is a traditional English look; on an ongoing basis it continues to generate annual worldwide sales of over £2.5 million. There is a YouTube short film under “Spode UK” which shows how the pattern is produced today in our Stoke-on-Trent factory. Product development is a vital component of brand value. We continue to develop, extend, refresh and refine our existing patterns and products so as to retain and build customer appeal. Last year saw new patterns released of which Strawberry Thief, licensed from Morris & Co, is an outstanding example. There were also hundreds of line extensions to existing patterns. In the current year-to-date, Choices and Sara Miller have been well received amongst a number of new patterns, Wrendale Designs continues to expand, and we are additionally pulling home fragrance products into our established ceramic ranges as we tie more closely to Wax Lyrical. A list of our current patterns can be found at www.portmeirion.co.uk, www.spode.co.uk, www.wax-lyrical.com, www.royalworcester.co.uk and www.pimpernelinternational.co.uk. Customers in the United States should go to www.portmeirion.com. Production and sourcing It is customer demand which determines whether a ceramic product is manufactured at our own factory in Stoke-on-Trent, at another Stoke-on-Trent factory or elsewhere. Our Stoke-on-Trent factory produces the finest English earthenware, it does not produce bone china, porcelain, stoneware or any of a myriad other styles of ceramics. Regardless of what products are demanded, all are manufactured to our high quality standards, as our reputation is in the backstamp. Because of the decline in sales to South Korea and India, markets which take large volumes of English-made product, in 2016 our factory production was pulled back; tableware products excluding home fragrance were 40% UK production and 60% overseas production in 2016 whereas in 2015 the proportions were 46% to 54%. Our new kiln came online in 2016 just a few weeks before we saw the reality of falling demand from India and South Korea. However, it has helped relieve a bottleneck with our existing glost kiln, is more fuel efficient than the existing tunnel kilns and significantly more fuel and labour efficient than the four intermittent kilns that we have had to use during high throughput periods. We are confident that should demand require it we can raise production to 170,000 pieces of best per week, and with some planning and reorganisation achieve 250,000 pieces of best per week. Average weekly production of best per week has been 130,000 in 2016. The search for new manufacturing efficiencies is unrelenting including seeking more automated ways of working. Clearly, putting more volume through the factory would be a marginal cost benefit with a great effect on profits. People We had 788 people employed with us at the year end, this compares to 691 at the end of 2015. Of these 153 were with Wax Lyrical, so we have reduced existing headcount by 56. We have had to balance production against demand and have avoided new hirings allowing natural reductions through retirements and leavers to adjust our cost base. Our workforce is flexible in respect of their skill base, which has helped. We have an apprenticeship programme and a graduate programme. Average sales per employee were £99,323 in 2016, a 1.1% reduction on the 2015 level. EBITDA per employee was just over £12,600 which is a reduction of 11.3% over 2015. 06 Portmeirion Group PLCAnnual Report and Accounts 2016Strategic ReportAverage wage costs per employee were just over £27,800, a 2.7% reduction on 2015. These average sales, EBITDA and wage costs per employee are key performance indicators. At over £21 million per annum, staff costs are the biggest item of expense in our business. Most of our people are in the UK at our Stoke-on-Trent factory, offices and warehouse, at our UK stores and at our Cumbrian factory, warehouse and offices; nearly 40 of our people are in the US at our warehouse, offices and showroom. We operate a non-contractual annual incentive scheme; for 2016 most of our people will receive a payment under this scheme, albeit it at generally lower levels than in previous years, by way of thanks for their continuing contribution and commitment to the long-term success of Portmeirion. No director of Portmeirion Group PLC will receive an incentive payment in respect of 2016. A Corporate and Social Responsibility page 18 The environment We recognise our environmental responsibilities and strive for more efficient use of resources and elimination of waste. We continue to beat the challenging targets on energy efficiency set as part of ongoing membership of a Climate Change Agreement. Our annual energy bills exceed £1.3 million per annum; it makes good commercial sense for us to care about energy usage. Our factory in Cumbria makes extensive use of renewable energy. We have a diversified approach to product sourcing, from our own factories in the UK, other UK sources and from overseas. This diversification increases the chances of a problem occurring but lessens the impact of any decision, although switching production does take time. Our long-closed defined benefit pension scheme continues to absorb cash. Last year we paid £1.4 million in and the previous year we paid in £0.9 million, although these figures do not reflect as costs. This is an example of a political risk; a political decision in 1997 is still feeding through and current monetary policy is hitting discount rates and thus liability levels. We continue to take action to de-risk the scheme. A Principal Risks and Uncertainties page 17 Corporate governance We recognise and welcome the benefits of corporate governance requirements and we implement them enthusiastically when we can see tangible shareholder benefits. We are an AIM-listed company and so are not subject to the full listing requirements and corporate governance rules which apply to companies with a full listing on the main market. In short, we comply where reasonable and where not we explain. We consider our approach to be forward looking and proactive in a number of areas, in particular in seeking re-election of all continuing Directors each year and in the efforts which we make to get shareholders to engage with us. Risks The principal risks which we consider we are subject to are listed on page 17; five of these risks merit a little more discussion here. The invaluable guidance provided by the Quoted Companies Alliance, of which we are enthusiastic members, is a vital yardstick for companies of our size. Good corporate governance provides shareholder value. Currency risks are carefully monitored by us on a daily basis. We are broadly covered by a natural hedge as our US dollar receivables from our US dollar denominated sales are largely matched by our US dollar payables for our purchases from the Far East. In the year under review and in 2017 this feature of the business is comforting as sterling has weakened so far against the US dollar. Other foreign exchange exposures are managed as appropriate. Political and regulatory decisions are often unforeseen, last year we noted the impending UK referendum on the EU and the US presidential election. We have weathered those storms thus far. We will continue to monitor any future changes to trading terms internationally and take action as appropriate. Energy costs are a major item of expenditure; we will maintain our relentless search for energy efficiencies, but we must be cognisant of the effect of weakened sterling feeding through to energy prices over time. A Corporate Governance Statement page 24 Senior management This year Brett Phillips, Group Finance Director and Portmeirion UK Managing Director, is retiring. Brett has been a big part of Portmeirion since 1988 when he was appointed as Group Finance Director; he is probably the longest serving finance director on the Stock Exchange. His careful guidance, industry and company knowledge, conservative financial approach and cheerful disposition will be missed. We are currently recruiting a replacement. We wish Brett well for the future and have asked him to retain a link to Portmeirion by chairing Furlong Mills Limited, an associate company which provides us with raw materials, for at least a year after his retirement. The Board has been strengthened by the appointment of Michael Knapper as Operations Director and by the appointment of Moira MacDonald as Company Secretary. 07 Portmeirion Group PLCAnnual Report and Accounts 2016Business Model and Strategy Portmeirion Group PLC is a British company with its headquarters in Stoke-on-Trent. Our shares are traded on the Alternative Investment Market (“AIM”) of the London Stock Exchange. We sell ceramic tableware, cookware, giftware, glassware, home fragrance products and associated housewares worldwide; our main markets are detailed on page 3. The Group manufactures in England – ceramics in Stoke-on-Trent and home fragrance products in Cumbria – and we source products worldwide. We have warehouses in Stoke-on-Trent and Cumbria, England, and in Connecticut, USA and Guangdong, China. We are international. 1 2 3 Guiding principles Income Underlying everything we do are the guiding principles of nurturing our brands, continuing product development, assured quality, conservative financing and the drive to improve dividends. These principles are reinforced by an emphasis on diversity; we strive for diversity in our markets, products, suppliers and workforce so as to ensure the long-term prosperity of the business. The Group’s revenue is generated from a variety of channels, markets and currencies. Products are sold directly to consumers from our own UK shops and via the internet in the UK, the USA and elsewhere, and are sold to consumers via third parties from a network of agents, distributors and retailers throughout the world. We enjoy some royalty income from the valuable intellectual property embedded in our brands, patterns and designs. Our continued concentration on customer attentive product development and brands is reflected in the longevity of our patterns. Profitability and cash generation The business profitability and cash generation depend on sales volumes and prices, manufacturing levels, sourcing costs, overhead costs and working capital management. Growing sales and controlling costs drive healthy operating margins and cash balances. Sales volumes and prices, which are supported by product innovation, are carefully measured and our progress in key markets is monitored by customer feedback and input with particular focus on new product launches. We remain committed to product development; in the last twelve months we have launched over 460 new products including ranges such as Portmeirion Choices, Botanic Blooms and Sara Miller, and Spode Strawberry Thief. 08 Portmeirion Group PLCAnnual Report and Accounts 2016Strategic ReportPortmeirion The Holly and The Ivy Pimpernel Crimson Trees Portmeirion Sara Miller 4 Brands Much of the value of the Group lies within the five brands and the patterns which underpin these brands; our brands are described in detail on pages 11 to 15. Portmeirion has been an innovative brand since 1960. Within the Portmeirion catalogue is Botanic Garden, which is a traditional casual pattern with worldwide appeal. It was first manufactured in 1972 and is a brand in itself being one of the most sought after, recognisable and valuable tableware patterns in the world. The Sophie Conran for Portmeirion ranges are more contemporary than Botanic Garden and also have significant export appeal. The Spode and Royal Worcester brands were acquired in 2009; their heritage goes back more than 250 years. We continue to develop these brands with new pattern introductions, Royal Worcester Wrendale Designs being an outstanding example, and refresh their heritage ranges with new products. Spode Blue Italian still generates sales of over £2.5 million a year from a 5 Funding 200 year old pattern. Spode Christmas Tree, which is 80 years old in 2018, generates sales of $10 million a year, mainly from North America. Portmeirion Group PLC is listed on the AIM. The AIM gives us access to equity capital should we so require. Our shares are actively traded. We acquired the Wax Lyrical brand in May 2016 for a net cost of just under £17 million; much of this purchase price can be ascribed to the brand value. Our expenditure on maintaining, building and protecting our brands and patterns is significant; our future success as a business depends upon it. On average some 45,000 individual items carrying our prestigious brand names are sold every day worldwide; each item sold carries our reputation with it. The Group remains keen to acquire and develop other brands which can fit within our business model. We review many opportunities against our strict criteria of strategic fit, value and combined growth opportunities. Funding for the business is provided by our own cash resources and a £2 million overdraft, a £10 million revolving credit facility and a £10 million term loan provided by Lloyds Bank plc; this ensures that our short-term borrowing requirements are adequately covered. The third and fourth quarters of our calendar and financial year have a significant working capital requirement as we build stocks and then debtors to meet the increased consumer demand over our important fourth quarter which includes Christmas. The Group is cash generative, over the last eight years we have averaged over £5 million a year generated from operating profits, and aims to provide a sustainable and growing return to shareholders through a progressive dividend policy, increasing dividends where profitability, cash generation and business needs allow. 09 Portmeirion Group PLCAnnual Report and Accounts 2016Snapshot of 2016 Queen’s Award 2016 In June 2016 the Group was informed that it had won the Queen’s Award for Enterprise in the category of International Trade, which recognises the Company’s continuous growth in international trade over the last six years. Wax Lyrical Fired Earth The Wax Lyrical Fired Earth decorative candle tin collection was The Giftware Association’s Gift of the Year 2016, in the home fragrance category. Ted Baker Portmeirion Ted Baker Portmeirion Rosie Lee range won the Best Licensed Brand Home and Garden Product or Range at the Brand and Lifestyle Licensing Awards. Apprenticeship and Training Award Portmeirion UK was awarded the Insider Made in the Midlands Apprenticeship and Training Award 2016 in recognition of our commitment to the development of skills for local young people and current employees. International Trade awards Portmeirion UK was presented with the 2016 International Trade Award in The Sentinel Business Awards. Portmeirion UK was awarded the 2016 International Trade award at the Staffordshire Chambers Business Awards. The Douglas Macmillan Hospice Corporate Partner 2017 Gold Award Portmeirion UK achieved a Gold Corporate Partner Award for their contribution to the Douglas Macmillan Hospice. Portmeirion exceeded their initial fundraising target of £5,000, largely as a result of the passion and dedication shown by all of our staff who have fundraised or given their time. 10 Portmeirion Group PLCAnnual Report and Accounts 2016Strategic ReportOur Brands 11 Portmeirion Group PLCAnnual Report and Accounts 2016Portmeirion is recognised worldwide for producing unique designs as epitomised by its best-selling and timeless Botanic Garden range. The award-winning Sophie Conran for Portmeirion and Ted Baker Portmeirion ranges together with the new Choices collection showcase the diverse, high quality products within the brand which deliver both beautiful designs and practicality for modern-day living.www.portmeirion.co.ukPictured: Portmeirion Botanic BloomsOur Brands continued 12 Portmeirion Group PLCAnnual Report and Accounts 2016Strategic ReportRenowned for its rich heritage and timeless designs, Spode’s product portfolio appeals across the generations and includes celebrated British designs such as Blue Italian, Blue Room and Christmas Tree. These classic and intricately detailed designs have stood the test of time with Spode being widely regarded as one of the UK’s great ceramic brands. www.spode.co.ukPictured: Spode Christmas Tree13 Portmeirion Group PLCAnnual Report and Accounts 2016Portmeirion Group acquired Wax Lyrical in May 2016. Wax Lyrical is the UK’s largest home fragrance company and its products are British made. An extensive range of candles, reed diffusers and room mists are manufactured and distributed from its base in the Lake District. As well as Wax Lyrical and Colony branded products, Wax Lyrical supplies private-label ranges to supermarkets and other retailers.www.wax-lyrical.comPictured: Wax Lyrical Fired EarthOur Brands continued 14 Portmeirion Group PLCAnnual Report and Accounts 2016Strategic ReportFounded in 1751, Royal Worcester has a rich and diverse design heritage. The brand offers a wide spectrum of quality products from fashionable fine bone china mugs and sophisticated, competitively priced tableware sets to the unique and opulent Painted Fruit collection. Quirky new characters have enhanced the popularity of the brand’s Wrendale Designs licensed collection of mugs and giftware.www.royalworcester.co.ukPictured: Royal Worcester Wrendale Designs15 Portmeirion Group PLCAnnual Report and Accounts 2016With its unrivalled reputation for quality products, Pimpernel, the premier brand for placemats, coasters, trays and accessories, continues to build on its holistic solution for the tabletop with the introduction of new and exclusive designs.www.pimpernelinternational.co.ukPictured: Pimpernel Chef’s SpecialsKey Performance Indicators The following charts illustrate a number of key performance indicators that the Group reviews on a regular basis and by which overall business performance is measured. Return on sales (%) New products launched Revenue (£’000) £76,677 +11.7% 10.4% -16.8% 2016 2015 2014 2013 2012 76,677 68,669 61,370 58,295 55,525 2016 2015 2014 2013 2012 465 +29.5% 2016 2015 2014 2013 2012 10.4 12.5 12.3 12.1 12.0 465 604 540 359 360 Revenue growth is key, in existing markets and in new markets. 2016 was our eighth successive year of revenue growth, with the part-year sales of Wax Lyrical being the most important contributor to the increase over prior year. Return on sales expresses operating profit as a percentage of revenue. Because of our high fixed cost base, increases in revenue growth can have great effect on return on sales. The return on sales was impacted during 2016 by the reduction in manufactured sales to South Korea and India. New products launched include new ranges and extensions to existing ranges; these are essential to help drive revenue growth in future years and so in many ways represent expenditure today for benefit tomorrow. The Group has a strong track record of launching new products and in 2017 will be launching home fragrance products into our established ceramic ranges. Basic EPS (p) 59.60p -9.7% 2016 2015 2014 2013 2012 Dividend cover 1.85x -16.3% 59.60 66.02 57.64 53.26 47.28 2016 2015 2014 2013 2012 1.85 2.21 2.17 2.21 2.12 Earnings per share is a shorthand measure of profitability; it takes all the revenue and costs from the year and divides the post-tax profit arising by the number of active shares in issue. It is a measure which helps determine the amount of dividend which can be declared and paid and, as such, together with dividend cover, summarises the final annual output for shareholders. Dividend cover shows the extent to which profits exceed dividends paid. The Board continues to consider dividend cover of two to be an appropriate and sustainable level, although a marginal fall for the 2016 dividend cover below this guideline can be temporarily accommodated. 16 Portmeirion Group PLCAnnual Report and Accounts 2016Strategic ReportPrincipal Risks and Uncertainties The Group Board considers the risks to the business at every Board meeting. It formally reviews and documents the principal risks to the business at least annually. The principal risks inherent in the Group’s business model include the following: Risk Mitigation Economic environment Whilst there is renewed optimism regarding the general world economy and hope for an economic recovery, retail conditions remain challenging following the uncertainty created by the Brexit vote and further adverse conditions in the retail sector would have a detrimental impact on trading. Competitors The Group faces strong competition in most of the major markets in which it operates, which presents a risk of losing market share, revenue and profit. The Group monitors and maintains close relationships with its key customers and suppliers to be able to identify signs of financial difficulties early in order to prevent or limit any potential losses. Customer orders and sales trends in major markets are constantly reviewed to enable early action to be taken in the event of sales declining. The general economic factors affecting the Group during the period are discussed further in the Chairman and Chief Executive’s Review on pages 4 to 7. This risk is managed by ensuring that high quality and innovative products are brought to market, maintaining strong relationships with key customers and ensuring the Group is aware of local market conditions, trends and industry-specific issues and initiatives. This enables the Group to identify and address any specific matters within the overall business strategy. Change L Increase L Increase People Skilled senior managers and personnel are essential in order to achieve the strategic objectives of the Group. Failure to recruit and retain key staff would present significant operational difficulties for the Group. Suppliers The Group’s purchasing activities could expose it to overreliance on certain key suppliers or markets and, as a result, inflationary pricing pressure. Production is split between our UK factories and outsourced supply, which allows the Group to mitigate some of the risk presented by suppliers. Financial risk Financial risk is wide-ranging and covers capital management, credit risk, currency risk and liquidity risk. The risks presented in these areas include the failure to achieve business goals, potential financial losses caused by default, reduction in profitability due to currency fluctuations and insufficient funds to complete the daily business function and consequent threat to the going concern basis of the organisation. Existing staff are provided with relevant training and career progression to improve motivation. The Group has a clearly defined recruitment policy which ensures that new employees meet the required standard and experience for each position. I No change Management also seeks to ensure that personnel are appropriately remunerated to ensure that good performance is recognised. For the manufacturing process conducted in the UK, the Group ensures that key raw materials are available from more than one source to ensure continuity of supplies. I No change For the sourcing process, suppliers are carefully selected and the Group seeks to maintain a sufficient breadth in its supplier base such that the risk remains manageable. The Group also ensures that all intellectual property rights are retained and easily transferable should an alternative supplier be required. Details of the Group’s approach to management of these risks and the systems in place to mitigate them are covered in the financial risk management objectives in note 31 on pages 76 to 78. L Increase During 2016 the weakening of sterling against the US dollar was a risk that was negotiated in part by a natural self hedge and the remainder by US dollar currency contracts. 17 Portmeirion Group PLCAnnual Report and Accounts 2016Corporate and Social Responsibility Portmeirion UK’s Employee of the Year winner Alan Varley. Portmeirion UK completed a 200 for 200 volunteer scheme during the year. Environmental policy The Group recognises the importance of its environmental responsibilities and monitors its impact on the environment. Policies are designed and implemented to reduce damage that might be caused by the Group’s activities. Efficient use of resources is important to the Group. Products are designed and production processes formulated to target high manufacturing yields, thus optimising the utilisation of resources. Initiatives designed to reduce the Group’s impact on the environment include the recycling of manufacturing waste, reducing carbon emissions and utilisation of recyclable packaging materials. In addition, the Group’s products are designed to achieve a long ‘Product Life Cycle’ so that they need only be replaced after a lengthy period of time. Other measures include the safe disposal of manufactured waste, energy recycling and reduction of energy consumption. The Group will continue to recycle its main waste streams, scrap product, plaster of Paris moulds and cardboard, as appropriate. Approximately half of the energy used at Wax Lyrical’s production site in Cumbria during 2016 was provided by wind turbine, which on average can supply 1,283,902 kWh of “green” electricity per year and saves up to 559 tonnes of carbon dioxide in emissions per year. Wax Lyrical won the Insider Made in the North West Award for Green Innovation in 2016. Portmeirion UK’s commitment to reducing its carbon emissions is evidenced by having been subject to a Climate Change Agreement since 2000. During 2016, the Company continued to beat the challenging targets on energy efficiency set as part of its ongoing membership of this agreement. Employees The Group recognises that our people are our greatest asset and that the Group’s performance and its success within our marketplace is directly related to the effectiveness of our people, who deliver the high quality products and exceptional service that we are renowned for. The Group aims to attract, retain and motivate the highest calibre of employees within a structure that encourages their development to maximise their contribution to our customers and the Group. The Group has established people centred policies which are communicated and updated via our internal physical and electronic notice boards, employee briefings and newsletters to build the ‘one team’ ethos embedded in our Group values. We operate employee forums where representatives from different areas meet to discuss business related issues. Employee engagement is measured by opinion surveys. Portmeirion UK’s 2016 survey, showed that 90% of employees responding said that they were happy or very happy to be working for the Group and in Wax Lyrical’s 2016 survey 91% of employees responding said that they were proud to work for Wax Lyrical. In 2016, the Group continued to align both individual and team objectives to focus on the aims, vision and values set by each operating subsidiary and that are specific to their business and their stakeholders. Recognition Throughout the Group we operate employee recognition schemes including discretionary incentive schemes, length of service and good attendance awards. These schemes reinforce employee actions which support Group aims and values, foster a sense of belonging and a recognition culture. Employee performance is measured against formal objectives set annually with line management and on which regular feedback is given. 18 Portmeirion Group PLCAnnual Report and Accounts 2016Strategic ReportIn 2016, Portmeirion UK recognised its first winner of its employee voted ‘Employee of the Year’ award. The winner, Alan Varley, showed exceptional focus, commitment and dedication in his duties as a senior engineer in our Stoke-on-Trent factory. Training The Group provides a number of training and development opportunities across all areas of the business to ensure that our employees have all of the necessary skills to competently perform their roles. These opportunities include National Vocational Qualifications, professional development, first aid training and other specific job-related training courses. Management development is addressed including through accredited qualifications in leadership and management. Within our manufacturing and distribution centres we aim to train all of our employees to be multi-skilled so they can perform in a variety of roles to aid flexibility. We use training needs analysis to highlight any skills gaps within our ceramic manufacturing processes and to drive succession planning. We recognise the benefits of coaching and mentoring and are particularly proud of our number of internal skills trainers. Our Stoke-on-Trent production function has 18 such trainers and we hope to increase this by a further 5 in 2017. Internal trainers have the very best knowledge of the job that they are doing and sharing their expertise is crucial to ensuring that those valuable, developed skills are not lost. Reward strategy Our reward strategy aims to provide a package that offers competitive pay and distinctive benefits. All employees are offered membership of our Group personal pension plans which provide employer contributions for all members. Health and Safety The Group promotes a positive health and safety culture throughout the business to ensure that all of our people consider health, safety and welfare issues while at work and make an effective contribution towards maintaining and improving health and safety standards. By using this approach the Group aims to reduce accidents and provide a healthy workplace and working environment. Representatives from across the business are involved in health and safety committee meetings. Reporting of not only all injuries or incidents but near misses too is required and actively encouraged. All new employees receive in-house health and safety training with further training undertaken as the employee role or need requires. 386 employees in Portmeirion UK and 147 in Wax Lyrical have received in-house health and safety training in 2016. Recruitment Youth unemployment remains one of the biggest social issues that the UK faces. During 2016 some of our employees visited local high schools on career days to help guide young people to a future career with us. Giving people the opportunity to succeed is at the heart of our ethos and we recognise the value young people can bring to building a dynamic and productive workforce. To help with our future succession planning we are aiming to recruit a further 10 apprentices during 2017. Wellbeing Investment in our people stretches beyond their careers to their wellbeing generally. Our new Portmeirion UK Health and Wellbeing calendar provides free advice on matters such as: healthy eating and exercise, smoking cessation, cancer awareness, further education, alcohol and drug awareness, mental health support and pension planning. Portmeirion UK has recently been accredited for the Workplace Wellbeing Charter. Community Helping the community is important to us. Most of our financial contributions to charities come from the efforts and personal involvement of our staff, with support from the Board. Product donations are also made to local charities. During 2016, Portmeirion UK supported the Douglas Macmillan Hospice as its employee chosen Charity of the Year. This support included a 200 for 200 volunteer scheme which entailed employees completing over 200 hours of charitable service in celebration of Spode Blue Italian’s 200th anniversary and a Charity night raising £16,000. The highly successful volunteer scheme actually delivered 273 volunteering hours to help with activities such as gardening, coin counting, retail support and popular mobile lithographing in-patient craft therapy sessions. For many years St Mary’s Hospice has been Wax Lyrical’s nominated charity and has received fundraising support as well as sponsored advertisements and dedicated clothes donation banks on site. Investor in People Both the Group’s UK trading subsidiaries are officially recognised as Investors in People (IiP); Portmeirion UK at silver level and Wax Lyrical at bronze level. This prestigious accreditation is recognised across the world as a mark of excellence and demonstrates our commitment to employee engagement, health and wellbeing and skills enhancement. 19 Portmeirion Group PLCAnnual Report and Accounts 2016Corporate and Social Responsibility continued The Group aims to use contractors that are, as a minimum, appropriately qualified and ideally experienced in the ceramics and home fragrance industry. New contractors undergo health and safety inductions. Risk assessments are carried out on all major assignments and contractors are required to provide method statements for major works. The Group will either agree terms of payment with suppliers and contractors at the start of business or ensure that the supplier or contractor is aware of the Group’s payment terms. Payment will be made in accordance with contractual or other legal obligations. Relations with customers The Group is committed to providing safe, value for money, high quality products and to developing and maintaining positive relationships with its customers. All employees are expected to behave respectfully and honestly in all their dealings with customers and the general public. The Group encourages feedback from its customers through trade account managers and engagement with individual customers through customer service teams and social media such as Facebook and Twitter. Investment in Young People Portmeirion UK won the Apprenticeship and Training Award 2016 at the Insider Made in the Midlands Awards, recognising our commitment to the development of skills for local young people and current employees. We are very proud of this award and look forward to the continued success of our Home Grown Talent Programme. Ethics and Human Rights The Group aims to conduct its business with honesty, integrity and openness, respecting human rights and the interests of its employees, customers and third parties. The Group advocates high ethical standards in carrying out its business activities and has policies for dealing with gifts, hospitality, bribery, corruption, modern slavery, whistle-blowing, conflicts of interest and inside information. Relations with suppliers, partners and contractors The Group expects its suppliers to adhere to business principles consistent with the Group’s own. Suppliers are expected to adopt and implement acceptable health and safety, environmental, product quality, labour, human rights, social and legal standards in line with the Group’s Supplier Code of Conduct. The selection of new suppliers will continue to be subject to them meeting high international standards of compliance. Conformance to these standards is assessed by on-site audits at the supplier’s premises. All suppliers are requested to complete pre-prepared compliance declarations. The Group will continue to test all products for compliance with international standards in relation to quality and technical performance. Supplier compliance requirements cover both: • a Code of Conduct: covering social and ethical treatment of workforce, minimum age of workforce, health and safety, working conditions and environmental waste control; and • quality of goods: quality must meet or exceed international quality, technical performance and safety standards. 20 Portmeirion Group PLCAnnual Report and Accounts 2016Strategic ReportGoing Concern and Outlook Going Concern The business activities of the Group, its current operations and factors likely to affect its future development, performance and position are set out in the Chairman and Chief Executive’s review on pages 4 to 7. In addition, note 31 to the accounts includes an analysis of the Group’s financial risk management objectives, details of its financial instruments and hedging activities and its exposure to credit and liquidity risk. Outlook Trading in the first two months of the current year is over 20% ahead of the comparative period in 2016 with Wax Lyrical’s sales in for the first time. Excluding Wax Lyrical, the business is currently trading marginally ahead of 2016. However, as we remain increasingly second half weighted, sales in these first two months of the year are low in comparison to the balance of the year. The Group has a formalised process of monthly budgeting, reporting and review, and information is provided to the Board of Directors in order to allow sufficient review to be performed to enable the Board to ensure the adequacy of resources available for the Group to achieve its business objectives. At the year end the Group had net borrowings of £2.3 million and, as disclosed in note 23, had unutilised bank facilities with available funding of £12 million. Operating cash generation was strong during the year at £6.9 million (2015: £10.7 million). Overall cash decreased by £13.5 million, largely due to the funding required for the Wax Lyrical acquisition of £16.7 million. This was funded partly by cash reserves and the remainder from a term loan repayable over five years. The Group sells into over 60 countries worldwide and has a spread of customers within its major UK and US markets with adequate credit insurance cover in export markets where required. The Group manufactures approximately 48% of its products and sources the remainder from a range of third-party suppliers. After making enquiries and reviewing budgets and forecasts for the Group, the Directors have a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts. Our business is worldwide for revenues and for supplies; our ranges have longevity and our brands have heritage and strength. Our strategy and core values remain unchanged; we believe in attentive design, assured quality, a professional sales approach, nurtured brands, prudent financing and progressive dividends. The greatest of these beliefs is dividends, and our ability to maintain our dividend policy is dependent on the delivery of our strategy and the strength of our core values. Of immediate importance to us is volume throughput in our factories and leveraging the benefits of the Wax Lyrical acquisition. We will continue to seek out acquisition opportunities to match our demanding criteria. Our brands, quality standards, people, production facilities, suppliers, logistics, designs and finances are all in fine fettle. We remain confident in our ability to create shareholder value in the short, medium and long term. Approved by the Board of Directors and signed on behalf of the Board. Dick Steele Non-executive Chairman 8 March 2017 Lawrence Bryan Chief Executive 21 Portmeirion Group PLCAnnual Report and Accounts 2016 Board of Directors Chairman’s introduction “We believe that good corporate governance is a building block of a successful and sustainable business. Although compliance with the UK Corporate Governance Code is not mandatory for AIM companies, such as ourselves, the Company continues to operate a framework of policies and procedures designed to comply with a number of the Code’s provisions as far as is reasonably practicable and appropriate for a company of our size and complexity.” Dick Steele Non-executive Chairman R A N Remuneration Committee Audit Committee Nomination Committee 22 N Lawrence Bryan Chief Executive Lawrence Bryan oversees all the Group’s business and is responsible for formulating the Group’s objectives and strategy. In addition, all operations in the United States report directly to him as President of Portmeirion Group USA, Inc., as well as the newly acquired Wax Lyrical business. Lawrence has extensive experience in the glass, ceramics and gift industry. He was previously the Vice President, Sales of Waterford Wedgwood USA, President of Waterford Wedgwood USA Retail and President of International China Company. He is a Fellow of the Royal Society of Arts. Philip Atherton Group Sales and Marketing Director Phil Atherton is responsible for Portmeirion UK’s sales, marketing and design. Before joining the Group, Phil was the Sales and Marketing Director of the Home Textiles division of the John Cotton Group Limited. He also spent twelve years in the drinks industry working in a number of commercial roles with Remy & Associates (UK) Limited, The Gaymer Group Limited and Allied Domecq PLC where he gained extensive experience of working with premium brands. Portmeirion Group PLCAnnual Report and Accounts 2016Corporate GovernanceR A N Dick Steele Non-executive Chairman Dick Steele is responsible for leading the Board and ensuring that it operates in an effective manner whilst promoting communication with shareholders. He is a Fellow of the Institute of Chartered Accountants in England and Wales and also a member of the Institute of Taxation. He is a Non-executive Director of the Quoted Companies Alliance and Non-executive Chairman of two private equity backed businesses: ASL and Country Baskets. R A N Janis Kong OBE Non-executive Director Janis Kong has extensive experience in retail, consumer products and risk management. She is Chairman of Bristol Airport Limited, Non-executive Director of Copenhagen Airports A/S and Tui AG. Formerly, she held positions as Non-executive Director of the Royal Bank of Scotland Group PLC, Network Rail Limited and Visit Britain, Executive Chairman of Heathrow Airport Limited, Chairman of Heathrow Express Limited and a member of the BAA plc Board. R A N Lady Judge CBE Non-executive Director Lady Barbara Judge was previously an international corporate lawyer with significant experience as a senior executive and non-executive director and chairman in the private and public sectors. She is the Chairman of the Institute of Directors and Non-executive Chairman of CIFAS and LoopUp Group plc. Formerly she was Chairman of the UK Pension Protection Fund and the UK Atomic Energy Authority, Deputy Chairman of the UK Financial Reporting Council and a Commissioner of the United States Securities and Exchange Commission. Michael Knapper Operations Director Mick Knapper was appointed to the Board on 1 March 2017 and is responsible for Portmeirion UK’s sourcing, production, information systems, human resources and logistics functions. Mick has held several roles in IT and logistics since joining Portmeirion in 1998. He has been responsible for the Group’s IT and logistics in the UK since 2009 and a member of the Board of the Company’s main operating subsidiary, Portmeirion Group UK Limited, since 2011. Brett Phillips Group Finance Director Brett Phillips is responsible for all aspects of financial control and legal matters. He is Managing Director of Portmeirion Group UK Limited, the Group’s main operating company, and sits on all subsidiary boards. Brett is a Chartered Accountant. He is Chairman of the Board of Furlong Mills Limited, an associated undertaking of the Group. Brett will retire from the Group during 2017. Moira MacDonald Company Secretary Moira MacDonald was appointed on 1 March 2017 replacing Brett Phillips as Company Secretary. Moira is a Chartered Secretary and has held the position of Deputy Group Secretary since joining the Group in 2007, prior to which she was Assistant Company Secretary at Legal & General Group plc and at BPB plc. 23 Portmeirion Group PLCAnnual Report and Accounts 2016Corporate Governance Statement As a company listed on the Alternative Investment Market (AIM) the Company is not required to adhere to the UK Corporate Governance Code 2014 (the “Code”). The Company has regard to the Code as best practice guidance; however, it has not sought to comply with the full Code. The Board The Company is controlled by the Board of Directors. The Board comprises four Executive and three Non-executive Directors. The Board considers, after careful review, that the Non-executive Directors bring an independent judgement to bear notwithstanding their length of service. The Board has considered the need for progressive refreshing of the Board in formulating this view. All Non-executive Directors have contracts which expire on the completion of one year’s notice. These are available for inspection at the Company’s registered office and at the Annual General Meeting. The Company’s Articles of Association require that all Directors retire no later than at the third Annual General Meeting of the Company after the general meeting at which he/she was appointed or last reappointed. The Board has decided to adopt voluntarily the practice that all continuing Directors stand for re-election on an annual basis in line with recommendations of the Code. All Directors undergo a performance evaluation before being proposed for election/re-election to ensure that their performance is and continues to be effective, that where appropriate they maintain their independence and that they are demonstrating continued commitment to the role. Dick Steele, the Non-executive Chairman, is responsible for the running of the Board and Lawrence Bryan, the Chief Executive, has executive responsibility for running the Group’s business and implementing Group strategy. The Board has not appointed a Senior Non-executive Director. The Board believes that, given its size, there is sufficient opportunity for shareholders to raise any concerns they may have with the Non-executive Chairman, the Chief Executive, the Group Finance Director, the other two Non-executive Directors or the Company Secretary. The Board meets at least five times each year and has a formal schedule of matters reserved to it. It is responsible for overall Group strategy, approval of major capital expenditure projects, approval of the annual and interim results, annual budgets, dividend policy and Board structure. It monitors the exposure to key business risks and reviews the strategic direction of all trading subsidiaries, their annual budgets, their performance in relation to those budgets and their capital expenditure. The Board delegates day-to-day responsibility for managing the business to the Executive Directors and the senior management team. All Directors receive regular and timely information on the Group’s operational and financial performance. Relevant information is circulated to the Directors in advance of meetings. In addition, minutes of the meetings of the Directors of the main UK subsidiary are circulated to the Group Board of Directors. All Directors have direct access to the advice and services of the Company Secretary and are able to take independent professional advice in the furtherance of their duties, if necessary, at the Company’s expense. The following table shows the attendance of the Directors at meetings of the Board and its principal Committees during 2016: Total meetings held(1) Meetings attended R.J. Steele (Non-executive Chairman) L. Bryan (Chief Executive) P.E. Atherton (Group Sales and Marketing Director) Lady Judge (Non-executive) J. Kong (Non-executive) B.W.J. Phillips (Group Finance Director) Notes: Board Audit Committee Remuneration Committee Nomination Committee 5 5 5 5 5 5 5 3 3 3(2) 3(2) 3 3 3(2) 3 3 3(2) n/a 3 3 1 1 1 n/a 1 1 n/a n/a (1) During the year additional Board and Remuneration Committee meetings were held and attended by a duly authorised committee of members of the Board, principally to discuss share option matters. (2) Meetings which the Director attended, in whole or in part, by invitation. 24 Portmeirion Group PLCAnnual Report and Accounts 2016Corporate GovernanceDuring the year the Board carried out an evaluation of its own performance, taking into account guidance included in the Financial Reporting Council’s Guidance on Board Effectiveness. The Board concluded that it had performed effectively. During the year appraisals were carried out with the Directors. The Group Finance Director and the Group Sales and Marketing Director were appraised by the Chief Executive, who, in turn, was appraised by the Chairman. Additionally, the Chairman appraised the Non-executive Directors. The Non-executive Directors appraised the Chairman’s performance without the Chairman being present. The Board has three Committees which assist in the discharge of its responsibilities – the Audit, Remuneration and Nomination Committees. The terms of reference for each Committee are available on the Company’s website at www.portmeiriongroup.com. These terms of reference are reviewed annually together with Committee composition and performance. The Board considers it appropriate that Dick Steele, with his experience and expertise in financial control and risk management, chairs the Audit Committee. The Company Secretary supports the Chairman in addressing the training and development needs of Directors. The Remuneration Committee believes that the presence of the Chief Executive is important when determining the remuneration of the other Executive Directors. The Chief Executive does not participate in discussions relating to his personal remuneration. Audit Committee The Audit Committee considers any matter relating to the financial affairs of the Group and to the Group’s external audit that it determines to be desirable. In particular, the Committee oversees the monitoring of the adequacy of the Group’s internal controls, accounting policies and financial reporting and provides a forum through which the Group’s external auditors report to the Non-executive Directors. During 2016, the Committee considered the following significant issues, with management and the external auditors, in relation to the financial statements: internal controls, defined benefit pension scheme, goodwill and intangible assets, revenue and income recognition and inventory provisions. Board of Directors Remuneration Committee The Remuneration Committee is responsible for making recommendations to the Board in relation to all aspects of remuneration for Executive Directors. In framing its policy, the Remuneration Committee takes into account any factors which it deems necessary, including industry-standard executive remuneration, differentials between Executive Director and employee remuneration and differentials between Executive Directors. When designing schemes of performance related remuneration the Remuneration Committee considers the provisions in Schedule A to the Code. The remuneration of the Non-executive Directors is determined by the Executive Directors. Nomination Committee The Nomination Committee oversees the process and makes recommendations to the Board on all new Board appointments. Where new Board appointments are considered, the search for candidates is conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the Board, including gender. The Committee also considers the re-election of Directors retiring by rotation and succession planning. Dick Steele (Chairman) Lady Barbara Judge Janis Kong Dick Steele (Chairman) Lady Barbara Judge Janis Kong Dick Steele (Chairman) Lady Barbara Judge Janis Kong Lawrence Bryan 25 Portmeirion Group PLCAnnual Report and Accounts 2016Corporate Governance Statement continued Internal control The Board acknowledges that it is responsible for the Group’s overall approach to risk management and internal control and for reviewing the effective application of risk management and internal control systems. An ongoing process for identifying, evaluating and managing or mitigating the principal risks faced by the Group has been in place throughout the financial year and has remained in place up to the approval date of the report and accounts. That process is regularly reviewed by the Board and accords with the principles in The Financial Reporting Council’s Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, published in September 2014. The Board intends to keep its risk control procedures under constant review, particularly with regard to the need to embed internal control and risk management procedures further into the operations of the business, both in the UK and overseas, and to deal with areas of improvement which come to management’s and the Board’s attention. As might be expected in a group of this size, a key control procedure is the day-to-day supervision of the business by the Executive Directors, supported by the senior managers with responsibility for key operations. The Board has considered the impact of the values and culture of the Group and ensures that, through staff communication and training, the Board’s expectations and attitude to risk and internal control are embedded in the business. The Executive Directors are involved in the budget setting process, constantly monitor key performance indicators and review management accounts on a monthly basis, noting and investigating major variances. All significant capital expenditure decisions are approved by the Board as a whole. The Group’s principal risks, together with the relevant control and monitoring procedures, are subject to regular review to enable the Board to assess the effectiveness of the system of internal control. The adequacy of internal controls with regard to the risks identified are reviewed at every Board meeting. The Board has also specifically reviewed the effectiveness of the Group’s internal financial controls. These regular reviews allow the Board to re-evaluate the risks and adjust controls effectively in response to changes in attitude to risk, in our business or in the external environment. During the course of its reviews the Board has not identified nor been advised of any failings or weaknesses which it has determined to be significant. The Board has considered the need for an internal audit function, but has decided that, because of the size of the Group and the systems and controls in place, it is not appropriate at present. The Board will review this on a regular basis. The Group’s system of internal control is designed to identify fraud or material error and manage, rather than eliminate, the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss. The Audit Committee reviews arrangements by which employees of the Group may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters, so seeking to ensure that appropriate arrangements are in place for the proportionate and independent investigation of such concerns and for appropriate follow-up action. Auditors Annually, the Audit Committee reviews the relationship the Company has with the external auditors including the scope of the audit work, the audit process, fees and audit independence. The last review, in November 2016, concluded that the Committee was satisfied with the effectiveness of the external audit. Mazars LLP have acted as the Company’s auditors since 2009. The external auditors are required to rotate the audit partner responsible for the Company and subsidiary audits every five years and a new lead audit partner was appointed in 2014. Mazars LLP are recommended for reappointment as auditors at the AGM on 25 May 2017. Whilst the Code recommends that FTSE 350 companies should tender their external audit contract at least every ten years, this does not apply to the Company, which is AIM listed. Non-audit services The Audit Committee is responsible for keeping under review the nature and extent of non-audit services provided by the external auditors in order to ensure that objectivity and independence are maintained. For non-audit work, the policy is that the Group does not use the external auditors unless they have the necessary skills and experience to make them the most suitable supplier. There are appropriate safeguards in place to eliminate or reduce to an acceptable level any threat to the objectivity and independence of the external auditors in the provision of non-audit services. Fees paid to the auditors for non-audit services are disclosed in note 8 on page 61. The external auditors have in place processes to ensure their independence is maintained including safeguards to ensure that where they do provide non-audit services their independence is not threatened. They have written to the Audit Committee confirming that, in their opinion, they are independent. 26 Portmeirion Group PLCAnnual Report and Accounts 2016Corporate GovernanceConflicts of interest In line with the requirements of the Companies Act 2006, the Directors have put in place a policy and process for notifying and recording the nature and extent of their interests, together with those of connected persons, in organisations and companies outside the Group. Each Director must formally notify the Company if there is the potential for these interests to conflict with their duties as a Director of the Company. All such notifications are regularly reviewed by the Board. Relations with shareholders The Group encourages two-way communication with both its institutional and private investors and responds quickly to all queries received. The Chairman talks regularly with the Group’s major shareholders and ensures that their views are communicated fully to the Board. The Chairman wrote to significant institutional shareholders in February 2017 offering a meeting to discuss corporate governance matters. The Non-executive Directors are offered the opportunity to attend meetings with major shareholders. All shareholders receive notice of the Annual General Meeting (AGM) at which the chairmen of all committees will be available for questions. The Board recognises the AGM as an important opportunity to meet private shareholders. At its AGM, which is chaired by the Chairman, the Company complies with the provisions of the Code relating to the notice period required, the disclosure of proxy votes, the separation of resolutions and the attendance of committee chairmen. The Directors are available to listen to the views of shareholders informally immediately following the AGM. Financial reporting The Board seeks to present a fair, balanced and understandable assessment of the Group’s position and prospects. Details are given in the Strategic Report on pages 1 to 21. Approval This report was approved by the Board and signed on its behalf by: Dick Steele Non-executive Chairman 8 March 2017 27 Portmeirion Group PLCAnnual Report and Accounts 2016Directors’ Remuneration Report This report is on the activities of the Remuneration Committee for the year ended 31 December 2016 and sets out the remuneration policy and remuneration details for the Executive and Non-executive Directors of the Company. As a company listed on the Alternative Investment Market (AIM), the Company is not required to comply with Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 as amended in August 2013 (the “Regulations”), nor is it required to comply with the principles relating to directors’ remuneration in the UK Corporate Governance Code 2014 (the “Code”). This report has not been audited. This report, excluding the Remuneration Policy section, will be subject to an advisory shareholder vote at the Annual General Meeting on 25 May 2017 at which approval of the financial statements will be sought. Performance of our Executive Directors is assessed against a range of financial and operational measures ensuring value is delivered to shareholders. Annual incentive payments are based on a demanding proﬁt before tax and exceptional items target. As a result of this target not being met in 2016, Executive Directors did not receive an incentive payment for the year ended 31 December 2016. Details of the Directors’ shareholdings are given on page 37. We are committed to maintaining an open and transparent dialogue with shareholders. The objective of this report is to communicate clearly how much our Executive Directors are earning and how this is strongly linked to performance. Each year, we review how shareholders voted on the Directors’ Remuneration Report, together with any feedback received. I welcome any comments from shareholders regarding Directors’ remuneration. Dick Steele Chairman of the Remuneration Committee 8 March 2017 Dear shareholder, On behalf of the Board, I am pleased to present the Directors’ Remuneration Report for the year ended 31 December 2016. The aim of our report is to provide shareholders with the information to understand our Remuneration Policy and its linkage to the Group’s financial performance. The Remuneration Committee seeks to achieve a fair outcome in reward that is linked to the Group’s immediate and long-term results and strategy delivery. Through the commitment and determination of our employees and senior management team, Portmeirion Group continues to deliver sustainable returns and growth for our shareholders as shown by our results on page 1. There have been no structural changes to the Remuneration Policy during 2016. 28 Portmeirion Group PLCAnnual Report and Accounts 2016Corporate GovernanceRemuneration Committee The members of the Remuneration Committee during 2016 are set out on pages 22 and 23. The terms of reference of the Remuneration Committee are available at www.portmeiriongroup.com. Dick Steele is Chairman of the Remuneration Committee. The Board considers it appropriate that Dick Steele, with his experience in this area, chairs this Committee. There have been no changes in the composition or chairmanship of the Remuneration Committee during the year. None of the Committee have any personal financial interest (other than as shareholders), conflicts of interest arising from cross-directorships or day-to-day involvement in running the business. No Director plays a part in any discussion about his or her own remuneration. The Committee meets at least twice a year to undertake the following actions: • review the market competitiveness of the Remuneration Policy and the remuneration of the Executive Directors; • agree the incentive policy and payments for the Executive Directors; • agree the individual share option and long-term share awards for the forthcoming financial period; • review the performance measures, targets and achievement thereof in relation to share scheme awards; • approve the Directors’ Remuneration Report; and • administer the Group’s share schemes. During 2016, the Committee held three scheduled meetings. In addition, the Committee held meetings at other times throughout the year to deal with share option awards, exercises and other related matters. Pinsent Masons LLP provided advice on the administration of the Company’s share schemes in 2016. In determining the Directors’ remuneration for the year, the Committee consulted Lawrence Bryan, Chief Executive, about its proposals. Remuneration Policy Executive remuneration packages are prudently designed to attract, motivate and retain Directors of high calibre and to reward them for enhancing value to shareholders. The performance measurement of the Executive Directors and the determination of their annual remuneration package is undertaken by the Remuneration Committee. The remuneration of the Non-executive Directors is determined by the Executive Directors. There are five main elements of the remuneration package for Executive Directors and senior management: • basic salary and benefits; • annual incentive payments; • share option incentives; • long-term incentives; and • pension arrangements. The Company’s policy is that a substantial proportion of the remuneration of the Executive Directors should be performance related in order to encourage and reward improving business performance and shareholder returns. In determining the remuneration arrangements for Executive Directors the Committee is sensitive to pay and employment conditions elsewhere in the Group, especially when determining base salary increases. The Committee operates the various incentive plans according to their respective rules and in accordance with HMRC rules where relevant. To ensure the efficient administration of the plans the Committee has certain operational powers. These include the determination of the participants in the plans on an annual basis; the timing of grants of awards and/or payments; the quantum of an award and/or payment; the extent of vesting based on the assessment of performance; determination of leaver status and appropriate treatment under the plans; and annual performance measures and targets. The Company recognises that Executive Directors may be invited to become non-executive directors of other companies and that this can help broaden the skills and experience of a Director. Executive Directors are entitled to accept appointments outside the Group providing that the Chairman grants his permission. The Committee has reviewed the policy for the year ahead and has concluded that the key features of the Remuneration Policy remain appropriate. 29 Portmeirion Group PLCAnnual Report and Accounts 2016Directors’ Remuneration Report continued Remuneration Policy continued Key aspects of the Remuneration Policy for Executive Directors The following table provides a summary of the key elements of the remuneration package for Executive Directors: Purpose and link to strategy Operation Maximum opportunity Performance conditions Base salary To provide competitive fixed remuneration that will attract and retain key employees and reflect their experience and position in the Group. Benefits To provide market levels of benefits on a cost-effective basis. Pension Providing post-retirement benefits. Annual incentive Recognises achievement of annual objectives which support the short to medium-term strategy of the Group. Deferred Incentive Plan Incentivising and retaining Executive Directors whilst aligning their interests with those of shareholders through delivery and retention of shares. None. None. Reviewed annually taking into account industry-standard executive remuneration and pay levels elsewhere within the Group. Salaries for the year ended 31 December 2016 are set out on page 33. Changes in the scope or responsibilities of a Director’s role may require an adjustment to salary levels above the normal level of increase. Private health cover for the Executive and their family, life insurance cover of up to four times salary, critical illness cover and a company car or cash alternative. Other benefits may be offered from time to time broadly in line with market practice. Private healthcare benefits are provided through third-party providers and therefore the cost to the Company and the value to the Director may vary from year to year. It is intended that the maximum value of benefits offered will remain broadly in line with market practice. The Group operates defined contribution pension schemes. Dependent on the value of the fund at retirement. None. The performance targets are set by the Remuneration Committee at the start of the year with input, as appropriate, from the Chief Executive. Discretionary award over shares not exceeding a market value of 20% of the gross annual incentive payment earned by the Executive Director in respect of the previous financial year. Maximum incentive potential is 100% of salary. Based on achievement of a demanding profit before tax and exceptional items target. Maximum award is 20% of the prior year’s gross annual incentive payment. Options under the plan can only be granted to the extent performance targets relating to the annual incentive arrangements are met. Executive Share Option Plans Setting value creation through share price growth as a major objective for Executive Directors and senior managers. Alignment of option holder interests with those of shareholders through delivery of shares. Subject to earnings per share (EPS) performance measurement to reflect operational performance as EPS is a significant factor in determining the market’s view of the Group’s value. 30 The Portmeirion 2012 Approved Share Option Plan has a limit of £30,000 for any “approved” options in accordance with HMRC limits. Growth in earnings per share targets as detailed on page 32. Portmeirion Group PLCAnnual Report and Accounts 2016Corporate GovernanceRemuneration Policy continued Key aspects of the Remuneration Policy for Non-executive Directors (including the Chairman) The following table provides a summary of the key elements of the remuneration package for Non-executive Directors: Purpose and link to strategy Operation Maximum opportunity Performance conditions Base fee To provide competitive fixed fees in order to procure and retain the appropriate skills required and expected time commitment. Pension Providing post-retirement benefits if the Non-executive Director does not opt out of the auto-enrolment process. Non-executive Director fees are reviewed on a periodic basis and are subject to the Articles of Association. The Board will exercise judgement in determining the extent to which Non-executive Director fees are altered in line with market practice and rates. Fees for the year ended 31 December 2016 are set out on page 33. None. Increases above those awarded for the rest of the Group may be made to reflect the periodic nature of any review. Changes in the scope and responsibilities of a Director’s role, or the time commitment required, may require an adjustment to the level of fees. The Group operates defined contribution schemes. Dependent on the value of the fund at retirement. None. Current service contracts and terms of engagement It is the Company’s policy that Executive Directors should have contracts with an indefinite term providing for a maximum of one year’s notice. The details of the Executive Directors’ contracts are summarised in the table below: P.E. Atherton L. Bryan M.J. Knapper B.W.J. Phillips Date of contract Notice period 22.11.2012 12 months 08.11.2002 12 months 01.03.2017 12 months 15.03.2000 12 months In the event of early termination, the Executive Directors’ contracts provide for compensation of an amount equal to the gross salary and benefits that the Executive would have received during the balance of the notice period, plus any incentive once declared, to which he would have become entitled had contractual notice been given. All Non-executive Directors have service contracts with an indefinite term providing for a maximum of one year’s notice, without liability for compensation. Their remuneration is determined by the Board taking into account their duties and the level of fees paid to Non-executive Directors of similar companies. The Directors proposed for election and re-election at the next Annual General Meeting on 25 May 2017 are set out in the Directors and their interests section of the Report of the Directors on page 36. Consideration of shareholders’ views The Committee considers shareholder feedback following the AGM and any other meetings with shareholders as part of the Company’s annual review of the Remuneration Policy. 31 Portmeirion Group PLCAnnual Report and Accounts 2016Directors’ Remuneration Report continued Application of Remuneration Policy for the year ended 31 December 2016 Basic salary and benefits Executive Directors’ base salaries are determined by the Committee at the beginning of each year or when responsibilities change. In deciding the appropriate levels, the Committee takes into account factors which it considers necessary including industry-standard executive remuneration and comparable pay levels within the Group. Each Executive Director is provided with healthcare benefits, critical illness cover, life insurance and a car. Annual incentive payments Each Executive Director’s remuneration package includes an annual incentive payment. If the profit before tax and exceptional items exceeds an annual target, then an incentive will be paid. The incentive is a percentage of the Executive Director’s basic salary, which is linked to the amount by which profit before tax and exceptional items exceeds the target. The maximum incentive payable is 100% of basic salary. Demanding budgets and targets are established by the Board and reviewed at the end of each year to determine the degree of successful achievement. For the year ended 31 December 2016, the profit target was not met and no incentive payment made. Share options The Company’s policy is to grant options to Executive Directors at the discretion of the Remuneration Committee taking into account individual performance. It is the Company’s policy to phase the granting of share options rather than to award them in a single large block to any individual. The Company has two Executive Share Option Plans: The Portmeirion 2012 Approved Share Option Plan (the “2012 Approved Plan”) and The Portmeirion 2012 Unapproved Share Option Plan (the “2012 Unapproved Plan”). These are discretionary schemes, enabling the grant of options over ordinary shares in the Company to selected employees of the Portmeirion Group, with flexibility for the grant of tax-favoured options. For both schemes, earnings per share has been selected as a measure of performance as it directly reflects operational performance and is also a significant factor in determining the market’s view of the Group’s value. Options granted in 2013 and 2014 can normally only be exercised if the increase in the average of the Group’s basic adjusted (for changes in accounting standards and exceptional items) earnings per share for each of the three years beginning with the financial year in which the option was granted is at least 13% higher than that for the year before the option was granted. Options granted in 2015 can normally only be exercised if the increase in the average of the Group’s basic adjusted (for changes in accounting standards and exceptional items) earnings per share for each of the three years beginning with the financial year in which the option was granted is at least 10% higher than that for the year before the option was granted. There were no options granted during 2016. 32 Basic earnings per share is considered to be an appropriate figure because it is a significant factor used by the market in determining the value of the Company and by the Company in determining the level of dividend to be paid. These targets align management interests closely with those of shareholders. Long-term incentive plan The Portmeirion Group 2010 Deferred Incentive Share Option Plan (the “2010 Deferred Incentive Plan”) was established to incentivise and retain Executive Directors and encourage them to acquire and retain shares in the Company. The 2010 Deferred Incentive Plan operates in conjunction with the Group’s existing annual incentive arrangements. The 2010 Deferred Incentive Plan permits the grant of an option to a participant in any year over shares with a market value not exceeding 20% of the gross incentive earned by the relevant employee in respect of the previous financial year. Options are exercisable normally only after the third anniversary of the date of grant. On exercise, provided that the participant is still employed by the Group (or has left due to limited good leaver provisions as specified in the rules of the 2010 Deferred Incentive Plan), the participant will be entitled to receive a “grossed-up” payment (i.e. a payment which after discharge of necessary taxes (including National Insurance contributions) leaves a net amount) sufficient to pay the taxes (including National Insurance contributions) due in respect of the exercise of the option (subject to a cap on the maximum tax and National Insurance rates covered). The Remuneration Committee believes this payment is appropriate so as to ensure that the shares are acquired without any need to sell the shares to generate cash to cover tax liabilities. Options may be satisfied by an issue of shares or the transfer of shares out of treasury. Options under the 2010 Deferred Incentive Plan can only be granted to the extent performance targets relating to the annual incentive payment arrangements are met. The exercise of options granted under the 2010 Deferred Incentive Plan are not, therefore, subject to the satisfaction of performance targets. Pensions Philip Atherton, Brett Phillips and Dick Steele are members of the Portmeirion Group UK Limited Group Personal Pension Plan, a money purchase pension scheme. Lawrence Bryan receives pension contributions for a money purchase pension operated by the Group in the United States. Annual performance related incentives are not subject to contributions by the Group to the money purchase pension arrangements maintained for the Directors. Details of contributions paid by the Group for the benefit of the Directors are shown in the Directors’ emoluments table that follows. Portmeirion Group PLCAnnual Report and Accounts 2016Corporate GovernanceApplication of Remuneration Policy for the year ended 31 December 2016 continued Pensions continued On 31 October 2002, the Portmeirion Potteries Pension Plan, a contracted-in money purchase occupational pension plan, closed. Brett Phillips was a member of the plan at that time and holds preserved benefits. On 5 April 1999, the Group’s defined benefit UK pension scheme was frozen, i.e. closed to new entrants and to future accrual. Brett Phillips was a member of the scheme at that time and holds preserved benefits. He became an active pensioner on 31 March 2014 and has received pension payments from that date. During 2016, Brett Phillips received a gross pension of £16,000 (2015: £15,000). Non-executive Directors The Non-executive Directors do not participate in the Company’s annual incentive, share option or long-term incentive schemes. Aggregate Directors’ remuneration The total amounts for Directors’ remuneration were as follows: Emoluments Long-term incentive plan (LTIP) Gains made on exercise of share options Money purchase pension contributions Directors’ emoluments Executive P.E. Atherton L. Bryan(3) B.W.J. Phillips Non-executive Lady Judge J. Kong R.J. Steele Notes: 2016 £’000 1,057 39 — 59 2015 £’000 1,313 210 111 70 1,155 1,704 Total 2015 £’000 294 791 467 31 31 90 Salary and fees £’000 Taxable benefits(1) £’000 Incentive £’000 LTIP(2) £’000 Pension contributions £’000 Total 2016 £’000 188 444 233 31 31 90 1,017 17 6 15 1 — 1 40 — — — — — — — — 25 14 — — — 39 21 22 15 — — 1 59 226 497 277 32 31 92 1,155 1,704 (1) The taxable benefits shown above for P.E. Atherton and B.W.J. Phillips arise from the provision of a company car, critical illness and private medical insurance; life assurance provided is not a taxable benefit for these directors based in the UK. The taxable benefits for L. Bryan, who is resident in the US, arise from the provision of a company car and life assurance. A further £26,000 (2015: £18,000) in non-taxable benefits arise from the provision of disability, medical and dental insurance for L. Bryan. Non-executive taxable benefits relate to travel expenses. (2) On 11 May 2016, L. Bryan and B.W.J. Phillips exercised options granted in 2013 under the 2010 Deferred Incentive Plan. The mid-market closing price of the Company’s shares on 11 May 2016 was 1190.0p. The amounts in the table above include the value of the shares on exercise by reference to the mid-market closing price of the Company’s shares on the day before exercise, 1190.0p, and the amount paid in accordance with the rules of the Plan such that after discharge of necessary taxes a net amount was left sufficient to pay the taxes due in respect of the exercise of the options. Further details on the exercises are shown under the long-term incentive plan section of this report on page 35. (3) L. Bryan is remunerated in US dollars and his remuneration is translated into sterling at the average exchange rate for the year. In 2016, this was $1.3548/£ (2015: $1.5282/£). Directors’ share options and long-term incentives Aggregate emoluments disclosed above do not include any amounts for the value of options to acquire ordinary shares in the Company granted to or held by the Directors. 33 Portmeirion Group PLCAnnual Report and Accounts 2016 Directors’ Remuneration Report continued Application of Remuneration Policy for the year ended 31 December 2016 continued Executive Share Option Plans The Company has two share option plans, the 2012 Approved Plan and the 2012 Unapproved Plan, as described on page 32. Details of options held under these schemes by Directors who served during the year are as follows: Director P.E. Atherton P.E. Atherton P.E. Atherton L. Bryan L. Bryan L. Bryan B.W.J. Phillips B.W.J. Phillips B.W.J. Phillips Notes: At 01.01.2016 Number of options Granted Exercised At 31.12.2016 30,000 30,000 33,000 45,000 45,000 49,500 30,000 30,000 33,000 — — — — — — — — — — — — — — — — — — 30,000 30,000 33,000 45,000 45,000 49,500 30,000 30,000 33,000 Exercise price (p) Dates on which exercisable Earliest Latest 610.0 03.05.2016 01.05.2023 740.0 01.05.2017 29.04.2024 935.0 28.04.2018 26.04.2025 610.0 03.05.2016 01.05.2023 740.0 01.05.2017 29.04.2024 935.0 28.04.2018 26.04.2025 610.0 03.05.2016 01.05.2023 740.0 01.05.2017 29.04.2024 935.0 28.04.2018 26.04.2025 (1) The performance criteria attaching to share options are detailed on page 32. (2) The Company’s share price reached a high of 1267.5p and a low of 749.0p during 2016. The average share price during 2016 was 974.9p. The share price on 31 December 2016 was 935.0p. (3) There have been no changes to the Directors’ interests in the shares or options over shares of the Company between 31 December 2016 and 8 March 2017. Long-term incentive plan Details of options held under the 2010 Deferred Incentive Plan by Directors who served during the year are as follows: Director P.E. Atherton P.E. Atherton P.E. Atherton L. Bryan L. Bryan L. Bryan L. Bryan B.W.J. Phillips B.W.J. Phillips B.W.J. Phillips B.W.J. Phillips Notes: Number of options Granted Exercised At 31.12.2016 Dates on which exercisable Earliest Latest At 01.01.2016 392 1,102 — — — 1,365 2,106 833 2,034 — — — — 2,860 1,197 509 1,321 — — — — 1,605 — — — 392 16.04.2017 14.07.2017 1,102 22.04.2018 20.07.2018 1,365 12.05.2019 10.08.2019 (2,106) — 20.04.2016 18.07.2016 — — — 833 16.04.2017 14.07.2017 2,034 22.04.2018 20.07.2018 2,860 12.05.2019 10.08.2019 (1,197) — 20.04.2016 18.07.2016 — — — 509 16.04.2017 14.07.2017 1,321 22.04.2018 20.07.2018 1,605 12.05.2019 10.08.2019 (1) The exercise price payable by the option holder to acquire shares upon the exercise of a 2010 Deferred Incentive Plan option is £1 in respect of all of the shares under option for that particular award. 34 Portmeirion Group PLCAnnual Report and Accounts 2016Corporate GovernanceApplication of Remuneration Policy for the year ended 31 December 2016 continued Long-term incentive plan continued Details of the options exercised under the 2010 Deferred Incentive Plan during the year are as follows: Director L. Bryan B.W.J. Phillips Date of exercise 11.05.2016 11.05.2016 Number of options exercised 2,106 1,197 Total exercise price (p) Market price on exercise per share (p) Gains on exercise £’000 Total gains on exercise 2016 £’000 Total gains on exercise 2015 £’000 100.0 1,190.0 100.0 1,190.0 25 14 25 14 69 40 Consultations with shareholders and statement of voting at general meeting At the Annual General Meeting of the Company held on 19 May 2016, a resolution to approve the Directors’ Remuneration Report for the year ended 31 December 2015 was passed with 6,328,622 proxy votes lodged, of which 99.59% were in favour, 0.21% gave discretion and 0.20% voted against. In February 2017, the Chairman wrote to significant institutional shareholders offering a meeting to discuss corporate governance matters. The Chairman is in contact with all other significant shareholders in the Company. Approval This report was approved by the Board and signed on its behalf by: Dick Steele Chairman of the Remuneration Committee 8 March 2017 35 Portmeirion Group PLCAnnual Report and Accounts 2016Report of the Directors The Directors have pleasure in presenting their annual report on the affairs of the Group, together with the audited financial statements of the Company and its subsidiary undertakings for the year ended 31 December 2016. The Corporate Governance Statement set out on pages 24 to 27 forms part of this report. Directors and their interests The Directors of the Company are listed on pages 22 and 23 together with biographical and Committee membership details. Michael Knapper joined the Board on 1 March 2017; all other Directors have served throughout the year. The Company is a public limited company, registered in England and Wales and listed on the Alternative Investment Market (AIM) of the London Stock Exchange. The Company has been permanently domiciled in the UK since incorporation and is the ultimate parent company of the Portmeirion Group. As permitted by Paragraph 1A of Schedule 7 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 certain matters which are required to be disclosed in the Directors’ Report have been omitted as they are included in the Strategic Report on pages 1 to 21. These matters relate to a full review of the performance of the Group for the year, current trading and future outlook. Information about the use of financial instruments by the Company and its subsidiaries is given in note 31 on pages 76 to 79. This note also includes information on financial risk management objectives and policies, including the policy for hedging and an assessment of the Group’s exposure to financial risk. Dividends On 3 October 2016 an interim dividend of 7.00p (2015: 6.10p) per share was paid on the ordinary share capital. The Directors recommend that a final dividend of 25.25p per share be paid (2015: 23.90p), making a total for the year of 32.25p (2015: 30.00p) per share. The final dividend will be paid, subject to shareholders’ approval, on 30 May 2017 to shareholders on the register at the close of business on 28 April 2017. Research and development The Group continues to research methods of tackling the environmental issues facing it as a ceramics manufacturer whilst improving manufacturing efficiency. The development of innovative new products and designs is a key part of the Group’s strategy. In accordance with our commitment to good corporate governance practice that is relevant to our business, the Board has voluntarily adopted the policy that in normal circumstances all continuing Directors stand for re-election on an annual basis in line with the recommendations of the UK Corporate Governance Code 2014. Phil Atherton, Lawrence Bryan, Lady Barbara Judge, Janis Kong and Dick Steele will therefore retire at the Annual General Meeting to be held on 25 May 2017 and, being eligible, are offering themselves for re-election. In addition, Michael Knapper is being proposed for election, as he has joined the Board since the last Annual General Meeting. In light of Brett Phillips’ retirement from the Group during 2017, he will continue as a Director under the mandate given by shareholders at the Annual General Meeting on 19 May 2016 until such time as he does retire. The Board has formally reviewed the performance of each Director and concluded that they remain effective and are committed to their roles at Portmeirion Group PLC. Further details on the composition of the Board and appointment of Directors are given in the Corporate Governance Statement on pages 24 to 27. With regard to the appointment and replacement of Directors, the Company is governed by its Articles of Association, the Companies Act 2006 and related legislation. The Articles themselves may be amended by special resolution of the shareholders. The powers of Directors are described in the Corporate Governance Statement on pages 24 to 27. 36 Portmeirion Group PLCAnnual Report and Accounts 2016Corporate GovernanceSubstantial shareholdings On 31 December 2016 the Company had been notified, in accordance with chapter 5 of the Disclosure Guidance and Transparency Rules, of the following beneficial interests in 3% or more of its issued share capital excluding treasury shares: Percentage of voting rights and issued share capital(1) Number of ordinary shares Trustees of Caroline Fulbright Settlement(3) 16.65% 1,792,272 Investec Wealth & Investment Limited(3) 13.00% 1,399,867 Marlborough Multi Cap Income Fund(3) 7.70% 828,500 Ymddiriedolaeth Clough Williams-Ellis Foundation(3) Shahrzad Farhadi Kamrouz Farhadi Henderson UK Equity Income Fund(3) 6.17% 5.87% 5.23% 3.46% 664,612 632,333 562,917 372,500 Notes: (1) The percentages are of the total shares in issue, excluding treasury shares (10,765,556). (2) All holdings are direct holdings unless otherwise indicated. (3) Shareholding held indirectly through a nominee. During the period between 31 December 2016 and 8 March 2017, the Company did not receive any notifications under chapter 5 of the Disclosure Guidance and Transparency Rules. The Directors who held office at 31 December 2016 had the following beneficial interests in the share capital of the Company: At 31 December 2016 5p ordinary shares Beneficial At 31 December 2015 5p ordinary shares Beneficial 142,834 140,728 5,000 5,000 61,745 27,000 5,000 5,000 90,548 22,000 L. Bryan Lady Judge J. Kong B.W.J. Phillips R.J. Steele Directors’ share interests include the interests of their spouses, civil partners and infant children or stepchildren as required by section 822 of the Companies Act 2006. There were no changes in the beneficial interests of the Directors in the Company’s shares between 31 December 2016 and 8 March 2017. Details of Directors’ share options are provided in the Directors’ Remuneration Report on pages 34 and 35. Details of transactions with Directors and other related parties are to be found in note 29 on page 73. Directors’ indemnities The Company has qualifying third-party indemnity provisions for the benefit of its Directors which remain in force at the date of this report. Capital structure Details of the share capital in issue, together with details of the movements in the Company’s issued share capital during the year, are shown in note 25 on page 71. The Company has one class of ordinary shares which carry no right to fixed income. Each share carries the right to one vote at general meetings of the Company. There are no specific restrictions on the size of a holding nor on the transfer of shares, which are both governed by the general provisions of the Articles of Association and prevailing legislation. The Directors are not aware of any agreements between holders of the Company’s shares that may result in restrictions on the transfer of securities or on voting rights. Details of employee share schemes are set out in notes 25 and 32 on page 71 and pages 79 to 81. No person has any special rights of control over the Company’s share capital and all issued shares are fully paid. 37 Portmeirion Group PLCAnnual Report and Accounts 2016Report of the Directors continued Acquisition of the Company’s own shares The Company did not purchase any of its own shares during the year. The Company holds 239,477 treasury shares, purchased at an average cost of 187p per share. At the end of the year, the Directors had authority, under a shareholders’ resolution of 19 May 2016, to purchase through the market 1,076,037 of the Company’s ordinary shares. This authority expires on 30 June 2017. The Directors believe that it is in the interests of the Company and its members to continue to have the flexibility to purchase its own shares and a special resolution of the 2017 AGM seeks authority from members to allow the Company to make market purchases, subject to the restrictions set out in the Notice of Annual General Meeting, and in particular to the maximum number of ordinary shares that may be purchased being 1,076,555, approximately equal to 10% of the present issued share capital of the Company excluding treasury shares as at 8 March 2017. The Directors intend to renew this authority annually but only to exercise the authority where, after considering market conditions prevailing at the time, the investment needs of the Company, its opportunities for expansion and its overall financial position, they believe the effect of such exercise would be to increase the earnings per share and be in the best interests of shareholders generally. The Portmeirion Employees’ Share Trust (the “Trust”) was set up in 2013 to encourage and facilitate the acquisition and holding of shares in the Company by and for the benefit of the employees of the Group. The shares are held in the Trust to provide for awards under employee share option schemes. During 2016, 32,000 were transferred from the Trust to certain employees of the Group on the exercise of share options. There were no purchases of shares into the Trust during 2016. The Trust holds a total of 307,048 shares representing approximately 2.85% of the issued share capital of the Company excluding treasury shares as at 8 March 2017. Annual General Meeting The Annual General Meeting will be held at the registered office of the Company at London Road, Stoke-on-Trent, on 25 May 2017 at 12:00 noon (the “2017 AGM”). All ordinary and special resolutions to be proposed at that meeting are detailed in the Notice of Annual General Meeting. As special business at the 2017 AGM, the following resolutions will be proposed together with the resolution described below regarding market purchases of the Company’s shares: • Authority to allot shares – under section 551 of the Companies Act 2006, the directors of a company may only allot unissued shares or any rights to subscribe for or to convert any security into shares in the company if authorised to do so. The resolution giving authority to allot shares, if passed, will continue to provide flexibility for the Directors to act in the best interests of shareholders, when opportunities arise, by issuing new shares, and replaces the authority given at the Annual General Meeting of the Company held on 19 May 2016. The authority will allow the Directors to allot new shares up to a nominal value of £179,425, approximately equal to one-third of the present issued share capital excluding treasury shares as at 8 March 2017. The Directors have no current intention of exercising this authority except in relation to the allotment of shares under the share option schemes. • Disapplication of pre-emption rights – if equity securities are to be allotted for cash, section 561(1) of the Companies Act 2006 requires that those equity securities are offered first to existing shareholders in proportion to the number held by them at the time of the offer and otherwise in compliance with the technical requirements of that Act. Those pre-emption provisions also apply to the sale of treasury shares by the Company. However, it may be in the interests of the Company for the Directors to allot shares and/or sell treasury shares other than to shareholders in proportion to their existing holdings or otherwise than strictly in compliance with those requirements. This resolution would allow the Directors, pursuant to section 570 and section 573 of the Companies Act 2006, to allot shares and to sell treasury shares for cash without first offering them to shareholders in accordance with that Act. The authority is limited to the issue of equity securities and/or sale of treasury shares for cash up to a maximum nominal amount of £53,827, which is approximately equal to 10% of the present issued share capital excluding treasury shares as at 8 March 2017, and allotments of equity securities and/or sale of treasury shares in connection with a rights issue or other in proportion offer to shareholders. 38 Portmeirion Group PLCAnnual Report and Accounts 2016Corporate GovernanceEmployees The Group has an equal opportunities policy and is committed to ensuring that all employees are treated fairly, regardless of age, gender, race, marital status or disability. It is the Group’s policy to give disabled people full and fair consideration for all job vacancies for which they offer themselves as suitable candidates, having regard to their particular aptitudes and abilities, including the consideration of any reasonable adjustments to the job or workplace. Training and career development opportunities are available to all employees and, if necessary, all efforts are made to retrain any member of staff who develops a disability during employment with the Group. The Group recognises the importance of good communications with its employees and considers that the most effective form of communication regarding its activities, performance and plans is by way of informal daily discussions between management and other employees. During 2016, to complement these discussions, the Group has continued communicating information from Board level to all employees on a regular basis via a programme of team briefings and by use of the Company’s intranet and notice boards. Share option and profit related incentive schemes are operated to encourage the involvement of employees in the Group’s performance. The Group’s UK operating subsidiaries are both Investors in People and Portmeirion UK has received the Investment in Young People Award. The Directors are committed to the continuing development of the Group’s employees through the principles of Investors in People. Details of staff numbers and costs are set out in note 7 on page 60. Political contributions There were no political contributions during the year. Auditors Each of the persons who are Directors at the date of approval of this Annual Report confirms that: 1. so far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and 2. the Director has taken all the steps that he/she ought to have taken as a Director in order to make himself/herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. Mazars LLP have expressed their willingness to continue in office as auditors and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting. Approved by the Board of Directors and signed on behalf of the Board. Moira MacDonald Company Secretary 8 March 2017 39 Portmeirion Group PLCAnnual Report and Accounts 2016Statement of Directors’ Responsibilities The Directors are responsible for preparing the Strategic Report, the Report of the Directors and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Company financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. International Accounting Standard 1 requires that IFRS financial statements present fairly for each financial year the Group and Company financial position, financial performance and cash flows. This requires the fair representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s “Framework for the preparation and presentation of financial statements”. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRS. Directors are also required to: • properly select and apply accounting policies; • make judgements and accounting estimates that are reasonable and prudent; • state whether IFRS as adopted by the European Union have been followed subject to any material departures disclosed and explained in the financial statements; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and • provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance. The Directors have elected to prepare the Company financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The Company financial statements are required by law to give a true and fair view of the state of affairs of the Company. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether IFRS as adopted by the European Union have been followed subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the Group and the Company financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 40 Portmeirion Group PLCAnnual Report and Accounts 2016Corporate GovernanceIndependent Auditors’ Report Independent auditors’ report to the members of Portmeirion Group PLC We have audited the financial statements of Portmeirion Group PLC for the year ended 31 December 2016 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated and Company balance sheets, the consolidated and Company statements of changes in equity, the consolidated and Company statements of cash flows and the related notes. The financial reporting framework that has been applied in the preparation of the Group and Company financial statements is applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union and, as regards the parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2016. Respective responsibilities of Directors and auditors As explained more fully in the Statement of Directors’ Responsibilities set out on page 40, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. 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 auditors’ 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. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Opinion on the financial statements 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 31 December 2016 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRS as adopted by the European Union; • the parent Company financial statements have been properly prepared in accordance with IFRS as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • the information given in the Strategic Report and the Report of the Directors for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the Strategic Report and the Report of the Directors have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In 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 Report of the Directors. We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or • the 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. Stephen Eames (Senior Statutory Auditor) for and on behalf of Mazars LLP, Chartered Accountants and Statutory Auditor The Pinnacle 160 Midsummer Boulevard Milton Keynes MK9 1FF 8 March 2017 41 Portmeirion Group PLCAnnual Report and Accounts 2016Consolidated Income Statement for the year ended 31 December 2016 Revenue Operating costs Operating profit Interest income Finance costs Share of profit of associated undertakings Profit before tax Tax Profit for the year attributable to equity holders Earnings per share Diluted earnings per share Dividends paid and proposed per share All the above figures relate to continuing operations. Notes 4,5 6 9 10 2016 £’000 2015 £’000 76,677 68,669 (68,713) (60,102) 7,964 8,567 31 (387) 198 19 (177) 240 7,806 8,649 11 (1,581) (1,752) 6,225 6,897 59.60p 66.02p 59.10p 65.48p 32.25p 30.00p 13 13 12 42 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsConsolidated Statement of Comprehensive Income for the year ended 31 December 2016 Profit for the year Items that will not be reclassified subsequently to profit or loss: Remeasurement of net defined benefit pension scheme liability Deferred tax relating to items that will not be reclassified subsequently to profit or loss Items that may be reclassified subsequently to profit or loss: Exchange differences on translation of foreign operations Deferred tax relating to items that may be reclassified subsequently to profit or loss Other comprehensive income for the year Notes 30 24 24 2016 £’000 6,225 (5,357) 815 1,293 193 (3,056) 2015 £’000 6,897 261 (245) 385 17 418 Total comprehensive income for the year attributable to equity holders 3,169 7,315 43 Portmeirion Group PLCAnnual Report and Accounts 2016Consolidated Balance Sheet 31 December 2016 Non-current assets Goodwill Intangible assets Property, plant and equipment Interests in associates Deferred tax asset Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Current income tax liabilities Borrowings Total current liabilities Non-current liabilities Pension scheme deficit Deferred tax liability Borrowings Total non-current liabilities Total liabilities Net assets Equity Called up share capital Share premium account Investment in own shares Share-based payment reserve Translation reserve Retained earnings Total equity Notes 2016 £’000 2015 £’000 14 15 16 17 24 19 20 21 22 23 30 24 23 25 26 7,229 6,566 10,617 2,313 1,475 — 1,032 9,639 2,044 566 28,200 13,281 16,267 12,485 6,540 12,700 9,312 11,130 35,292 33,142 63,492 46,423 (8,738) (1,005) (1,961) (5,986) (830) — (11,704) (6,816) (7,130) (3,085) (961) (6,909) — — (15,000) (3,085) (26,704) (9,901) 36,788 36,522 550 6,624 550 6,612 (2,936) (3,137) 496 2,900 370 1,414 29,154 30,713 36,788 36,522 These financial statements were approved by the Board of Directors and authorised for issue on 8 March 2017. They were signed on its behalf by: L. Bryan Director 44 B.W.J. Phillips Director Portmeirion Group PLCAnnual Report and Accounts 2016Financial Statements Company Balance Sheet 31 December 2016 Non-current assets Investment in subsidiaries Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Total current assets Total assets Current liabilities Current income tax liabilities Total current liabilities Total liabilities Net assets Equity Called up share capital Share premium account Other reserves Investment in own shares Share-based payment reserve Retained earnings Total equity Notes 2016 £’000 2015 £’000 18 12,366 12,366 12,366 12,366 20 2,244 — 2,244 721 12 733 14,610 13,099 — — — (13) (13) (13) 14,610 13,086 25 550 6,624 197 550 6,612 197 26 (2,936) (3,137) 496 9,679 370 8,494 14,610 13,086 The financial statements of Portmeirion Group PLC, company registration number 124842, were approved by the Board of Directors and authorised for issue on 8 March 2017. They were signed on its behalf by: L. Bryan Director B.W.J. Phillips Director 45 Portmeirion Group PLCAnnual Report and Accounts 2016 Consolidated Statement of Changes in Equity for the year ended 31 December 2016 At 1 January 2015 Profit for the year Other comprehensive income for the year Total comprehensive income for the year Dividends paid Increase in share-based payment reserve Transfer on exercise or lapse of options Shares issued under employee share schemes Purchase of own shares Deferred tax on share-based payment At 1 January 2016 Profit for the year Other comprehensive income for the year Total comprehensive income for the year Dividends paid Increase in share-based payment reserve Transfer on exercise or lapse of options Shares issued under employee share schemes Deferred tax on share-based payment Share capital £’000 Share premium account £’000 Investment in own shares £’000 Share- based payment reserve £’000 Translation reserve £’000 Retained earnings £’000 Total £’000 549 6,456 (1,814) 292 1,012 26,552 33,047 — — — — — — 1 — — — — — — — — 156 — — — — — — — — 74 (1,397) — — — — — 175 (97) — — — — 6,897 6,897 402 402 — — — — — — 16 418 6,913 7,315 (2,852) (2,852) — 97 (21) (7) 31 175 — 210 (1,404) 31 550 6,612 (3,137) 370 1,414 30,713 36,522 — — — — — — — — — — — — — — 12 — — — — — — — 201 — — — — — 144 (18) — — — 6,225 6,225 1,486 1,486 — — — — — (4,542) (3,056) 1,683 3,169 (3,217) (3,217) — 18 (6) (37) 144 — 207 (37) At 31 December 2016 550 6,624 (2,936) 496 2,900 29,154 36,788 46 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsCompany Statement of Changes in Equity for the year ended 31 December 2016 Share capital £’000 549 Share premium account £’000 6,456 Other reserves £’000 Investment in own shares £’000 Share- based payment reserve £’000 197 (1,814) 292 At 1 January 2015 Profit for the year Total comprehensive income for the year Dividends paid Increase in share-based payment reserve Transfer on exercise or lapse of options Shares issued under employee share schemes Purchase of own shares At 1 January 2016 Profit for the year Total comprehensive income for the year Dividends paid Increase in share-based payment reserve Transfer on exercise or lapse of options Shares issued under employee share schemes — — — — — 1 — — — — — — 156 — — — — — — — — — — — — — 74 (1,397) 550 6,612 197 (3,137) — — — — — — — — — — — 12 — — — — — — — — — — — 201 At 31 December 2016 550 6,624 197 (2,936) — — — 175 (97) — — 370 — — — 144 (18) — 496 Retained earnings £’000 6,840 4,437 4,437 Total £’000 12,520 4,437 4,437 (2,852) (2,852) — 97 (21) (7) 8,494 4,390 4,390 175 — 210 (1,404) 13,086 4,390 4,390 (3,217) (3,217) — 18 (6) 144 — 207 9,679 14,610 47 Portmeirion Group PLCAnnual Report and Accounts 2016Consolidated Statement of Cash Flows for the year ended 31 December 2016 Operating profit Adjustments for: Depreciation of property, plant and equipment Amortisation of intangible assets Contributions to defined benefit pension scheme Charge for share-based payments Exchange gain Profit on sale of tangible fixed assets Operating cash flows before movements in working capital (Increase)/decrease in inventories (Increase)/decrease in receivables Increase/(decrease) in payables Cash generated from operations Interest paid Income taxes paid Net cash from operating activities Investing activities Interest received Proceeds on disposal of property, plant and equipment Purchase of property, plant and equipment Purchase of intangible assets Acquisition of subsidiary Net cash outflow from investing activities Financing activities Equity dividends paid Shares issued under employee share schemes Purchase of own shares New bank loans raised Repayments of borrowings Net cash inflow/(outflow) from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes Cash and cash equivalents at end of year 48 2016 £’000 7,964 1,328 454 (1,400) 144 205 (2) 8,693 (342) (709) 1,096 8,738 (233) 2015 £’000 8,567 978 192 (937) 175 58 (1) 9,032 3,096 1,607 (934) 12,801 (50) (1,620) (2,045) 6,885 10,706 31 34 (744) (20) (16,669) 19 2 (1,420) (47) — (17,368) (1,446) (3,217) (2,852) 207 — 16,844 (8,000) 210 (1,404) — — 5,834 (4,046) (4,649) 11,130 59 5,214 5,905 11 6,540 11,130 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsCompany Statement of Cash Flows for the year ended 31 December 2016 Operating profit Adjustments for: Charge for share-based payments Operating cash flows before movements in working capital Increase in receivables Cash generated from operations Income taxes paid Net cash from operating activities Financing activities Equity dividends paid Shares issued under employee share schemes Purchase of own shares Net cash outflow from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 2016 £’000 4,390 144 4,534 (1,523) 3,011 (13) 2,998 2015 £’000 4,421 175 4,596 (539) 4,057 (11) 4,046 (3,217) (2,852) 207 — 210 (1,404) (3,010) (4,046) (12) 12 — — 12 12 49 Portmeirion Group PLCAnnual Report and Accounts 2016Notes to the Financial Statements 1. Basis of preparation Portmeirion Group PLC is a company incorporated in England and Wales. The address of the registered office is given on page 84. The nature of the Group’s operations and its principal activities are set out in the Strategic Report on pages 1 to 21. These accounts have been prepared in accordance with accounting standards adopted for use in the European Union (International Financial Reporting Standards (IFRS)) and the Companies Act 2006 applicable to companies reporting under IFRS. The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present an income statement. The profit of the Company for the year was £4,390,000 (2015: £4,437,000). The going concern basis has been considered in the Strategic Report on page 21. These financial statements are presented in pounds sterling. Foreign operations are included in accordance with the policies set out in note 2.6. In the current year, the Group has applied a number of amendments to IFRS and a new interpretation issued by the International Accounting Standards Board (IASB) that are mandatorily effective for an accounting period that begins on 1 January 2016. Their adoption has not had any material impact on the disclosures or on the amounts reported in these financial statements. The following new and revised standards and interpretations have also been adopted in the current year. Their adoption has not had any significant impact on the amounts reported in these financial statements but may impact the accounting for future transactions and arrangements: IAS 1 (amendment) ‘Presentation of Financial Statements’ – Disclosure initiative IAS 16 (amendment) ‘Property, Plant and Equipment’ and IAS 38 (amendment) ‘Intangible Assets’ – Clarification of acceptable methods of depreciation and amortisation EU effective date periods beginning on or after 1 January 2016 1 January 2016 IAS 16 (amendment) ‘Property, Plant and Equipment’ and IAS 41 (amendment) ‘Agriculture’ – Agriculture: Bearer plants 1 January 2016 IAS 19 (amendment) ‘Employee Benefits’ – Defined benefit plans: Employee contributions 1 February 2015 IAS 27 (amendment) ‘Separate Financial Statements’ – Equity method in separate financial statements 1 January 2016 IFRS 10 (amendment) ‘Consolidated Financial Statements’, IFRS 12 (amendment) ‘Disclosure of Interests in Other Entities’ and IAS 28 (amendment) ‘Investments in Associates and Joint Ventures’ – Investment entities: Applying the consolidation exception 1 January 2016 IFRS 11 (amendment) ‘Joint Arrangements’ – Accounting for acquisitions of interests in joint operations 1 January 2016 Annual Improvements to IFRS (2010–2012) Annual Improvements to IFRS (2012–2014) 1 February 2015 1 January 2016 At the date of authorisation of these financial statements, the Group has not applied the following new and revised IFRS that have been issued but are not yet effective and (in some cases) had not yet been adopted by the EU: IAS 7 (amendment) ‘Statement of Cash Flows’ – Disclosure initiative IAS 12 (amendment) ‘Income Taxes’ – Recognition of deferred tax assets for unrealised losses IFRS 9 ‘Financial Instruments’ IFRS 15 ‘Revenue from Contracts with Customers’ Clarifications to IFRS 15 ‘Revenue from Contracts with Customers’ IFRIC 22 ‘Foreign Currency Transactions and Advance Consideration’ 50 EU effective date periods beginning on or after Expected to be endorsed Q2 2017 Expected to be endorsed Q2 2017 1 January 2018 1 January 2018 Expected to be endorsed Q2 2017 Expected to be endorsed H2 2017 Portmeirion Group PLCAnnual Report and Accounts 2016Financial Statements1. Basis of preparation continued IAS 40 (amendment) ‘Investment Property’ – Transfers of investment property IFRS 2 (amendment) ‘Share-based Payment’ – Classification and measurement of share-based payment transactions IFRS 4 (amendment) ‘Insurance Contracts’ – Applying IFRS 9 ‘Financial Instruments’ with IFRS 4 ‘Insurance Contracts’ Annual Improvements to IFRS (2014–2016) IFRS 16 ‘Leases’ IFRS 14 ‘Regulatory Deferral Accounts’ IFRS 10 (amendment) ‘Consolidated Financial Statements’ and IAS 28 (amendment) ‘Investments in Associates and Joint Ventures’ - Sale or contribution of assets between an investor and its associate or joint venture EU effective date periods beginning on or after Expected to be endorsed H2 2017 Expected to be endorsed H2 2017 Expected to be endorsed 2017 Expected to be endorsed H2 2017 Expected to be endorsed H2 2017 Will not be endorsed by the EU Endorsement by the EU has been postponed The Directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the Group in future periods other than the adoption of IFRS 16, which will require a presentational adjustment to include operating leases on the balance sheet, and as a result will affect the recognition, measurement and presentation of leases. 2. Significant accounting policies The accounting policies which follow set out those policies which were applied in preparing the financial statements for the year ended 31 December 2016. The financial statements have been prepared on the historical cost basis, with the exception of derivative financial instruments which are stated at their fair value. 2.1 Basis of consolidation The consolidated financial statements incorporate the financial statements of Portmeirion Group PLC and its subsidiaries. The Group’s share of the results and retained earnings of associated undertakings is included. Subsidiary undertakings are consolidated on the basis of the acquisition method of accounting. Intra-group transactions and balances are eliminated fully on consolidation and the consolidated accounts reflect external transactions only. Subsidiaries’ accounting policies are amended where necessary to ensure consistency with the policies adopted by the Group. All accounts for subsidiaries and associated undertakings have been prepared for the year ended 31 December 2016 except for the accounts of Portmeirion Canada Inc. which have a year end of 30 June 2016. The Group accounts include interim financial information to 31 December 2016 for Portmeirion Canada Inc. 2.2 Investments Fixed asset investments in subsidiaries and associates are shown at cost less provision for impairment. 2.3 Investment in associated undertakings (“associates”) An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The results, assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted by post-acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments. Where a Group company transacts with an associate of the Group, unrealised profits and losses are eliminated to the extent of the Group’s interest in the relevant associate. 51 Portmeirion Group PLCAnnual Report and Accounts 20162. Significant accounting policies continued 2.4 Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes. Sales of goods are recognised when goods are delivered and title has passed. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount. Royalty revenue is recognised on an accruals basis in accordance with the substance of the relevant agreement. Royalties determined on a time basis are recognised on a straight-line basis over the period of the agreement. 2.5 Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance leases are recognised as assets of the Group at their fair value. Rentals payable or receivable under operating leases are charged or credited to income on a straight-line basis over the term of the relevant lease. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis over the term of the lease. 2.6 Foreign currencies The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates (its functional currency). The results and financial position of each Group company are expressed in pounds sterling, which is the functional currency of the Company, and the presentation currency for the consolidated financial statements. In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit or loss for the year. In order to hedge its exposure to certain foreign exchange risks, the Group enters into forward contracts (see note 2.17 for details of the Group’s accounting policies in respect of such derivative financial instruments). For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity. 2.7 Operating profit Operating profit is stated before interest income, finance costs and share of profit of associated undertakings. 2.8 Group pension schemes Payments to defined contribution retirement schemes are charged as an expense as they fall due. For defined benefit schemes, the cost of providing benefits is determined using the defined accrued benefit method, with actuarial valuations being carried out at least triennially and updated at each balance sheet date. Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside profit or loss and presented in other comprehensive income. Past service costs are recognised immediately to the extent that the benefits are already vested, and otherwise are amortised on a straight-line basis over the average period until the benefits become vested. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost, and as reduced by the fair value of scheme assets. 52 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsNotes to the Financial Statements continued2. Significant accounting policies continued 2.9 Taxation The tax expense represents the sum of the tax currently payable and deferred tax. Current tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax laws and rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited in other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. 2.10 Property, plant and equipment Freehold and leasehold land is not depreciated. Property, plant and equipment are held at cost less accumulated depreciation and any recognised impairment losses. Depreciation is recognised so as to write off the cost of assets (other than land) less their residual values over their useful lives, using the straight-line or the reducing balance method, on the following bases: Freehold and leasehold buildings Leasehold improvements Plant and vehicles 2.11 Intangible assets – – – 2% per annum 6% to 30% per annum 5% to 33% per annum Purchases of intellectual property and customer lists are included at cost and written off in equal annual instalments over their estimated useful economic life of between ten and twenty years. Provision is made for any impairment. Computer software is held at cost less accumulated amortisation less any recognised impairment losses. Amortisation is charged so as to write off the cost of assets less their residual value over their useful lives, using the straight-line method. The estimated useful life of computer software is between three and ten years. 53 Portmeirion Group PLCAnnual Report and Accounts 20162. Significant accounting policies continued 2.12 Impairment of tangible assets, intangible assets and goodwill At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately. Goodwill is not amortised but is reviewed for impairment at least annually. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less that the carrying value of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset of the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. 2.13 Business combinations and goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date fair value and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, any previously held equity interest is remeasured at its acquisition date fair value and any resulting gain or loss is recognised in profit or loss. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IAS 39 Financial Instruments: Recognition and Measurement is measured at fair value with changes in fair value recognised either in profit or loss or as a change to other comprehensive income. If the contingent consideration is not within the scope of IAS 39, it is measured in accordance with the appropriate IFRS. Contingent consideration that is classified as equity is not remeasured and subsequent settlement is accounted for within equity. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests, and any previous interest held, over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognised in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. 54 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsNotes to the Financial Statements continued2. Significant accounting policies continued 2.13 Business combinations and goodwill continued Where goodwill has been allocated to a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is remeasured based on the relative values of the disposed operation and the portion of the cash-generating unit retained. 2.14 Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. 2.15 Research and development Expenditure on research activities is recognised as an expense in the period in which it is incurred. An internally generated intangible asset arising from the Group’s development activities is recognised only if all of the following conditions are assessed and met: • the technical feasibility of completing the intangible asset so that it will be available for use or sale; • the intention to complete the intangible asset and use or sell it; • the ability to use or sell the intangible asset; • how the intangible asset will generate probable future economic benefits; • the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and • the ability to measure reliably the expenditure attributable to the intangible asset during its development. The amount initially recognised for internally generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally generated intangible asset can be recognised, development expenditure is recognised in profit or loss in the period in which it is incurred. Subsequent to initial recognition, internally generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. Amortisation is recognised on a straight-line basis over their estimated useful lives. 2.16 Equity Ordinary shares are classified as equity. The excess of the nominal value of ordinary shares received upon the issue of a new share is classified as share premium. Investment in own shares has been classified as a deduction from equity. These shares are valued at the weighted average cost of purchase and comprise treasury shares and shares held by an employee benefit trust. The share-based payment reserve represents the cumulative charge on outstanding share options. Once the options have been exercised or lapsed, this reserve is transferred into retained earnings. The translation reserve represents the aggregate of the cumulative exchange differences arising from the retranslation of the balance sheets of non-sterling denominated subsidiary undertakings. Retained earnings are the cumulative profits recognised by the Group and the Company. The Company other reserve is a merger reserve arising on the purchase of subsidiary undertakings. 55 Portmeirion Group PLCAnnual Report and Accounts 20162. Significant accounting policies continued 2.17 Financial instruments Financial assets and financial liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. Derivative financial instruments The Group’s activities expose it to the financial risks of changes in foreign currency exchange rates. The Group uses foreign exchange forward contracts to hedge this exposure. The Group does not use derivative financial instruments for speculative purposes. Changes in the fair value of derivative financial instruments that are designated and are effective as hedges of future cash flows are recognised directly in equity and the ineffective portion is recognised immediately in the income statement. Amounts deferred in equity are recognised in the income statement in the same period in which the hedged item affects net profit or loss. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement as they arise. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecasted transaction occurs. Receivables Trade receivables and other receivables that have fixed or determinable payments that are not quoted in an active market are categorised as loans and receivables. These are measured at amortised cost using the effective interest method, less any impairment. Discounting is omitted where the effect of discounting is immaterial. Impairment of financial assets Financial assets are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectable, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs. Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. Further details on the Group’s financial instruments can be found in note 31. 2.18 Share-based payments Equity-settled share-based payments to employees are measured at the fair value of the equity instruments at the grant date. The fair value excludes the effect of non-market-based vesting conditions. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 32. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of equity instruments that will eventually vest. At each balance sheet date, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity reserves. 56 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsNotes to the Financial Statements continued3. Critical accounting judgements and key sources of estimation uncertainty In the application of the Group’s accounting policies, which are described in note 2, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years. Critical judgements in applying the Group’s accounting policies The following are the critical judgements that the Directors have made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements. Impairment of inventory Provision is made for the impairment of slow-moving and obsolete inventory based on historical and forecast sales and estimates of net realisable value. The carrying value of inventory at the year end was £16,267,000 (2015: £12,700,000). Defined benefit pension scheme The valuation of the Group’s defined benefit pension scheme assets and liabilities under IAS 19 ‘Employee Benefits’ requires assumptions to be made regarding inflation, discount rates, mortality, salary and pension increases. The carrying value of the scheme liability at the year end was £7,130,000 (2015: £3,085,000). 4. Revenue An analysis of the Group’s revenue is as follows: Continuing operations Sale of goods Royalties 2016 £’000 2015 £’000 76,467 68,480 210 189 76,677 68,669 5. Segmental analysis IFRS 8 requires operating segments to be identified on the basis of internal reports about the components of the Group that are regularly reviewed by the Chief Executive to allocate resources to the segments and to assess their performance. Based upon the nature and extent of these internal reports, the Directors are of the opinion that there are three reportable segments under IFRS 8, namely the Portmeirion UK and USA operations and the newly acquired Wax Lyrical business. The Directors are of the opinion that only one class of business is being undertaken, that of the manufacture and sale of ceramics, home fragrances and associated homeware. Revenue by origin Portmeirion UK Portmeirion USA Wax Lyrical 2016 Inter- segment sales £’000 Sales to third parties £’000 (3,835) 42,353 — (160) 23,969 10,355 2015 Inter- segment sales £’000 (4,134) — — Sales to third parties £’000 46,533 22,136 — Total sales £’000 50,667 22,136 — Total sales £’000 46,188 23,969 10,515 80,672 (3,995) 76,677 72,803 (4,134) 68,669 Included in revenues arising from the United Kingdom are revenues of £9,724,000 (2015: £12,346,000) which arose from sales to the Group’s largest customer in South Korea. Inter-segment sales are charged at prevailing market prices. 57 Portmeirion Group PLCAnnual Report and Accounts 20165. Segmental analysis continued The following table provides an analysis of the Group’s revenue by geographical market, irrespective of the origin of the products: Revenue United Kingdom United States South Korea Rest of the World 2016 £’000 27,084 24,216 9,724 15,653 2015 £’000 17,924 22,287 12,346 16,112 76,677 68,669 The accounting policies of the reportable segments are the same as the Group’s accounting policies as described in note 2. Segment profit represents the profit earned by each segment without allocation of the share of profits of associates, interest income, finance costs and income tax expense. This is the measure reported to the Group’s Chief Executive for the purpose of resource allocation and assessment of segment performance. For the purposes of monitoring segment performance and allocating resources between segments the Group’s Chief Executive monitors the tangible, intangible and financial assets attributable to each segment. All assets are allocated to reportable segments with the exception of interests in associates. Assets used jointly by reportable segments are allocated on the basis of the revenues earned by individual reportable segments. 2016 £’000 5,307 1,202 1,455 7,964 198 31 2015 £’000 7,459 1,108 — 8,567 240 19 (387) (177) 7,806 8,649 (1,581) (1,752) 6,225 6,897 Operating profit by origin Portmeirion UK Portmeirion USA Wax Lyrical Operating profit Unallocated items: Share of profit of associated undertakings Interest income Finance costs Profit before tax Tax Profit after tax 58 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsNotes to the Financial Statements continued5. Segmental analysis continued 2016 2015 Portmeirion UK £’000 Portmeirion USA £’000 Wax Lyrical £’000 Consolidated £’000 Portmeirion UK £’000 Portmeirion USA £’000 Wax Lyrical £’000 Consolidated £’000 Other information Capital additions Depreciation and amortisation Balance sheet: Assets Non-current segment assets Other segment assets Total segment assets Interests in associates Other assets Consolidated total assets Liabilities 411 1,092 10,885 19,332 30,217 160 179 193 764 1,449 511 1,782 1,023 668 8,168 8,836 14,333 7,356 25,886 34,856 21,689 60,742 10,100 25,797 35,897 18 147 571 7,449 8,020 — — — — — 2,313 437 63,492 Segment liabilities 21,675 1,694 3,315 26,684 8,737 1,070 — Other liabilities Consolidated total liabilities 20 26,704 Reconciliation of earnings before interest, tax, depreciation and amortisation (EBITDA) Operating profit Add back: Depreciation Amortisation Earnings before interest, tax, depreciation and amortisation 6. Operating costs Cost of inventories recognised as an expense Movement on inventory impairment provision Other external charges Staff costs (note 7) Depreciation of property, plant and equipment Amortisation of intangible assets Impairment of trade receivables Cost of research and development Net foreign exchange gains 2016 £’000 7,964 1,328 454 9,746 2016 £’000 31,581 723 12,920 21,491 1,328 454 49 265 (98) 1,467 1,170 10,671 33,246 43,917 2,044 462 46,423 9,807 94 9,901 2015 £’000 8,567 978 192 9,737 2015 £’000 27,201 1,238 10,691 19,569 978 192 28 214 (9) 68,713 60,102 59 Portmeirion Group PLCAnnual Report and Accounts 2016 7. Staff numbers and costs The average number of persons employed during the year, including Directors: Operatives Salaried employees Staff costs Wages and salaries Social security costs Other pension costs Non-monetary benefits Directors’ emoluments: Salary and fees, taxable benefits and incentive Gains made on exercise of share options Long-term incentive plan Pension contributions Number of Directors who were members of a defined contribution pension scheme during the year Number of Directors who exercised options over shares in the ultimate parent company Remuneration of the highest paid Director: Salary and fees, taxable benefits and incentive Gains made on exercise of share options Long Term Incentive Plan Pension contributions The highest paid Director exercised options in the year over shares in the Company. 2016 Number 2015 Number 483 289 772 2016 £’000 439 245 684 2015 £’000 18,182 16,565 1,526 1,228 555 1,389 1,166 449 21,491 19,569 2016 £’000 2015 £’000 1,057 1,313 — 39 59 111 210 70 1,155 1,704 2016 Number 2015 Number 4 2 4 2 2016 £’000 2015 £’000 450 — 25 22 497 571 65 135 20 791 60 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsNotes to the Financial Statements continued 8. Auditors’ remuneration Fees payable to the Group’s auditor for the audit of the Group’s annual accounts Other audit related services – interim review The audit of the Company’s subsidiaries Total audit related fees Fees payable to the Group’s auditor and their associates for other services to the Group Other taxation advisory services Other services Total non-audit fees Fees payable to the Group’s auditor and their associates in respect of associated pension schemes Audit of the Portmeirion Potteries Limited Retirement Benefits Scheme 2016 £’000 2015 £’000 51 8 13 72 2 5 7 5 5 The audit fee for the Company was £1,600 (2015: £1,600). Fees payable to Mazars LLP and their associates for non-audit services to the Company are not required to be disclosed because the consolidated financial statements are required to disclose such fees on a consolidated basis. 9. Interest income Bank deposits 10. Finance costs Interest paid Realised losses on financial derivatives Unrealised losses on financial derivatives Net interest expense on pension scheme deficit 2016 £’000 31 2016 £’000 281 8 10 88 387 49 6 — 55 5 — 5 4 4 2015 £’000 19 2015 £’000 20 10 17 130 177 61 Portmeirion Group PLCAnnual Report and Accounts 2016 11. Taxation on profit on ordinary activities Current taxation United Kingdom corporation tax at 20% (2015: 20.25%) Overseas taxation Deferred taxation Origination and reversal of temporary differences Pension scheme 2016 £’000 2015 £’000 1,149 483 1,632 (209) 158 (51) 1,201 482 1,683 38 31 69 1,581 1,752 United Kingdom corporation tax is calculated at 20% (2015: 20.25%) of the estimated assessable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. The actual tax charge for the current and the previous year differs from the standard rate for the reasons set out in the following reconciliation: Profit on ordinary activities before taxation Tax on profit on ordinary activities at standard rate of 20% (2015: 20.25%) Factors affecting charge for the year: Expenses not deductible for tax purposes and other adjustments Foreign tax charged at higher rates than UK standard rate Differences relating to associates’ tax charge Total tax on profit on ordinary activities 12. Dividends paid Final dividend of 23.90p per share paid in respect of the year ended 31 December 2015 (2015: final dividend of 21.00p per share paid in respect of the year ended 31 December 2014) Interim dividend of 7.00p per share paid in respect of the year ended 31 December 2016 (2015: interim dividend of 6.10p per share paid in respect of the year ended 31 December 2015) Unclaimed dividends written back Total dividends paid in the year 2016 £’000 7,806 1,561 (209) 269 (40) 2015 £’000 8,649 1,751 (253) 272 (18) 1,581 1,752 2016 £’000 2015 £’000 2,491 2,216 732 (6) 636 — 3,217 2,852 The Directors recommend that a final dividend for 2016 of 25.25p (2015: 23.90p) per ordinary share be paid, making a total for the year of 32.25p (2015: 30.00p) per share. The final dividend will be paid, subject to shareholders’ approval, on 30 May 2017, to shareholders on the register at the close of business on 28 April 2017. This dividend has not been included as a liability in these financial statements. 62 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsNotes to the Financial Statements continued 13. Earnings per share The calculation of basic and diluted earnings per share is based on the following data: Basic earnings per share Effect of dilutive securities: employee share options Diluted earnings per share 14. Goodwill Cost At 1 January 2015 and 1 January 2016 Recognised on acquisition of a subsidiary At 31 December 2016 2016 Weighted average number of shares Earnings £’000 Earnings per share (p) Earnings £’000 2015 Weighted average number of shares Earnings per share (p) 6,225 10,445,140 59.60 6,897 10,446,483 66.02 — 87,517 — — 87,095 — 6,225 10,532,657 59.10 6,897 10,533,578 65.48 Total £’000 — 7,229 7,229 Goodwill acquired in a business combination is allocated, at acquisition, to the cash-generating units, or group of units that are expected to benefit from that business combination. Before recognition of impairment losses, the carrying amount of goodwill had all been allocated to the Wax Lyrical business. The Group tests annually for impairment, or more frequently if there are indications that goodwill might be impaired. Goodwill has been tested for impairment during the year. The recoverable amounts of the cash-generating units are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct cost during the year. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the cash-generating unit. The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next five years and extrapolates cash flows for the following five years based on an estimated growth rate of 1.5%. This rate does not exceed the average long-term growth rate for the relevant markets. The rate used to discount the forecast cash flows from Wax Lyrical is 5%. 63 Portmeirion Group PLCAnnual Report and Accounts 2016 15. Intangible assets Cost At 1 January 2015 Additions Disposals At 1 January 2016 Additions Recognised on acquisition of a subsidiary Disposals At 31 December 2016 Amortisation At 1 January 2015 Charge for the year On disposals At 1 January 2016 Charge for the year On disposals At 31 December 2016 Net book value At 31 December 2016 At 31 December 2015 Development costs £’000 Computer software £’000 Intellectual property and customer lists £’000 Total £’000 59 — — 59 — — — 59 14 45 — 59 — — 59 — — 556 47 (314) 289 20 — — 2,693 3,308 — — 2,693 — 5,968 — 47 (314) 3,041 20 5,968 — 309 8,661 9,029 364 84 (314) 134 80 — 214 95 155 1,753 2,131 63 — 192 (314) 1,816 2,009 374 — 454 — 2,190 2,463 6,471 877 6,566 1,032 Included within intellectual property and customer lists are the rights to certain intellectual property and the trade names of Spode and Royal Worcester (purchased in April 2009) and the intellectual property and customer lists recognised at fair value on the acquisition of Wax Lyrical (purchased in May 2016). At the year end the Spode and Royal Worcester intellectual property had a carrying value of £814,000 (2015: £877,000). The remaining amortisation period is thirteen years. At the year end the Wax Lyrical intellectual property had a carrying value of £3,725,000 and the customer lists had a carrying value of £1,932,000. The remaining amortisation periods are fourteen years four months and nine years four months respectively. At 31 December 2016, the Group had entered into contractual commitments for the acquisition of intangible assets amounting to £nil (2015: £nil). An impairment review of intellectual property has been carried out based on anticipated revenue and no indications of impairment have been identified. 64 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsNotes to the Financial Statements continued16. Property, plant and equipment Cost At 1 January 2015 Additions Disposals Exchange rate adjustments At 1 January 2016 Additions Acquisition of subsidiary Disposals Exchange rate adjustments At 31 December 2016 Depreciation At 1 January 2015 Charge for the year On disposals Exchange rate adjustments At 1 January 2016 Charge for the year On disposals Exchange rate adjustments At 31 December 2016 Net book value At 31 December 2016 At 31 December 2015 Land and buildings Freehold £’000 Leasehold £’000 Leasehold improvements £’000 Plant and vehicles £’000 Total £’000 3,855 3,874 1,326 13,210 22,265 — — — — — — — — 32 1,420 (919) 57 1,420 (919) 89 3,855 3,874 1,358 13,768 22,855 — — — — — — — — 4 117 — 116 740 1,365 (335) 214 744 1,482 (335) 330 3,855 3,874 1,595 15,752 25,076 1,821 70 — — 1,891 70 — — 72 51 — — 123 51 — — 832 10,372 13,097 90 — 17 767 (918) 42 978 (918) 59 939 10,263 13,216 99 — 70 1,108 1,328 (303) 148 (303) 218 1,961 174 1,108 11,216 14,459 1,894 1,964 3,700 3,751 487 419 4,536 3,505 10,617 9,639 At 31 December 2016, the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to £101,000 (2015: £nil). 65 Portmeirion Group PLCAnnual Report and Accounts 201617. Interests in associates Associated undertakings Furlong Mills Limited 2,080 ordinary shares of £1 each, representing 33.33% of the issued share capital Share of net assets Discount on acquisition Portmeirion Canada Inc. 100 common shares representing 50% of the issued share capital Share of net assets Aggregated amounts relating to associates Profit or loss from continuing operations 2016 £’000 2015 £’000 1,477 (13) 1,464 849 2,313 2016 £’000 198 1,347 (13) 1,334 710 2,044 2015 £’000 240 A list of the investments in subsidiaries and associates, including the name, country of incorporation and proportion of ownership interest, is given in note 18. Portmeirion Canada Inc. has been accounted for as an associate as it is independently managed from Canada, and with a 50% share of ownership the Directors consider that the Group asserts significant influence but not joint control. 18. Investment in subsidiaries Company investment in subsidiary undertakings: 30,100 ordinary shares of £1 each in Portmeirion Group UK Limited representing 100% of the issued share capital at cost Capital contributions made to subsidiary undertakings: Portmeirion Group UK Limited Portmeirion Enterprises Limited Portmeirion Distribution Limited 2016 £’000 2015 £’000 1,455 1,455 10,146 10,146 705 60 705 60 12,366 12,366 Long-term receivables have been reflected as capital contributions within investments to better represent their nature. 66 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsNotes to the Financial Statements continued18. Investment in subsidiaries continued At 31 December 2016 the Company had the following subsidiary and associated undertakings: Country of operation and incorporation Legal/registered address Nature of business Subsidiary undertakings Portmeirion Group UK Limited England and Wales London Road, Stoke-on-Trent, ST4 7QQ Ceramic manufacturer, marketing and distribution of homeware Portmeirion Enterprises Limited(1) England and Wales London Road, Stoke-on-Trent, ST4 7QQ Intermediate holding company Portmeirion Distribution Limited(1) England and Wales London Road, Stoke-on-Trent, ST4 7QQ Property company Portmeirion Services Limited(1) England and Wales London Road, Stoke-on-Trent, ST4 7QQ Dormant Portmeirion Group USA, Inc.(2) USA Portmeirion Group Designs, LLC(3) USA 105 Progress Lane, Waterbury, Connecticut, USA 06705 Marketing and distribution of homeware 105 Progress Lane, Waterbury, Connecticut, USA 06705 Online marketing and distribution of homeware Portmeirion Group Hong Kong Limited(1) Hong Kong 42/F Central Plaza, 18 Harbour Road, Wan Chai, Hong Kong Intermediate holding company Portmeirion (Shenzhen) Trading Company Limited(4) China Room A807, Block A, Lianhe Plaza, Futian District, Shenzhen, People’s Republic of China Marketing and distribution of homeware Lighthouse Holdings Limited(1) England and Wales Lindal-in-Furness, Ulverston, Intermediate holding company Wax Lyrical Limited(5) England and Wales Lindal-in-Furness, Ulverston, Cumbria, LA12 0LD Colony Deutschland GmbH(6) Germany Cumbria, LA12 0LD Pilotystr 4, 80538 München, Germany Manufacture, marketing and distribution of home fragrances Marketing and distribution of home fragrances Colony Gift Corporation Limited(6) England and Wales Lindal-in-Furness, Ulverston, Dormant Cumbria, LA12 0LD Associated undertakings Portmeirion Canada Inc. Canada 20 Voyager Court South, Rexdale, Etobicoke, Toronto, Ontario, Canada Marketing and distribution of homeware Furlong Mills Limited England and Wales Furlong Lane, Burslem, Stoke-on-Trent, ST6 3LE Suppliers of clay and glaze The companies are incorporated in England and Wales and registered in England and Wales except where stated. The share capital of all subsidiary undertakings consists solely of ordinary shares. The Company holds 100% of the share capital of all subsidiaries, 50% of the ordinary share capital of Portmeirion Canada Inc. and 33.33% of the ordinary share capital of Furlong Mills Limited. Furlong Mills Limited supplies Portmeirion Group UK Limited with all of its clay and most of its glaze raw materials. Notes (1) Wholly owned by Portmeirion Group UK Limited. (2) Wholly owned by Portmeirion Enterprises Limited. (3) Wholly owned by Portmeirion Group USA, Inc. (4) Wholly owned by Portmeirion Group Hong Kong Limited. (5) Wholly owned by Lighthouse Holdings Limited. (6) Wholly owned by Wax Lyrical Limited. 67 Portmeirion Group PLCAnnual Report and Accounts 201619. Inventories Raw materials and other consumables Work in progress Finished goods 20. Trade and other receivables Group Amounts receivable for the sale of goods Allowance for doubtful debts Trade receivables Amounts owed by associated undertakings Other receivables Prepayments and accrued income 2016 £’000 3,039 564 2015 £’000 1,984 545 12,664 10,171 16,267 12,700 2016 £’000 11,435 (310) 11,125 251 97 1,012 2015 £’000 8,647 (210) 8,437 215 33 627 12,485 9,312 Generally no interest is charged on receivables; however, there is provision in the Group’s terms and conditions for interest to be charged on late payments. The allowance for doubtful debts has been determined by reference to past default experience and a review of specific customers’ debts at the year end. Included in the Group’s trade receivable balance are receivables with a carrying amount of £2,447,000 (2015: £1,573,000) which are past due at the reporting date for which the Group has not provided as there has not been a significant change in credit quality and the amounts are still considered recoverable. The Group does not hold any collateral over these balances. The average age of these receivables is 48 days (2015: 55 days). Ageing of past due but not impaired receivables 31–60 days 61–90 days 91+ days Total Movement in the allowance for doubtful debts Balance at the beginning of the year Recognised on acquisition of a subsidiary Impairment losses recognised Amounts written off as uncollectable Balance at the end of the year 68 2016 £’000 2,264 124 59 2015 £’000 1,158 222 193 2,447 1,573 2016 £’000 210 99 49 (48) 310 2015 £’000 196 — 28 (14) 210 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsNotes to the Financial Statements continued 20. Trade and other receivables continued In determining the recoverability of a trade receivable the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the Directors believe that there is no further credit provision required in excess of the allowance for doubtful debts. Ageing of individually impaired trade receivables 120+ days 2016 £’000 109 2015 £’000 91 Included in the allowance for doubtful debts are individually impaired trade receivables with a balance of £nil (2015: £13,000), owed by companies which have been placed into liquidation. The impairment recognised represents the difference between the carrying amount of these trade receivables and the present value of the expected liquidation proceeds. The Group does not hold any collateral over these balances. Company Amounts owed by subsidiary undertakings 2016 £’000 2,244 2015 £’000 721 The Directors consider that the carrying amount of trade and other receivables for the Group and the Company approximates to their fair value. 21. Cash and cash equivalents Cash and cash equivalents 2016 £’000 2015 £’000 6,540 11,130 Cash and cash equivalents comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates to their fair value. 22. Trade and other payables Group Trade payables and accruals Other taxation and social security Other payables 2016 £’000 7,317 808 613 2015 £’000 5,003 449 534 8,738 5,986 Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 35 days (2015: 34 days). For most suppliers no interest is charged on the trade payables from the date of invoice to the end of the following month. Thereafter, interest may be charged on the outstanding balances at various interest rates. The Group’s policy is to pay all payables within the credit timeframe. The Directors consider that the carrying amount of trade payables approximates to their fair value. 69 Portmeirion Group PLCAnnual Report and Accounts 2016 23. Borrowings The Group has three facilities: a) A £2,000,000 overdraft facility available until 31 May 2017. Interest is payable at 1.9% on the net pooled fund balance, plus bank base rate on net sterling borrowings. b) A £10,000,000 loan facility repayable in equal instalments over a five-year term until 4 May 2021. Interest is payable at an average 1.38% above three-month LIBOR. At the year end the outstanding balance was £9,000,000. c) A £10,000,000 revolving credit facility available until 4 May 2019. Interest is payable at 2.0% above three-month LIBOR. These facilities are secured by an unlimited debenture from the Group and the Company and a first charge over the Group’s property. The overdraft and revolving credit facilities were not being utilised at 31 December 2016. 24. Deferred tax The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting years: Accelerated tax depreciation £’000 Retirement benefit obligations £’000 Share- based payment £’000 Capital gain rolled over £’000 Other temporary differences £’000 Temporary difference acquired intangibles £’000 At 1 January 2015 Credit/(charge) to income Credit to equity (Charge)/credit to other comprehensive income At 1 January 2016 Credit/(charge) to income Charge to equity Credit to other comprehensive income Acquisition of subsidiary (519) 27 — — (492) 59 — — — 831 (31) — (245) 555 (158) — 815 — At 31 December 2016 (433) 1,212 105 (27) 31 — 109 8 (37) — — 80 (277) 28 — — (249) 14 — — — (235) 692 (66) — 17 643 15 — 193 — 851 Total £’000 832 (69) 31 (228) 566 51 (37) 1,008 — — — — — 113 — — (1,074) (1,074) (961) 514 Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to do so. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes: Deferred tax liability Deferred tax asset 2016 £’000 (961) 1,475 514 2015 £’000 — 566 566 At the balance sheet date, the Group had no unused tax trading or capital losses (2015: £nil) available for offset against future profits. Temporary differences arising in connection with interests in associates and joint ventures are insignificant. 70 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsNotes to the Financial Statements continued 25. Share capital 2016 Number ’000 £’000 2015 Number ’000 £’000 Allotted, called up and fully paid share capital: ordinary shares of 5p each 11,005 550 11,003 550 The market price of the Company’s shares at 31 December 2016 was 935.0p per share. During the year the price ranged between 749.0p and 1,267.5p per share. The Company has one class of ordinary shares which carry no right to fixed income. During the year the Company issued 1,879 new ordinary shares of 5p each for a total of £12,000 in order to satisfy the exercise of share options. Options granted to Directors and employees (note 32) to acquire ordinary shares of 5p in the Company and still outstanding at 31 December 2016 were as follows: 2010 Deferred Incentive Plan 2010 Deferred Incentive Plan 2010 Deferred Incentive Plan 2012 Approved Plan 2012 Unapproved Plan 2012 Approved Plan 2012 Unapproved Plan 2012 Approved Plan 2012 Unapproved Plan Number of shares 1,734 4,457 5,830 4,918 Exercise price per share (p) Dates on which exercisable Earliest Latest — 16.04.2017 14.07.2017 — 22.04.2018 20.07.2018 — 12.05.2019 10.08.2019 610.0 03.05.2016 01.05.2023 108,203 610.0 03.05.2016 01.05.2023 11,194 740.0 01.05.2017 29.04.2024 135,806 740.0 01.05.2017 29.04.2024 7,573 935.0 28.04.2018 26.04.2025 157,427 935.0 28.04.2018 26.04.2025 Options held by the Directors are shown in the Directors’ Remuneration Report on page 34. 71 Portmeirion Group PLCAnnual Report and Accounts 201626. Own shares Treasury shares At 1 January Shares purchased Shares issued under employee share schemes At 31 December ESOP shares At 1 January Shares purchased Shares issued under employee share schemes At 31 December Total at 31 December 2016 £’000 453 — (5) 448 2,684 — (196) 2,488 2,936 2015 £’000 527 — (74) 453 1,287 1,397 — 2,684 3,137 The Group currently holds 239,477 (2015: 242,780) ordinary shares of 5p each in treasury. The ESOP share reserve represents the cost of shares in Portmeirion Group PLC purchased in the market and held by The Portmeirion Employees’ Share Trust to satisfy options under the Group’s share option schemes (note 32). The number of ordinary shares held by the Employees’ Share Trust at 31 December 2016 was 307,048 (2015: 339,048). 27. Commitments Operating lease arrangements Operating lease payments represent rentals payable by the Group for: • Portmeirion UK’s retail outlets and motor vehicles; • Portmeirion USA’s warehouse, New York office and showroom and New Jersey office; and • Wax Lyrical’s main operating site, warehouse, retail outlet and motor vehicles. Leases are negotiated on an individual basis. The Group as lessee Lease payments under operating leases recognised as an expense in the year 2016 £’000 1,602 2015 £’000 1,271 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: Within one year In the second to fifth years inclusive After five years The Company did not have any operating lease arrangements. 72 2016 £’000 1,480 2,467 1,647 5,594 2015 £’000 1,139 2,487 — 3,626 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsNotes to the Financial Statements continued 28. Contingent liabilities The Group and the Company have given a guarantee of up to $900,000 to the landlord of the premises of Portmeirion Group USA, Inc. located in Connecticut, USA. The Group and the Company have also provided a guarantee to the Trustees of the UK defined benefit pension scheme which guarantees all present and future obligations and liabilities up to a maximum amount equal to the entire aggregate liability. 29. Related party transactions Transactions between the Group and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its associates and the Company and its subsidiaries and associates are disclosed below. Group The transactions during the year with associated undertakings were: Purchases 2016 £’000 Purchases 2015 £’000 Portmeirion Canada Inc. Furlong Mills Limited — 812 The outstanding balances at 31 December 2016 with associated undertakings were: Portmeirion Canada Inc. Furlong Mills Limited Debtor 2016 £’000 136 115 — 916 Debtor 2015 £’000 145 70 Sales 2016 £’000 1,509 — Sales 2015 £’000 1,603 — Creditor 2016 £’000 Creditor 2015 £’000 — — — — Sales to Portmeirion Canada Inc. are made at prices agreed between Portmeirion Group UK Limited and Portmeirion Canada Inc. The sales figure includes management fees for Group services. Purchases from Furlong Mills Limited are made at prices agreed between Portmeirion Group UK Limited and Furlong Mills Limited. Portmeirion Group UK Limited receives a rebate related to its level of purchases from Furlong Mills Limited. The purchases figure includes a credit for management fees. Several of the Directors made purchases of goods from the Group during the year on the same terms as those available to all employees. Total purchases did not exceed £1,000 for any Director in the year or in the prior year. No Director of the Company had a financial interest in any material contract, other than those for service, to which the Company was a party during the financial year. The key management personnel of the Group are considered to be the Directors, the remuneration of whom is set out in note 7 on page 60. Company During 2016 net transactions totalling £1,523,000 were debited (2015: £539,000 debited) to the intercompany account with the Company’s subsidiary, Portmeirion Group UK Limited. These transactions represented payments and receipts made on behalf of the Company by Portmeirion Group UK Limited, an intergroup dividend and the charge for share-based payments. During the year The Portmeirion Employees’ Share Trust repaid part of an intercompany loan to the Company for £196,000 (2015: borrowed £1,404,000). The purpose of the loan is for acquiring shares to satisfy Group share option exercises (note 32). The total outstanding loan is now £2,501,000 (2015: £2,697,000). The ESOP share reserve is disclosed in note 26 on page 72. The outstanding balances with subsidiary undertakings at 31 December 2016 and 31 December 2015 are shown in note 20 on page 69. No balances were owed to or from the Company by or to associated undertakings. 30. Pensions The Group operates group personal pension plans in the UK and a discretionary money purchase scheme in the USA. The total cost charged to income of £1,228,000 (2015: £1,166,000) represents contributions payable to these schemes by the Group at rates specified in the rules of the schemes. 73 Portmeirion Group PLCAnnual Report and Accounts 201630. Pensions continued The UK defined benefit scheme was frozen, i.e. closed to new entrants and for future accrual of benefits, at 5 April 1999. Following the decision for the scheme to be frozen, formal notice was given to employees in January 1999. A defined contribution pension scheme commenced on 6 April 1999 for all eligible UK employees. This scheme was closed on 31 October 2002 and was replaced by a group stakeholder pension plan. Membership in this scheme was transferred to a group personal pension plan during 2013. Investment risk The present value of the defined benefit liability is calculated using a discount rate determined by reference to high quality corporate bond yields; if the return on plan assets is below this rate, it will increase the scheme deficit. Interest risk A decrease in the bond interest rate will increase the scheme liability. Longevity risk The present value of the defined benefit scheme liability is calculated by reference to the best estimate of the mortality of the scheme participants both during and after their employment. An increase in the life expectancy of the scheme participants will increase the scheme’s liability. Salary risk The present value of the defined benefit scheme liability is calculated by reference to the salary of scheme participants at the point the scheme was closed. As such, only inflationary increases in the salary of scheme participants will increase the scheme’s liability. For the defined benefit scheme, the most recent triennial valuation was at 5 April 2014. The main actuarial assumptions used in the valuation were: • RPI of 3.60% per annum and CPI of 2.80% per annum; • pre-retirement valuation rate of interest of 5.00% per annum; • post-retirement valuation rate of interest of 3.70% per annum; and • mortality experience based upon PCA00 tables with projections based on year of birth with a long-term rate of improvement of 1.75% per annum. At the date of the last valuation on 5 April 2014 the market value of the scheme assets was £26,336,000 and the scheme had a deficiency of £7,295,000. The actuarial valuation of the scheme was updated at 31 December 2016 in accordance with IAS 19 by qualified actuaries. The major assumptions used by the actuaries were: Rate of increase of pensions in payment: Post 06.04.88 GMP Pre 06.04.97 excess over GMP Post 06.04.97 pension Rate of revaluation of pensions in deferment Rate used to discount scheme liabilities Inflation assumption: RPI CPI Life expectancy at 65 for a member: Currently aged 65 – male Currently aged 45 – male Currently aged 65 – female Currently aged 45 – female 74 2016 2015 3.00% 5.00% 3.50% 2.50% 2.60% 3.60% 2.50% 22.2 23.9 24.2 26.1 3.00% 5.00% 3.20% 2.20% 3.70% 3.30% 2.20% 22.1 23.8 24.1 26.0 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsNotes to the Financial Statements continued30. Pensions continued The most significant actuarial assumption for the determination of the defined benefit obligation is the discount rate. If the discount rate were 0.1% higher, the defined benefit obligation would reduce by £727,000 (2015: £537,000). The average duration of the defined benefit obligation at the end of the reporting period is 19 years. The amount included in the balance sheet arising from the Group’s obligations in respect of its defined benefit scheme is as follows: Scheme assets Equities Bonds Gilts Diversified growth funds Insured pensions Cash Total fair value of assets Present value of defined benefit obligations Deficit in the scheme Analysis of the amount charged to operating profit Current service cost Past service cost Analysis of the amount included in the income statement Interest on pension scheme assets Interest on pension scheme liabilities Amount charged to other finance costs Amounts recognised in the consolidated statement of comprehensive income Return on plan assets (excluding amounts included in net interest expense) Actuarial gains and losses arising from changes in financial assumptions Actuarial gains and losses arising from changes in demographic assumptions Remeasurement of the net defined benefit pension scheme liability 2016 Fair value £’000 4,683 7,544 9,413 4,715 5,963 41 2015 Fair value £’000 4,123 6,316 7,532 4,706 5,713 52 32,359 28,442 (39,489) (31,527) (7,130) (3,085) 2016 £’000 — — — 2016 £’000 1,049 2015 £’000 — — — 2015 £’000 1,024 (1,137) (1,154) (88) (130) 2016 £’000 3,036 (7,438) (955) (5,357) 2015 £’000 (964) 789 436 261 The cumulative amount of actuarial gains and losses recognised in the consolidated statement of comprehensive income since adoption of IFRS is a loss of £10,058,000 (2015: loss of £4,701,000). 75 Portmeirion Group PLCAnnual Report and Accounts 2016 30. Pensions continued Movements in the present value of defined benefit obligations were as follows: At 1 January Service cost Interest cost Remeasurements (financial) Remeasurements (demographic) Benefits paid At 31 December Movements in the fair value of scheme assets were as follows: At 1 January Interest on assets Remeasurement of assets Contributions by the employer Benefits paid At 31 December 2016 £’000 2015 £’000 31,527 32,501 — 1,137 7,438 955 (1,568) — 1,154 (789) (436) (903) 39,489 31,527 2016 £’000 28,442 1,049 3,036 1,400 (1,568) 2015 £’000 28,348 1,024 (964) 937 (903) 32,359 28,442 The estimated amount of contributions expected to be paid to the scheme during the current financial year is £1,200,000 (2016: £1,400,000). At 31 December 2016, contributions of £126,000 (2015: £129,000) due in respect of the current reporting period had not been paid over to the UK schemes. In the United States there was a provision for payments into the money purchase scheme of £155,000 (2015: £134,000) at 31 December 2016. 31. Financial instruments Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 2. Financial risk management objectives Capital management The Group and the Company manage their capital to ensure that all entities in the Group will be able to continue as a going concern while maximising the return to stakeholders. The capital structure of the Group consists of cash and cash equivalents, borrowings and equity attributable to equity holders, comprising capital, reserves and retained earnings. Credit risk The Group’s principal financial assets are cash, short-term deposits and trade receivables. The Group’s policy is to place funds on short-term deposit with highly rated institutions. Accounts receivable are monitored closely and provisions are made for bad and doubtful debts where appropriate. The creditworthiness of customers is assessed prior to opening new accounts and on a regular basis for significant customers. The assessment of credit quality of trade receivables is outlined in note 20. The Group does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics that is not covered by credit insurance. 76 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsNotes to the Financial Statements continued 31. Financial instruments continued Financial risk management objectives continued Credit risk continued The carrying amount of financial assets recorded in the financial statements, which is net of impairment losses, represents the Group and Company’s maximum exposure to credit risk. Interest rate risk management and sensitivity analysis The Group is exposed to interest rate risk because entities in the Group borrow funds at both fixed and floating interest rates as disclosed in note 23. The risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings, and could further be mitigated by the use of interest rate swap contracts and forward interest rate contracts if deemed appropriate. If interest rates had been 1% higher and all the other variables were held constant, the Group’s profit for the year ended 31 December 2016 would decrease by £98,000 (2015: £4,000). Foreign currency risk management The Group has exposure to foreign currency risk arising from its net investments in and cash flows from overseas subsidiaries and associates. Its policy in managing this risk is to maintain appropriate levels of net assets in the overseas companies and utilise foreign currency forward contracts. The most significant risk of exposure to foreign currency arises from the US dollar sales made by Portmeirion UK to Portmeirion USA. The Group’s net exposure to US dollar cash flows for the coming year is not expected to be significant. At the year end the Group had in place a forward contract for US dollars and an average rate option in US dollars to manage the risk arising from the retranslation of profit made in the United States. The Group enters into derivative transactions only to manage exposure arising from its underlying businesses. No speculative derivative contracts are entered into. The Group undertakes certain trading transactions denominated in foreign currencies. Hence, exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising forward foreign exchange contracts when considered appropriate. Open derivative positions at the year end are not material. The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows: Euro US dollar Canadian dollar Swedish krona Norwegian krone Chinese yuan Liabilities Assets 2016 £’000 56 2015 £’000 268 2016 £’000 606 2015 £’000 297 2,403 1,884 5,879 5,946 — 7 — 20 — 8 6 94 126 115 120 87 121 209 34 154 Foreign currency sensitivity analysis The Group is mainly exposed to the currencies of euro, US dollar, Canadian dollar, Swedish krona, Norwegian krone and Chinese yuan. The following table details the Group’s sensitivity to a 10% increase and decrease in sterling against the relevant foreign currencies. 10% is the sensitivity rate which represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the year end for a 10% change in foreign currency rates. A negative number below indicates a decrease in profit where sterling strengthens 10% against the relevant currency. For a 10% weakening of sterling against the relevant currency, there would be an equal and opposite impact on profit. Euro impact US dollar impact Canadian dollar impact Swedish krona impact Norwegian krone impact Chinese yuan impact 2016 £’000 2015 £’000 2016 £’000 2015 £’000 2016 £’000 2015 £’000 2016 £’000 2015 £’000 2016 £’000 2015 £’000 2016 £’000 2015 £’000 Profit or (loss) (50) (3) (29) (65) (11) (11) (9) (18) (11) (2) (6) (5) 77 Portmeirion Group PLCAnnual Report and Accounts 201631. Financial instruments continued Financial risk management objectives continued Liquidity risk management Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves and banking facilities, monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Liquidity and interest risk tables The following tables detail the Group’s expected maturity for its assets and liabilities. The tables have been drawn up based on the undiscounted contractual maturities of the financial assets and liabilities including interest that will be earned on those assets except where the Group anticipates that the cash flow will occur in a different period. At 31 December 2016 Financial assets Other assets Total assets Shareholders’ funds Financial liabilities Borrowings Other liabilities Pension scheme deficit Weighted average effective interest rate % 0.25 — — — 3.0 — — Less than 1 month £’000 13,065 — 1–3 months £’000 4,851 — 13,065 4,851 Non- financial assets/ (liabilities) £’000 — 45,576 Total £’000 17,916 45,576 45,576 63,492 (36,788) (36,788) — (7,105) (500) (583) — — (649) — — — (8,370) (455) — (775) (961) — (7,130) (7,930) (8,870) (2,774) (7,130) Total liabilities and shareholders’ funds (8,188) (1,104) (9,321) (44,879) (63,492) Cumulative gap 4,877 8,624 (697) — — At 31 December 2015 Financial assets Other assets Total assets Shareholders’ funds Financial liabilities Other liabilities Pension scheme deficit Weighted average effective interest rate % 0.5 — — — — — Less than 1 month £’000 15,503 — 1–3 months £’000 4,279 — 15,503 4,279 — — (4,241) (1,138) (581) — (138) — Non- financial assets/ (liabilities) £’000 — 26,641 Total £’000 19,782 26,641 26,641 46,423 (36,522) (36,522) — — (5,537) (1,279) (3,085) — (3,085) Total liabilities and shareholders’ funds (4,822) (1,276) (718) (39,607) (46,423) Cumulative gap 10,681 13,684 12,966 — — 78 Over 3 months £’000 — — — — (176) Over 3 months £’000 — — — — (158) (560) Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsNotes to the Financial Statements continued31. Financial instruments continued Liquidity and interest risk tables continued Categories of financial instruments Financial assets: Cash and cash equivalents Loans and receivables Financial liabilities: Amortised cost 32. Share-based payments Equity-settled share option schemes 2016 £’000 2015 £’000 6,540 11,376 11,130 8,652 17,916 19,782 7,930 5,537 The Group operates two share option schemes and one long-term incentive plan for senior managers and Directors. The Group recognised total expenses of £144,000 and £175,000 related to share-based payment transactions in 2016 and 2015 respectively. The Company recharged these expenses to Portmeirion Group UK Limited. a) The Portmeirion 2002 Share Option Scheme Options are exercisable at a price equal to the average quoted market price of the Company’s shares on the three trading days prior to the date of the grant. The vesting period is three years. If the options remain unexercised after a period of ten years from the date of grant the options expire. Details of the share options outstanding during the year are as follows: Outstanding at 1 January Granted during the year Lapsed during the year Surrendered during the year Exercised during the year Outstanding at 31 December Exercisable at 31 December There were no options outstanding at 31 December 2016. No options were granted in the current or prior years. 2016 2015 Weighted average exercise price £ Number of share options — — — — — — — — — — — — — — Weighted average exercise price £ 4.875 — — — Number of share options 43,000 — — — (43,000) 4.875 — — — — 79 Portmeirion Group PLCAnnual Report and Accounts 201632. Share-based payments continued Equity-settled share option schemes continued b) The Portmeirion Group 2010 Deferred Incentive Share Option Plan Options are granted to Executive Directors in a year over shares with a market value not exceeding 20% of the gross incentive earned by the relevant Director in respect of the previous financial year. Options are exercisable at £1 per individual as the total exercise price. The vesting period is three years. If the options remain unexercised after a period of three years and three months from the date of grant the options expire. Details of the share options outstanding during the year are as follows: Outstanding at 1 January Granted during the year Lapsed during the year Surrendered during the year Exercised during the year Outstanding at 31 December Exercisable at 31 December 2016 2015 Number of share options 9,494 5,830 — — (3,303) 12,021 — Total exercise price £ 8 3 — — 2 9 — Number of share options 16,645 4,457 — — (11,608) 9,494 — Total exercise price £ 7 3 — — 2 8 — The options outstanding at 31 December 2016 had a weighted average remaining contractual life of 1.9 years (2015: 1.7 years). In 2016, options were granted on 11 May. The aggregate of the estimated fair value of those options is £63,540. In 2015, options were granted on 21 April. The aggregate of the estimated fair value of those options is £38,141. The inputs into the Black–Scholes pricing model are as follows: Weighted average share price at date of grant Weighted average exercise price Expected volatility Expected life Risk-free rate Expected dividend rate 2016 2015 £11.800 £9.350 £nil 14% £nil 16% 3.125 years 3.125 years 0.53% 2.54% 0.70% 2.83% Expected volatility was determined by calculating the historical volatility over the previous 3.125 years. The expected life used in the model assumes that the options will be exercised on average halfway through the period during which they can be exercised. 80 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsNotes to the Financial Statements continued32. Share-based payments continued Equity-settled share option schemes continued c) The Portmeirion 2012 Approved and Unapproved Share Option Plans Options are exercisable at a price equal to the average quoted market price of the Company’s shares on the three trading days prior to the date of the grant. The vesting period is three years. If the options remain unexercised after a period of ten years from the date of grant the options expire. Details of the share options outstanding during the year are as follows: Outstanding at 1 January Granted during the year Lapsed during the year Surrendered during the year Exercised during the year Outstanding at 31 December Exercisable at 31 December 2016 2015 Weighted average exercise price £ Number of share options Number of share options 459,000 7.685 294,000 — — — — — — (33,879) 6.100 165,000 — — — Weighted average exercise price £ 6.750 9.350 — — — 425,121 7.811 459,000 7.685 113,121 6.100 — — The options outstanding at 31 December 2016 had a weighted average remaining contractual life of 7.4 years (2015: 8.4 years). There were no options granted in 2016. In 2015, options were granted on 27 April. The aggregate of the estimated fair value of those options is £136,837. The range of exercise prices for the options outstanding at 31 December is from £6.100 to £9.350. The inputs into the Black–Scholes pricing model are as follows: Weighted average share price at date of grant Weighted average exercise price Expected volatility Expected life Risk-free rate Expected dividend rate 2016 2015 — — — — — — £9.250 £9.350 17% 4 years 0.98% 2.86% Expected volatility was determined by calculating the historical volatility over the previous four years. The expected life used in the model is based upon management’s best estimate of life using historic experience as a benchmark. 33. Acquisition of subsidiary On 4 May 2016, the Group acquired the entire issued share capital of Lighthouse Holdings Limited for a total cash consideration of £17,500,000 plus surplus cash as at 30 April 2016. Lighthouse Holdings Limited’s wholly owned operating subsidiary, Wax Lyrical Limited, is the UK’s largest manufacturer of home fragrances. Wax Lyrical is based in the Lake District and is both a wholesaler and retailer of its home fragrance products, primarily scented candles and reed diffusers, to both UK and export markets. Manufactured in the UK, its leading brands of Wax Lyrical and Colony are sold in high quality stores together with ranges produced for some of the world’s leading luxury brands. Wax Lyrical exports to over 40 countries around the world. Lighthouse’s audited accounts for the year ended 31 December 2015 recorded revenue of £13,813,000, a pre-tax profit of £2,065,000 and net assets as at 31 December 2015 of £7,648,000. 81 Portmeirion Group PLCAnnual Report and Accounts 201633. Acquisition of subsidiary continued The acquisition brings the following strategic benefits for Portmeirion: • the acquisition was earnings enhancing in 2016; • Wax Lyrical, with its high quality brands and “Made in Britain” pedigree, represents a strong strategic fit for Portmeirion; and • the combined Group will benefit from a wider product offering and access to a larger customer base. Significant growth opportunities for Wax Lyrical’s products are envisaged within the Group’s existing markets and distribution channels. In particular, the Group expects to grow Wax Lyrical’s sales through Portmeirion’s existing UK customers, websites and retail outlets as well as into export markets such as the United States and South Korea. The amounts recognised at fair value in respect of the identifiable assets acquired and liabilities assumed are as follows: Cash and cash equivalents Trade and other receivables Inventory Property, plant and equipment Trade and other payables Current income tax liabilities Identifiable intangible assets Less deferred tax liability Total identifiable assets Goodwill Total consideration Satisfied by: Cash and cash equivalents Borrowings Total consideration transferred Net cash outflow arising on acquisition: Cash consideration Less: cash and cash equivalent balances acquired £’000 1,432 2,040 2,549 1,482 (1,362) (163) 5,968 (1,074) 10,872 7,229 18,101 £’000 5,257 12,844 18,101 £’000 18,101 (1,432) 16,669 The goodwill of £7,229,000 arising from the acquisition consists of the anticipated synergies of combing the existing Group operations with those of Wax Lyrical. This will include shared product development, distribution channels, access to new customers in the UK and export markets and other operational synergies. None of the goodwill is expected to be deductible for income tax purposes. The intangible assets value of £5,968,000 represents intellectual property and customer lists recognised at their fair value, which are being amortised over their estimated useful lives of 15 and 10 years respectively. Acquisition-related costs (included in operating costs) amount to £170,000. Wax Lyrical contributed £10,355,000 revenue and £1,455,000 to the Group’s profit for the period between the date of acquisition and the balance sheet date. If the acquisition of Wax Lyrical had been completed on the first day of the financial year, Group revenue for the period would have been £80,716,000 and Group pre-tax profit would have been £7,921,000. 82 Portmeirion Group PLCAnnual Report and Accounts 2016Financial StatementsNotes to the Financial Statements continuedFive-year Summary Consolidated income statement information Years ended 31 December Revenue Profit before tax Tax Profit attributable to equity holders Earnings per share Diluted earnings per share Dividends paid and proposed per share Consolidated balance sheet information At 31 December Assets employed Non-current assets Current assets Current liabilities Non-current liabilities Financed by Called up share capital Share premium account and reserves 2016 £’000 2015 £’000 2014 £’000 2013 £’000 2012 £’000 76,677 68,669 61,370 58,295 55,525 7,806 (1,581) 6,225 59.60p 59.10p 32.25p 8,649 7,611 7,009 6,595 (1,752) (1,538) (1,400) (1,709) 6,897 6,073 5,609 4,886 66.02p 57.64p 53.26p 47.28p 65.48p 57.30p 52.84p 46.60p 30.00p 26.50p 24.00p 21.80p 2016 £’000 2015 £’000 2014 £’000 2013 £’000 2012 £’000 28,200 35,292 (11,704) (15,000) 13,281 33,142 (6,816) (3,085) 13,031 32,221 (8,052) (4,153) 12,704 28,807 (7,606) (2,404) 9,774 28,683 (6,637) (4,973) 36,788 36,522 33,047 31,501 26,847 550 36,238 36,788 550 549 548 541 35,972 32,498 30,953 26,306 36,522 33,047 31,501 26,847 83 Portmeirion Group PLCAnnual Report and Accounts 2016Company Information Board of Directors Non-executive Chairman Richard J. Steele BCOM FCA CTA Chief Executive Lawrence Bryan BA Group Finance Director Brett W.J. Phillips BSc ACA Group Sales and Marketing Director Philip E. Atherton Operations Director Michael J. Knapper Non-executive Director Lady Barbara Thomas Judge CBE BA JD Non-executive Director Janis Kong OBE BSc Company Secretary Moira MacDonald ACIS Registered office and number London Road Stoke-on-Trent ST4 7QQ Tel: +44 (0) 1782 744721 www.portmeiriongroup.com Registered number: 124842 Auditors Mazars LLP The Pinnacle 160 Midsummer Boulevard Milton Keynes MK9 1FF Nominated adviser and broker Panmure Gordon (UK) Limited One New Change London EC4M 9AF Joint broker Cantor Fitzgerald Europe One Churchill Place Canary Wharf London E14 5RB 84 Registrars Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Tel: 0871 664 0300* (UK) +44 (0) 37 1664 0300 (outside UK) Email: shareholder.services@capitaregistrars.com www.capitaassetservices.com * Calls cost 12p per minute plus network extras. Lines open between 9:00 am and 5:30 pm GMT, Monday–Friday excluding public holidays in England and Wales. Solicitors Pinsent Masons LLP 3 Colmore Circus Birmingham B4 6BH Financial PR advisers Bell Pottinger 6th Floor, Holborn Gate 330 High Holborn London WC1V 7QD Tel: +44 (0) 20 3772 2500 Email: info@bellpottinger.com Financial Calendar Annual General Meeting Interim Report Dividends Interim announced Paid Final announced Paid May August August October March May Portmeirion Group PLCAnnual Report and Accounts 2016Financial Statements Retail Outlets Bridgend shop Unit 71, Bridgend Designer Outlet The Derwen Bridgend South Wales CF32 9SU Tel: +44 (0) 1656 669038 Colne shop ‘Boundary Mill’ Boundary Mill Stores Vivary Way Colne Lancashire BB8 9NW Tel: +44 (0) 1282 856200 Longton shop Phoenix Works Unit 1 & 2 500 King Street Longton Staffordshire ST3 1EZ Tel: +44 (0) 1782 326661 Rotherham shop ‘Boundary Mill’ Boundary Mill Stores Catcliffe Retail Park Poplar Way Catcliffe Rotherham S60 5TR Tel: +44 (0) 1709 832800 Shiremoor shop ‘Boundary Mill’ Boundary Mill Stores Park Lane Shiremoor Newcastle-Upon-Tyne NE27 0BS Tel: +44 (0) 1912 972420 Stoke shop London Road Stoke-on-Trent Staffordshire ST4 7QQ Tel: +44 (0) 1782 411756 Street shop 1B Clarks Village Farm Road Street Somerset BA16 0BB Tel: +44 (0) 1458 446703 Swindon shop Swindon Designer Outlet Kemble Drive Swindon Wiltshire SN2 2DY Tel: +44 (0) 1793 422910 Trentham shop Unit 230, Trentham Shopping Village Trentham Stoke-on-Trent Staffordshire ST4 8AX Tel: +44 (0) 1782 657828 Walsall shop ‘Boundary Mill’ Boundary Mill Stores Junction 10 Retail Park Bentley Mill Way Walsall West Midlands WS2 0LE Tel: +44 (0) 1922 618200 Wax Lyrical Lindal shop Wax Lyrical Lindal-in-Furness Ulverston Cumbria LA12 0LD Tel: +44 (0) 1229 461102 Wax Lyrical Lowry outlet Wax Lyrical Outlet Unit F2 Lowry Outlet Mall Salford Quays Manchester M50 3AH Tel: +44 (0) 161 876 4525 Details of opening times and directions to the outlets can be found on our websites at: www.portmeiriongroupfactoryshops.co.uk and www.wax-lyrical.com/outlets. 85 Portmeirion Group PLCAnnual Report and Accounts 2016P o r t m e i r i o n G r o u p P L C R e p o r t a n d A c c o u n t s f o r t h e y e a r e n d e d 3 1 D e c e m b e r 2 0 1 6 Portmeirion Group PLC London Road Stoke-on-Trent ST4 7QQ Tel: +44 (0) 1782 744721 www.portmeiriongroup.com

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