Churchill China Regulatory News (CHH)

14 September 2023

CHURCHILL CHINA PLC

("Churchill" or the "Company" or the "Group")

INTERIM RESULTS

For the six months ended 30 June 2023

Solid revenue and significant margin progress in the first half

Churchill China plc (AIM:CHH), the manufacturer of innovative performance ceramic products serving hospitality markets worldwide, is pleased to announce its Interim Results for the six months ended 30 June, 2023.

Highlights:

Financial

· Operating profit before exceptional items increased year on year by 39% to £4.9m (2022 H1: £3.5m, FY2022: £9.1m)

· Profit after exceptional items and before tax for the period was £4.7m, an increase of 20% (2022 H1: £3.9m, FY2022: £9.6m)

· Adjusted* earnings per share were 34.3p (H1 2022: 24.7p, FY2022: 66.9p)

· Interim dividend of 11.0 pence per share (H1 2022: 10.5 pence per share, FY2022: 31.5 pence per share)

· Net cash and deposits at 30 June 2023 of £9.9m (H1 2022: £15.7m, FY2022: £14.7m) reflecting planned increases in stocks and reduction of creditors

Business

· Revenue in the period increased by 6% to £44.0m (H1 2022: £41.4m, FY2022: £82.5m)

· Hospitality revenue increased by 9.2%

· Stocks successfully built to meet orderbook demand

· Strong demand from customers in the period

· Operating margins improved by 3% as labour efficiency improves

· Price per piece sustained in line with 2022

· Investment strategy continues to focus on innovation, automation and, energy efficiency to drive long term, sustainable, profit growth

Robin Williams, Chairman of Churchill China, commented:

"We are pleased to report a healthy increase in revenue and profit in the first half of the year and that despite some market headwinds the Group is in a good position to meet the Board's profit expectations for the full year."

Analyst meeting

An in-person meeting for analysts will be held at 10.00am today, 14 September 2023, at Buchanan, 107 Cheapside, London EC2V 6DN, along with an online facility. Please contact Buchanan at ChurchillChina@buchanan.uk.com for further details.

* Adjusted earnings per share is calculated after adjusting for the post tax effect of exceptional items

For further information, please contact:

David Flin / Alex Wright / William Brinkley

Chairman's Statement

We are pleased to report continued revenue, margin and profit improvement for the Group during the first half of the year.

Sales revenues increased by 6.3% overall and by 9.2% in our target hospitality market. Volumes were down year on year due to the general macro-economic climate and in particular the soft trading conditions within the UK. This is as a result of our strategic focus on value added product, which has increased its share of total revenue by 1% year on year and helped to improve the margin performance of the business.

Increased production costs, driven by both material and labour, have been mitigated by the price increases implemented last year and improvements in labour efficiencies and efficient energy purchasing has meant that margin expectations should be met for the year.

The build of stock has continued in the first half of the year with the aim of returning to pre-pandemic levels of customer service. This task is almost complete and as a result the order book has returned to normal levels, with much improved delivery times as a result. Our performance product is continuing to gain traction in our overseas markets, sales in which are up 12% on prior year.

Overall, the continued solid performance, despite difficult trading conditions, continues to highlight the resilience of the Company's long term strategy and the strength of the Churchill brand.

Financial Review

Total revenues increased 6.3% in the period from £41.4m to £44.0m (FY2022: £82.5m). Revenue increases were due in large part to the price increases implemented in 2022 which have helped with a softer volume requirement in the period.

Hospitality showed a 9.2% increase over H1 2022 and material sales performed strongly in the period.

Good progress has been made on gross margin improvement in the period. A 3% improvement was shown in H1 and this is expected to continue as agency staffing levels are reduced and energy prices, already forward purchased, feed through in H2. The Company expects gross margin to continue improving in the short to medium term.

Operating profit before exceptional expenses increased from £3.4m in H1 2022 to £5.0m in the current period, an increase of 47%. Operating profit was 12.5% ahead at £4.5m against £4.0m in H1 2022.

Adjusted earnings per share before exceptional expenses were 34.3p (H1 2022: 24.7p, FY2022: 66.9p).

Basic earnings per share were 31.9p (H1 2022: 28.9, FY2022: 71.7p).

Profit before taxation after exceptional items was £4.7m (H1 2022: £3.9m, FY2022: £9.6m).

During the period the Company completed its planned increase in stock levels to facilitate improved customer service. The required level of inventory has now been achieved, with the result that cash has reduced in the period from £14.7m at year end to £9.9m at the end of June.

Capital expenditure has continued at the same level as previous year, with £2.7m spent in the period (H1 2022: £2.7m, FY2022: £4.9m).

Dividends

During the period the Company paid £2.3m in dividend payments and is pleased to announce that the Directors recommend an interim dividend of 11.0 pence per share (H1 2022: 10.5 pence per share, FY2022: 31.5 pence per share) an increase of approximately 5% on the previous year despite the increase in corporation tax in the current year to 25% (2022: 19%). This improvement in dividend is in keeping with the Company's aim of increasing returns to shareholders and our confidence in the ongoing performance of the business. This dividend will be payable on 13 October 2023 to shareholders on the register at 22 September 2023.

Business

The first half of the year has been very positive for the business, with the Company performing well against its objectives. A slight reduction in volume, driven by the wider global macro-economic environment highlights the importance of the Company's focus on defined market segments, quality product, customer service and the transitioning of customers into value added offerings.

The Company continues to focus on export to countries where our market share is low and where opportunities abound for continued growth.

Ceramics

Hospitality revenue for the period was up 9.2% with Europe faring particularly well at 15% above 2022 levels. Volume for the period was however, down on H1 2022 by 7.8% with over 75% of this reduction coming from the UK, mirroring the slowdown in the UK market.

Our end user hospitality venues appear to have maintained revenues, whilst margins are being squeezed. This has had the effect of delaying purchasing decisions within the marketplace. There is a good level of enquiries which the Company expects will begin to convert to orders later in the year.

New product launch performance has been strong, with sales more than double those of 2022 and returning to levels seen pre-pandemic. The schedule for launches has returned to normal and the sales from last year's new products are well ahead of target.

The prospective pipeline on new installations remains healthy, particularly in overseas markets. Despite an increase in the lead time from enquiry to order, it is expected that a number of these orders will materialise as the general climate improves and as we enter the key end of year period.

Volume of added value products remained at similar percentage levels to 2022 however the revenue value of this increased by 9.7%.

Materials

Furlong Mills external sales were up 24% year on year with intercompany sales to Churchill up by a broadly similar 26% during the period. Furlong is in a similar position to Churchill with efficiencies delivering an improvement to margin and maintaining the Company's expectations on bottom line profitability. The Company has forward purchased some of its volatile priced stock in order to protect against rising commodity pricing and therefore cost input rises will be kept to a minimum for the foreseeable future.

Operations

As we communicated last year, the Company was constrained by labour availability and lower levels of workforce experience. The normalisation of our stock position and the current volumes have allowed manufacturing to focus on yield improvements along with a reduction in agency staff. This, combined with the natural improvement in colleague experience, is starting to bear fruit through better efficiencies in manufacturing, along with lower levels of waste, and it is through these important value-added activities that the Company expects to improve margins in the immediate future.

During the period the Company has continued the installation of 1MW of solar panel arrays which will deliver up to 33% of the factory electricity requirement in the peak summer months. In addition to this our energy hedging strategy continues to be to forward purchase contracts when those prices are favourable and to de-risk future costs.

The Company continues to invest in its automated pressure cast operation with the addition of an additional 25% of capacity in this area and further capital spend approved to increase the flexibility and efficiency. Staff training has also been focused on this area to improve productivity and yields from the operation and additional work has been completed at Furlong Mills to improve the material flow to pressure cast production.

 Environmental, Social and Governance ('ESG')

As an energy intensive industry, the Company is focussed on reducing the energy consumption within our operations. As already mentioned, the Company has invested heavily in solar arrays, but in addition the Company looks on energy as a strategic area for development, as our customers, shareholders, and employees expect an environmentally aware approach to our production techniques. As a result, the Company is investing in research to identify new processes and materials to reduce the energy required to produce our product. In addition to this the Company has commenced the journey to identify the impact of our supply chain emissions and to address the impact of our market offering through packaging recycling.

We have continued our journey to improve our engagement with our workforce, particularly within the context of the wider macro-economic environment. We supply support to assist employees in managing their day-to-day finances through helplines and, for those who request it we assist with language lessons to integrate employees into the workplace and to facilitate their interaction with their colleagues. In addition, the Company continues to engage with local schools to promote the benefits of a career in manufacturing.

As a larger employer the Company also focuses on delivering high quality employment with the opportunity for advancement at all levels of the organisation. Colleagues are encouraged to cross-skill and all sections and levels of the business have succession planning as a core requirement.

The Company has always strived to adhere to good governance principles. In line with this the Company is currently continuing with its succession activities with the recruitment of a new Audit Committee Chair and expects to be fully compliant with current guidance on Board Composition before the 2024 AGM.

People

The Company continues to appreciate the high level of commitment and engagement of our colleagues and was pleased to be able award an above inflation pay rise in April, at a time when many are struggling in their home lives with rapidly rising costs. Churchill remains committed to offering the local community a long-term destination for employment.

Outlook

We believe that the Company is well placed to improve profitability and move towards the levels of efficiency and productivity that were evident prior to the pandemic and indeed the first half performance in 2023 illustrates further progress on this journey. This performance improvement is expected to continue into the second half of 2023, albeit against the backdrop of a potentially worsening macroeconomic situation. The Company remains ungeared and in the current rising interest rate environment this is a welcome position. Rising interest rates will naturally have an impact on consumer discretionary spend and therefore impact our markets. The Company will continue to closely monitor the situation and will respond proportionately. Overall, the Group is in a good position to meet the Board's profit expectations for the full year.

The Board remains positive that the Company is resilient and operating in the optimal market segments to deliver long term growth such that, regardless of the short-term impacts of the economic environment, the Company will continue to deliver growth over the longer term.

Robin GW Williams

Chairman

13 September 2023

Consolidated Statement of Comprehensive Income

for the six months ended 30 June 2023

All above figures relate to continuing operations