Churchill China Regulatory News (CHH)

1 Apr 2008 07:01

Churchill China PLC01 April 2008 For Immediate Release 1 April 2008 Churchill China plc PRELIMINARY RESULTS for the year ended 31 December 2007 Churchill China plc, the manufacturer and global distributor of ceramictableware and household goods to the hospitality and retail markets, is pleasedto announce its preliminary results for the year ended 31 December 2007. Key Points: O Group turnover of £46.9m (2006: £45.9m) O Profit before exceptional items and tax of £4.0m (2006 : £3.1m) up 31% O Profit before tax of £4.8m (2006 : £5.7m) O Basic earnings per share 33.8p (2006: 37.7p) O Adjusted earnings per share before exceptional items 26.5p (2006: 20.5p) up 29% O Strong operating cash flow. Year end net cash £11.4m (2006 : £6.4m) O Final dividend increased by 13% to 9.2p per ordinary share (2006: 8.1p) Jonathan Sparey, Chairman said: "I am delighted to report that 2007 proved to be an excellent year forChurchill, exceeding our expectations, with strong growth in profitability,exceptionally strong cash flows and encouraging activity levels in both ourhospitality and retail businesses." For further information, please contact: Churchill China plc Today on: 020 7466 5000Andrew Roper/David Taylor thereafter on: 01782 577566 Buchanan Communications Tel No: 020 7466 5000Tim Anderson/Lisa Baderoon/Rebecca Skye Dietrich Brewin Dolphin Investment Banking Tel No: 0845 270 8610Andrew Emmott Chairman's Statement I am delighted to report that 2007 proved to be an excellent year for Churchill,exceeding our expectations, with strong growth in profitability, exceptionallystrong cash flows and encouraging activity levels in both our hospitality andretail businesses. This result reflects the successful implementation of keystrategies to deliver attractive product ranges backed by specific new productdevelopment, high service levels and tight management of our cost base. This wasagainst a backdrop of healthy customer demand in a number of geographicalmarkets especially in the UK. FINANCIAL REVIEW Group revenues rose by £1.0m to £46.9m (2006: £45.9m) reflecting good growth inmany key Hospitality accounts adjusted by lower levels of retail contractbusiness and higher rebates to certain customers. Group operating profit before exceptional items increased by 15% to £3.2m (2006:£2.8m) and our profit before exceptional items and taxation improved by over 30%to £4.0m (2006: £3.1m). The results also include an exceptional profit of £0.8m relating to the disposalof surplus land at Marlborough in December 2007. In 2006, net exceptionalprofits totalled £2.7m. Profit after exceptional items, but before taxation, was£4.8m (2006: £5.7m). Adjusted earnings per share have increased by 30% to 26.5p (2006: 20.5p). Basicearnings per share, including exceptional items, were 33.8p (2006: 37.7p) Overall cash balances rose by £5.0m to £11.4m (2006 £6.4m) and accounted forover one third of year end net assets of £29.7m. DIVIDEND In the light of the strong overall performance of the business the Board ispleased to recommend a 13% increase in the final dividend to 9.2p per share.Together with the increased interim dividend paid in October this gives a totaldividend declared in respect of 2007 of 13.7p an increase of 14% on thecorresponding figure for 2006. We will continue to manage our dividend policy todeliver progressive, long term, shareholder value creation. In 2007 taking intoaccount capital growth and uplifted dividends, our Total Return to Shareholdersin the year was 25%, in line with the average achieved over the last five years. ACCOUNTING POLICIES These are the Group's first results to be presented under IFRS and comparativefigures have been restated to reflect these changes. There has been nosignificant impact on reported profit figures from the adoption of IFRS. Themajor impact on our balance sheet has been the requirement to provide fordeferred taxation on previous revaluation gains. Revenue figures have also been restated, without any impact on profit, toreflect a change in the classification of certain rebates given to customers.The rebates, which were previously treated as costs, are now accounted for as areduction from disclosed revenues. Full details of the effect of the above changes on the Group's financialstatements are shown later in this report in "Transition statements". HOSPITALITY BUSINESS REVIEW Revenues from the sale of Churchill Super Vitrified and Alchemy Fine Chinadinnerware increased by 10% to £28.6m (2006: £26.0m). Churchill consolidated its position as the market leader in the UK as domesticsales increased by 17% to almost £19m, benefiting from our strategy ofinnovative NPD and close end user collaboration. The introduction of nonsmoking legislation boosted our sales, particularly in the first half of 2007,tothe pub sector as many clients sought to increase their food revenues with asuperior tabletop offering. Churchill now has broad and clear differentiation of its product offering to allsegments of the growing dining out market. Our end users and distributionpartners place high value on Churchill's brand values characterised by gooddesign, exemplary service and outstanding product performance in use. Sales to Europe improved by 7% to £6.2m whilst sales in the USA where we arerelatively underweight declined by 5% to £1.9m but yielded better margins.Whilst export sales growth tends to be more fragmented the same core brandvalues of design, product performance and service remain important to ourgrowing customer base. We have increased our marketing manpower and coverage inselected export markets to sustain our growth plans. MANUFACTURING AND TECHNICAL Demand for Churchill super vitrified and our prestige fine china Alchemy wasabove our expectations. In response we increased production volumes andsucceeded in maintaining and indeed improving service levels to our distributorsand end users. Effective use of available kiln capacity restricted the increasein gas and electricity costs in 2007 to £400k. As the ceramic industry in Staffordshire has declined we are increasinglymindful of the need to retain skill levels of both management and operatives andhave instituted a number of initiatives to safeguard our long term position. Setagainst external trends Churchill continues to invest in quality people and newworking methodologies to maintain and develop our technical excellence inceramic dinnerware production. CAPITAL EXPENDITURE In 2007 we initiated the first in a series of capital investments designed toincrease our manufacturing capacity to develop and produce more complex newproduct groups. This will enable us to deliver a more efficient and costeffective service to our customers in both divisions. We have invested substantially in the latest manufacturing technologies. Workingclosely with executive chefs has led us to the development of ever morecomplicated and innovative shapes for our prestige restaurant, hotel andcatering customers. We will continue to make further investment in this area. During 2008 we will complete the transfer of all manufacture of Alchemy finechina items to the main Marlborough site. Cost benefits generated from operatingon one site will start to feed through to the bottom line towards the end of2008.The total cost of these projects, including an energy efficient kiln andexpanded state of the art logistics facilities, is approximately £6m. Theseinvestments are expected to substantially improve our core operating platformfor the future. RETAIL BUSINESS REVIEW Revenues from the sale of Queens and Churchill retail products, which are allsourced from outside the UK, was £18.3m (2006: £19.9m) with the decline beingentirely due to a planned withdrawal from low contribution business. Thisresulted in an improved net contribution before central costs compared to lastyear. It is pleasing to record our plans to gradually increase margins in our retailactivities are being delivered and further progress is expected this year. Ourkey objective remains to increase margins, principally by expanding our middlemarket "Queens" business to departments stores and independents. Supply to UK volume channel customers can be by both full service and directship basis for Churchill branded and bespoke product. Most export customers optto buy on a direct ship basis in which case containers are shipped direct fromthe country of supply. A core element of our approach has been to develop licence partnerships withother companies including Disney, Sanderson and Cath Kidston. These highlyrespected businesses are attracted to Churchill by our ability to transformbrand and design expertise into sales of mugs and dinnerware on an internationalstage. Churchill has the capability and reputation to deliver the guarantees andtechnical security our customers require. We achieved our internal benchmarks for 2007 in terms of margin, sales mix,control of working capital and cost management and are optimistic of furtherdevelopment this year. OUTSOURCING Chinese cost and wage inflation has been well documented since we last reported.Manufacturers have been affected by the weakness of the US$ against the RMB, thewithdrawal of Chinese government export subsidies and the dramatic increases inglobal energy and raw material costs. We also source product to our ownspecifications from a range of markets in Asia, Europe and Latin America whereproducer price inflation is only a couple of percentage points behind China inUS$ terms. However, the effect on our net revenue is broadly neutral. We havematched price increases to direct ship customers in line with cost increases. We have aimed to differentiate our approach to the market from that of puretrading companies. Churchill can provide both suppliers and customers with ahigh level of technical expertise and depth of understanding of all ceramicrelated issues. Teams from both our Shanghai office and the UK are responsiblefor quality, shipping, order processing and fulfilment. The consumer expects tobe able to purchase safe ceramics manufactured in ethically sound sources.Compliance with all international Health and Safety legislation is in itself notenough, all our products have to perform well in use. PEOPLE We are keen to ensure that our people are well motivated and feel valued,whether in Stoke on Trent, Shanghai or Chicago. Our business has been built onthe experience, knowledge base and skills of our talented team. We are keen toaugment these qualities through training and development at all levels fromNVQ's, Health and Safety, to MBA's and beyond. In addition to an experiencedworkforce we are very fortunate to have a highly professional operationalmanagement team and they have delivered an excellent result in 2007. The Boardis very grateful to everyone in the business who made these results possible. PROSPECTS Despite the economic downturn in the UK and USA we believe that with a strongbalance sheet and robust business plan, Churchill is capable of achieving itsobjectives for the full year. Demand has been weaker in the first quarter of 2008 when compared to thecorresponding period of 2007 which was characterised by a number of significantinstallation sales to the Hospitality sector, although repeat sales toestablished customers are performing to expectations. As a result it is unlikelythat gross revenue and profits for the first half of 2008 will reach theexceptional levels achieved last year. We have several opportunities to grow our revenues across a number of marketsin both our businesses. We are actively pursuing projects aimed at increasingnear term sales and broadening both our distribution and product range. CONSOLIDATED INCOME STATEMENTfor the year ended 31 December 2007 Audited Year to Audited Year to 31 December 2007 31 December 2006 As restated Before Before Exceptional Exceptional Exceptional Exceptional Items Items Total Items Items Total Note £000 £000 £000 £000 £000 £000 Revenue 46,930 - 46,930 45,930 - 45,930 Operating profit before 2 3,230 - 3,230 2,795 - 2,795exceptional itemsExceptional items 3 - 798 798 - 2,660 2,660 Operating profit after 2 3,230 798 4,028 2,795 2,660 5,455exceptional items Share of results of 120 - 120 (7) - (7)associates companyFinance income 730 - 730 294 - 294Finance cost 4 (36) - (36) - - - Profit before Income Tax 4,044 798 4,842 3,082 2,660 5,742 Income Tax expense 5 (1,147) (1,147) (846) (785) (1,631) Profit for the period 2,897 798 3,695 2,236 1,187 4,111 Attributable to:Equity holder of the parent 2,897 798 3,695 2,236 1,187 4,111 Pence per Pence per share share Basic earnings per ordinary 6 33.8 37.7share Diluted basic earnings per 6 33.6 37.7ordinary share Adjusted earnings per share figures excluding the effect of exceptional items shown innote 5 All the above figures relate to continuing operationsRestated to reflect the adoption of IFRS CONSOLIDATED BALANCE SHEETAs at 31 December 2007 Audited Audited 31 December 2007 31 December 2006 As restated £000 £000AssetsNon Current AssetsPlant, property and equipment 10,813 10,693Intangible assets 34 35Investment in associates 814 797Available for sale financial assets - 22Deferred income tax assets 318 1,597 11,979 13,144 Current AssetsInventories 6,660 6,857Trade and other receivables 9,606 10,111Cash and cash equivalents 11,440 6,410 27,706 23,378 Total Assets 39,685 36,522 LiabilitiesCurrent LiabilitiesTrade and other payables (7,779) (6,177)Current income tax liabilities (493) (190) (8,272) (6,367) Non current liabilitiesDeferred income tax liabilities (592) (554)Retirement benefit obligations (1,090) (3,948) Total non current liabilities (1,682) (3,948) Total liabilities (9,954) (10,869) Net Assets 29,731 25,653 Capital and reserves attributable toequity holders in CompanyIssued share capital 1,095 1,090Share premium account 2,332 2,266Retained earnings 25,124 21,140Other reserves 1,180 1,157 29,731 25,653 Restated to reflect the adoption of IFRS STATEMENT OF RECOGNISED INCOME AND EXPENSEFor the year ended 31 December 2007 Audited Year to Audited Year to 31 December 2007 31 December 2006 As restated £000 £000 Net of taxActuarial gain on retirement benefit obligations 1,655 777Currency translation differences 3 (10)Impact of change in UK tax rate on deferred tax 26 - Net income recognised directly in equity 1,684 767Profit for the year 3,695 4,111 Total recognised income for the period 5,379 4,878 Attributable to:Equity holders of the company 5,379 4,878 CONSOLIDATED CASH FLOW STATEMENTFor the year ended 31 December 2007 Audited Year to Audited Year to 31 December 2007 31 December 2006 As restated Note £000 £000 Cash generated from operations 8 6,307 2,725Interest received 491 230Interest paid (14) -Income tax paid (225) (316) Net cash from operating activities 6,559 2,639 Investing activitiesPurchase of property, plant and equipment (1,413) (736)Proceeds on disposal of property, plan and equipment 1,107 3,053Purchase of intangible assets (25) (11)Dividends received 103 - Net cash used in financing activities (228) 2,306 Financing activitiesIssue of ordinary shares 71 63Dividends paid (1,375) (1,217) Net cash used in financing activities (1,304) (1,154) Net increase in cash and cash equivalents 5,027 3,791 Cash and cash equivalents at the beginning of the year 6,410 2,629 Exchange gains / (losses) on cash and cash equivalents 3 (10) Cash and cash equivalents at the end of the year 11,440 6,410 1. BASIS OF PREPARATION The Group financial statements for the period to 31 December 2007 have beenaudited and an unqualified audit report has been issued. The preliminaryfinancial statements represent extracts of those audited accounts, but do notconstitute statutory accounts within the meaning of Section 240 of the CompaniesAct 1985. Prior to the 1 January 2007, the Group was required to prepare its consolidatedfinancial statements under UK GAAP. For the year ending 31 December 2007 theGroup is required to prepare its annual consolidated financial statements inaccordance with accounting standards adopted for use in the European Union(International Financial Reporting standards (IFRS)). The preliminary financial statements for the year to 31 December 2007 have beenprepared in accordance with the accounting policies set out below, taking intoaccount the requirements and options set out in IFRS 1 "First time adoption ofInternational Financial Reporting Standards. The Group has not sought to adoptthe IAS 1 transitional guidance on business combinations and cumulativetranslational differences retrospectively. The transition date for the Group'sapplication of IFRS is 1 January 2006 and comparative figures for 31 December2006 have been restated to reflect IFRS. Reconciliations of the income statementand balance sheet from those previously reported under UK GAAP to the restatedIFRS figures are given later in this report. The preliminary financial statements have been prepared on the historic costbasis as modified by the revaluation of certain land and buildings and availablefor sale financial assets and financial liabilities (including derivativefinancial instruments) at fair value through profit or loss. 2. SEGMENTAL ANALYSIS The business is managed in two main business segments, Hospitality and Retail.Segmental performance is as follows: Hospitality Retail Unallocated Total £000 £000 £000 £0002007 Revenue 28,576 18,354 - 46,930 Contribution to group overheads 4,909 1,112 - 6,021Group overheads (2,791) (2,791)Exceptional items 798 798 Operating profit (1,993) 4,028 Share of results of associated company 120 120Finance income / cost 694 694 Profit before income tax 4,842 Income tax expense (1,147) Profit for the period 3,695 2006 Revenue 26,018 19,912 - 45,930 Contribution to group overheads 4,186 953 - 5,139Group overheads (2,344) (2,344)Exceptional items 2,660 2,660 Operating profit 316 5,455 Share of results of associated company (7) (7)Finance income / cost 294 294 Profit before income tax 5,742 Income tax expense (1,631) Profit for the period 4,111 The unallocated Group overheads principally comprise costs associated withcentralised functions of the parent company board, finance and administrationand information technology. 3. EXCEPTIONAL ITEMS As stated in the Group's accounting policies the Directors regard certainmaterial items as exceptional. The analysis of exceptional items is as follows. Audited Year to Audited Year to 31 December 2007 31 December 2006 As restated £000 £000 Restructuring costs - (366)Curtailment benefit - defined pension scheme - 1,150Profit on disposal of property, plant and equipment 798 1,876 798 2,660 The profit on disposal recognised in the year is in relation the sale of surplusland at Sandyford in November 2007. A taxation charge of £nil has been chargedin the Group's overall tax charge in the year in respect of this disposal. Netreceipts of £1,042,000 were received in respect of this disposal during theyear. The profit on disposal recognised in 2006 is in relation to the sale of theAlexander Pottery, Cobridge in January 2006. A taxation charge of £550,000 wasbeen charged in the Group's overall tax charge in 2006 in respect of thisdisposal. Net receipts of £2,898,000 were received in respect of this disposalduring 2006. A charge of £nil (2006: £235,000) has been included in the taxation charge inrelation to the restructuring costs and curtailment benefit. 4. FINANCE INCOME / COST Audited Year to Audited Year to 31 December 2007 31 December 2006 As restated £000 £000 Other interest receivable 491 230Net finance credit: pensions 239 64Finance income 730 294 Other interest payable (14) -Impairment of available for sale financial asset (22) -Finance cost (36) - Net finance income 694 294 5. INCOME TAX EXPENSE Audited Year to Audited Year to 31 December 2007 31 December 2006 As restated £000 £000 Current taxation 528 188Deferred taxation: origination and reversal of 626 1,443temporary differencesDeferred taxation: impact of change in UK tax rate (7) - Income tax expense 1,147 1,631 6. EARNINGS PER ORDINARY SHARE Basic earnings per ordinary share is based on the profit after income tax and on10,933,561 (2006: 10,867,167) ordinary shares, being the weighted average numberof ordinary shares in issue during the year. Adjusted earnings per ordinary share is based on the profit after income tax andadjusted to take into account exceptional items. Audited Year to Audited Year to 31 December 2007 31 December 2006 Pence per share Pence per share As restated Basic earnings per share 33.8 37.7Adjustments: Restructuring costs - 2.4 Profit on disposal of property, plant and (7.3) (12.2)equipment Curtailment of pension benefits - (7.4)Adjusted earnings per share 26.5 20.5 Diluted basic earnings per ordinary share is based on the profit after incometax and on 11,007,289 (2006: 10,910,580) ordinary shares, being the weightedaverage number of ordinary shares in issue during the year of 10,933,561(2006:10,867,167) increased by 73,728 (2006: 43,413) shares, being the weightedaverage number of ordinary shares which would have been issued if theoutstanding options to acquire shares in the Group had been exercised at theaverage price during the year. Diluted adjusted earnings per ordinary share is based on the profit after taxand adjusted to take into account exceptional items. Audited Year to Audited Year to 31 December 2007 31 December 2006 Pence per share Pence per share As restated Diluted basic earnings per share 33.6 37.7Adjustments: Restructuring costs - (2.4) Profit on disposal of property, plant and (7.3) (12.2)equipment Curtailment of pension benefits - (7.4)Diluted adjusted earnings per share 26.3 20.5 7. DIVIDEND The final dividend, which has not been provided for, has been calculated on10,947,876 shares being those in issue at 31 December 2007 qualifying fordividend and at a rate of 9.2p per 10p ordinary share. The dividend will be paidon 28 May 2008 to shareholders on the register on 11 April 2008. 8. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROMCONTINUING ACTIVITIES Audited Year to Audited Year to 31 December 2007 31 December 2006 As restated £000 £000 Continuing operating activities Operating profit 4,028 5,455Adjustments forDepreciation 1,002 1,298Profit on disposal of property, plant and equipment (719) (1,892)Share based payment 3 8Decrease in retirement benefit obligations (240) (1,150)Changes in working capitalInventory 197 1,789Trade and other receivables 505 (9)Trade and other payables 1,531 189 Net cash inflow before additional pension payments 6,307 5,688Additional cash contributions to the pension scheme - (2,963)Net cash inflow from continuing operating activities 6,307 2,725 Significant changes to disclosure - segmental analysis The Company has considered the segmentation of the business under the guidancein IAS 14 and considers the business should be disclosed in two primarysegments, Hospitality and Retail. Additional disclosure has been made detailingthe trading performance and assets of each of these segments. Accounting policies The accounting policies set out below and used in the preparation of thepreliminary financial statements represent an extract of the principal policiesthat apply to the preparation of the financial statements for the year ending 31December 2007. Basis of consolidation The consolidated financial statements of Churchill China plc include the resultsof the Company, its subsidiaries and associated companies. The financial statements of each undertaking in the Group are prepared to thebalance sheet date under UK GAAP. Subsidiaries accounting policies are amended,where necessary, to ensure consistency with the accounting policies adopted bythe Group. Intra group transactions are eliminated on consolidation. (a) Subsidiaries Subsidiaries are all entities over which the Group has the power to govern thefinancial and operating policies generally accompanying a shareholding of morethan one half of the voting rights. The existence and effect of potential votingrights that are currently exercisable or convertible are considered whenassessing whether the Group controls another entity. Subsidiaries are fullyconsolidated from the date on which control is transferred to the Group. Theyare de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition ofsubsidiaries by the Group. The cost of an acquisition is measured as the fairvalue of the assets given, equity instruments issued and liabilities incurred orassumed at the date of exchange, plus costs directly attributable to theacquisition. Identifiable assets acquired and liabilities and contingentliabilities assumed in a business combination are measured initially at theirfair values at the acquisition date, irrespective of the extent of any minorityinterest. The excess of the cost of acquisition over the fair value of theGroup's share of the identifiable net assets acquired is recorded as goodwill.If the cost of acquisition is less than the fair value of the net assets of thesubsidiary acquired, the difference is recognised directly in the incomestatement. Inter-company transactions, balances and unrealised gains on transactionsbetween Group companies are eliminated. Accounting policies of subsidiaries havebeen changed where necessary to ensure consistency with the policies adopted bythe Group. (b) Associates Associates are all entities over which the Group has significant influence butnot control, generally accompanying a shareholding of between 20% and 50% of thevoting rights. Investments in associates are accounted for using the equitymethod of accounting and are initially recognised at cost. The Group'sinvestment in associates includes goodwill identified on acquisition, net of anyaccumulated impairment loss. The Group's share of its associates' post-acquisition profits or losses isrecognised in the income statement, and its share of post-acquisition movementsin reserves is recognised in reserves. The cumulative post-acquisition movementsare adjusted against the carrying amount of the investment. When the Group'sshare of losses in an associate equals or exceeds its interest in the associate,including any other unsecured receivables, the Group does not recognise furtherlosses, unless it has incurred obligations or made payments on behalf of theassociate. Unrealised gains on transactions between the Group and its associates areeliminated to the extent of the Group's interest in the associates. Unrealisedlosses are also eliminated unless the transaction provides evidence of animpairment of the asset transferred. Accounting policies of associates have beenchanged where necessary to ensure consistency with the policies adopted by theGroup. Dilution in gains and losses arising in investments in associates are recognisedin the income statement. Segment Reporting A business segment is a Group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are differentfrom those of other business segments. Income and expenditure arising directlyfrom a business segment are identified to that segment. Income and expenditurearising from central operations which relate to the Group as a whole or cannotreasonably be allocated between segments are classified as unallocated. Revenue Revenue is measured at the fair value of the consideration received orreceivable and represents amounts receivable for goods and services provided inthe normal course of business, net of discounts, rebates and sales relatedtaxes. Sales of goods are recognised when goods have been delivered and title inthose goods has passed. Rebates are recognised at their anticipated level assoon as any liability is expected to arise and are deducted from gross revenue. Interest income is recognised on a time basis by reference to the principaloutstanding and at the effective interest rate applicable. Dividend income is recognised when the Group's right to receive payment has beenestablished. Leases Management review all new leases and classify them as operating or financeleases in accordance with the guidance in the standard. Lease payments madeunder operating leases are charged to income on a straight line basis over theterm of the lease. Operating profit and exceptional items Operating profit is stated both before and after the effect of exceptional itemsbut before the Group's share of results in associate companies, impairment ofinvestment in associate companies, finance income and costs and taxation. The Group has adopted a columnar income statement format which seeks tohighlight significant items within the Group results for the period. Such itemsare considered by the Directors to be exceptional in size and nature rather thanbeing representative of the underlying trading of the Group, and may includesuch items as restructuring costs, material impairments of non current assets,material profits and losses on the disposal of property, plant and equipment andmaterial increases or reductions in pension scheme costs. The Directors applyjudgement in assessing the particular items, which by virtue of their size andnature are separately disclosed in the income statement and notes to thefinancial statements as "Exceptional items". The Directors believe that theseparate disclosure of these items is relevant in understanding the Group'sfinancial performance. Dividends Dividends to the Company's shareholders are recognised as a liability in theGroup's financial statements in the period in which the dividends are proposedand approved by the Company's shareholders. Interest received / paid Interest received and paid is treated in the cash flow statement as a cash flowfrom operating activities as this reflects the nature of the Group's business. Retirement benefit costs The Group operates a defined benefit pension scheme and defined contributionpension schemes. The defined benefit scheme is valued every three years by a professionallyqualified independent Actuary. In intervening years the Actuary reviews thecontinuing appropriateness of the valuation. Schemes liabilities are measuredusing the projected unit method and the amount recognised in the balance sheetis the present value of these liabilities at the balance sheet date. Thediscount rate used to calculate the present value of liabilities is the interestrate attaching to high quantity corporate bonds. The assets of the scheme areheld separately from those of the Group and are measured at fair value. Theaccrual of further benefits under the scheme ceased on 31 March 2006. The regular service cost of providing retirement benefits to employees duringthe year, together with the cost of any benefits relating to past service andany benefits arising from curtailments, is charged or credited to operatingprofit in the year. These costs are included within staff costs. A credit representing the expected return on the assets of the scheme during theyear is included within finance income. This is based on the market value of theassets of the scheme. A charge representing the expected increase in the presentvalue of the liabilities in the scheme is included within finance cost. Thisarises from the liabilities of the scheme being one year closer to payment. Thedifference between the market value of assets and the present value of accruedpension liabilities is shown as an asset or liability in the balance sheet. Differences between actual and expected return on assets during the year arerecognised in the statement of recognised income and expense in the year,together with differences arising from changes in actuarial assumptions. Costs associated with defined contribution schemes represent contributionspayable by the Group during the year and are charged to the Income Statement asincurred. Share based payments Where share options have been issued to employees, the fair value of options atthe date of grant is charged to the profit and loss account over the period overwhich the options are expected to vest. The number of ordinary shares expectedto vest at each balance sheet date are adjusted to reflect non market vestingconditions such that the total charge recognised over the vesting periodreflects the number of options that ultimately vest. Market vesting conditionsare reflected within the fair value of the options granted. If the terms andconditions attaching to options are amended before the options vest any changein the fair value of the options is charged to the profit and loss account overthe remaining period to the vesting date. National insurance contributions payable by the Company in relation tounapproved share option schemes are provided for on the difference between theshare price at the balance sheet date and the exercise price of the option wherethe share price is higher than the exercise price. Foreign currencies The individual financial statements of each Group company are presented in thecurrency of the primary economic environment in which the company operates (itsfunctional currency). For the purpose of the consolidated financial statementsthe results of each entity are expressed in sterling, which is the functionalcurrency of the Group and is the presentation currency for the consolidatedfinancial statements. Foreign currency transactions are translated into the functional currency usingthe exchange rates prevailing at the dates of the transactions. Foreign exchangegains and losses resulting from the settlement of such transactions and from thetranslation at year end exchange rates of monetary assets and liabilitiesdenominated in foreign currencies are recognised in the income statement. Nonmonetary items that are measured in terms of historical cost in a foreigncurrency are not retranslated. For the purpose of presenting consolidated financial statements, the assets andliabilities of the Group's foreign operations are translated at exchange ratesprevailing on the balance sheet date. Income and expense items are translated ataverage exchange rates for the period. Exchange differences arising, if any, aredealt with through reserves. In order to manage its exposure to certain foreign exchange risks, the Groupenters into forward currency contracts (see "Derivative financial instruments"below). Derivative financial instruments The Group's operations expose it to the financial risks of changes in exchangerates. The Group uses forward currency contracts to mitigate this exposure. TheGroup does not use derivative financial instruments for speculative purposes.Changes in the fair value of derivative financial instruments are recognisedimmediately in the income statement as soon as they arise. Gains and losses onall derivatives held at fair value outstanding at a balance sheet date arerecognised in the income statement to that balance sheet date. Hedge accounting is not considered to be appropriate to the above currency riskmanagement techniques and has not been applied. Taxation Income tax expense represents the sum of the current tax and deferred tax. Current tax is based on the taxable profit for the year. The Group's liabilityfor current tax is calculated using tax rates that have been enacted orsubstantively enacted by the balance sheet date. Deferred income tax is provided in full, using the liability method, ontemporary differences arising between the tax bases of assets and liabilitiesand their carrying amounts in the consolidated financial statements. However,deferred income tax is not accounted for, if it arises from the initialrecognition of an asset or liability in a transaction other than a businesscombination that at the time of the transaction there is no effect on eitheraccounting or taxable profit or loss. The Group's liability for deferred tax iscalculated using tax rates that have been enacted or substantively enacted bythe balance sheet date or are expected to apply when the related deferred incometax asset is realised or deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable thatfuture taxable profit will be available against which the temporary differencescan be utilised. Deferred tax assets and liabilities are not discounted. Deferred tax assets andliabilities may be set off against each other provided there is a legal right todo so and it is managements' intention to do so. Property, plant and equipment Property, plant and equipment is shown at cost, net of depreciation, as adjustedfor the revaluation of certain land and buildings. Depreciation is calculated so as to write off the cost, less any provision forimpairment, of plant, property and equipment, less their estimated residualvalues over the expected useful economic lives of the assets concerned. Theprincipal annual rates used for this purpose are: %Freehold buildings 2 on cost or valuationPlant and machinery 10-25 on costMotor vehicles 25 on reducing net book valueFixtures and fittings 25-33 on cost Freehold land is not depreciated. The assets' residual values and useful lives are reviewed, and adjusted ifappropriate, at each balance sheet date. An asset's carrying amount is writtendown immediately to its recoverable amount if the asset's carrying amount isgreater than its estimated recoverable amounts. Intangible assets Intangible assets (computer software) are shown at cost net of depreciation.Depreciation is calculated so as to write off the cost, less any provision forimpairment, of intangible assets, less their estimated residual values over theexpected useful economic lives of the assets concerned. The principal annualrate used for this purpose is: %Computer software 33 on cost Neither the Group nor the Company has any goodwill. Investment in associates An associate is defined as an entity which the Group is in a position toexercise significant influence over, taking part in, but not controlling, thefinancial and operational management of the entity. The Group's share of post acquisition profits less losses of the associate, isincluded in the consolidated profit and loss account, and the Group's share ofits net assets after any impairment to the carrying value of those assets isincluded in the consolidated balance sheet, using the equity method ofaccounting. These amounts are taken from the latest financial statements of theundertaking concerned, which has the same accounting reference date as theGroup. Since the accounting policies of the associate do not necessarilyconform in all respects to those of the Group, adjustments are made onconsolidation where the amounts involved are material to the Group. Impairment of non financial assets At each reporting date the Directors assess whether there is any indication thatan asset may be impaired. If any such indicator exists the Group tests forimpairment by estimating the recoverable amount of the asset. If the recoverableamount is less than the carrying value of an asset an impairment loss isrequired. In addition to this, assets with indefinite lives are tested forimpairment at least annually. The recoverable amount is measured as the higherof net realisable value or value in use. Available for sale financial assets Available for sale financial assets are non derivatives that are eitherdesignated in this category or not classified to any of the other financialasset categories. They are included in non current assets unless the Directorsintend to dispose of the investment within twelve months of the balance sheetdate. At each reporting date the Directors assess whether there is an indication anasset may be impaired. If any such indicator exists the Group tests forimpairment by estimating the recoverable amount of the asset. If the recoverableamount is less than the carrying value of an asset an impairment loss isrequired. In addition to this, assets with indefinite lives are tested forimpairment at least annually. Inventories Inventories are stated at the lower of cost and net realisable value. Cost isdetermined on a first in first out basis and includes, where appropriate, directmaterials, direct labour, overheads incurred in bringing inventories to theirpresent location and condition and transport and handling costs. Net realisablevalue is the estimated selling cost less all further costs to sale. Provision ismade where necessary for obsolete, slow moving and defective inventories. Trade receivables Trade receivables are recognised initially at fair value and subsequentlymeasured at amortised cost using the effective interest method, less provisionfor impairment. A provision for impairment is established where there isobjective evidence that the Group will not be able to collect all amounts dueaccording to the original terms of the receivables. The amount of the provisionis the difference between the asset's carrying amount and the present value ofestimated future cash flows, discounted at the original effective interest rate. Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held on call withbanks, other short term highly liquid investments with original maturities ofthree months or less, and bank overdrafts. Non current assets held for sale Non current assets are classified as being held for sale where their value isexpected to be recovered through disposal rather than continuing usage withinthe business. This is generally held to be where there is a high probability ofsale in the near future. Management must be committed to sale which should beexpected to be completed to qualify for recognition as a completed sale withinone year from the date of classification. Non current assets are measured at thelower of carrying value and fair value less disposal costs. Provisions Provisions are recognised when (i) the Group has a present legal or constructiveobligation as a result of past events, (ii) it is probable that an outflow ofresources will be required to settle the obligation and (iii) the amount hasbeen reliably estimated. The Directors estimate the amount of provisionsrequired to settle any obligation at the balance sheet date. Provisions arediscounted to their present value where the effect would be material. Churchill China plc IFRS Transition Statements Income Statement As Total previously IAS 19 IAS 12 Other transition Restated reported IAS 18 IAS 36 IAS 17 Employee Deferred IAS Effect to under (UK GAAP) Revenue Goodwill Leases Benefits tax adjustments IFRS IFRS Year to 31 £000 £000 £000 £000 £000 £000 £000 £000 £000December 2006 Revenue 47,757 (1,827) (1,827) 45,930 Operating Profit 2,777 22 (5) 1 18 2,795beforeexceptional itemsExceptional items 784 1,876 1,876 2,660Operating profit 3,561 22 (5) 1,876 1,894 5,455after exceptionalitems 1 Share of results 5 (12) (12) (7)of associatedcompanyProfit on 1,876 (1,876) (1,876) 0disposal ofproperty, plantand equipmentFinance Income 305 (11) (11) 294 Profit before 5,747 0 22 (5) 1 0 (23) (5) 5,742Income Tax Income Tax (1,659) 1 4 23 28 (1,631)expense Profit for the 4,088 0 22 (4) 1 4 0 23 4,111period Attributable to:Equity holders of 4,088 0 22 (4) 1 4 0 23 4,111the parent Churchill China plc IFRS Transition Statements Balance Sheets As IAS 38 IAS 36 IAS 17 IAS 19 IAS 21 IAS 12 Other IAS Total Restated previously transition under reported effect to (UK GAAP) Intangible Goodwill Leases Employee Foreign Deferred adjustments IFRS IFRS assets Benefits Exchange tax Rates 31 December 2005 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 Non CurrentAssetsPlant, Property 11,485 (53) (68) (121) 11,364and EquipmentGoodwill and 56 53 (56) (3) 53intangibleAssetsInvestment in 825 (22) (22) 803AssociatesAvailable for 22 22 22sale financialassetsDeferred income (386) 3,727 3,341 3,341tax assets 12,366 0 (56) (68) 0 0 (386) 3,727 3,217 15,583 Current AssetsInventories 8,646 0 8,646Trade and other 10,537 (435) (435) 10,102receivablesCash and cash 2,629 0 2,629equivalents 21,812 0 0 0 0 0 0 (435) (435) 21,377Non current 1,022 0 1,022assets held forsale Current Assets 22,834 0 0 0 0 0 0 (435) (435) 22,399 Total Assets 35,200 0 (56) (68) 0 0 (386) 3,292 2,782 37,982 CurrentliabilitiesTrade and other (6,268) 22 (53) 318 287 (5,981)payablesCurrent income (318) (318) (318)tax liabilitiesProvisions for (6) 0 (6)otherliabilities andcharges (6,274) 0 0 22 (53) 0 0 0 (31) (6,305) Non currentliabilitiesHire purchase (16) 16 16 0Retirement (6,464) (2,771) (2,771) (9,235)benefitobligationsDeferred income (521) (521) (521)tax liabilities Total non (6,480) 0 0 16 0 0 0 (3,292) (3,276) (9,756)currentliabilities Total (12,754) 0 0 38 (53) 0 0 (3,292) (3,307) (16,061)liabilities Net Assets 22,446 0 (56) (30) (53) 0 (386) 0 (525) 21,921 Capital andreservesattributable toequity holdersin CompanyIssued share 1,086 0 1,086capitalShare premium 2,207 0 2,207accountRetained 17,600 (56) (30) (53) (139) 17,461earningsOther reserves 1,553 (386) (386) 1,167 22,446 0 (56) (30) (53) 0 (386) 0 (525) 21,921 Churchill China plc IFRS Transition Statements Balance Sheets As IAS 38 IAS 36 IAS 17 IAS 19 IAS 21 IAS 12 Other IAS Total Restated previously transition under reported effect to (UK GAAP) Intangible Goodwill Leases Employee Foreign Deferred adjustments IFRS IFRS assets Benefits Exchange tax Rates 31 December 2006 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 Non CurrentAssetsProperty, plant 10,779 (35) (51) (86) 10,693and equipmentGoodwill and 34 35 (34) 1 35intangibleAssetsInvestment in 819 (22) (22) 797AssociatesAvailable for 22 22 22sale financialassetsDeferred income (382) 1,979 1,597 1,597tax assets 11,632 0 (34) (51) 0 0 (382) 1,979 1,512 13,144 Current AssetsInventories 6,857 0 6,857Trade and other 10,412 (301) (301) 10,111receivablesCash and cash 6,410 0 6,410equivalents 23,378 0 0 0 0 0 0 (301) (301) 23,378Non current 0assets held forsale Current Assets 23,679 0 0 0 0 0 0 (301) (301) 23,378 Total Assets 35,311 0 (34) (51) 0 0 (382) 1,678 1,211 36,522 CurrentliabilitiesTrade and other (6,332) 16 (52) 191 155 (6,177)payablesCurrent income 1 (191) (190) (190)tax liabilitiesProvisions for 0 0otherliabilities andcharges (6,332) 0 0 1 (52) 0 0 0 (35) (6,367) Non currentliabilitiesHire purchase 0 0Retirement (2,764) (1,184) (1,184) (3,948)benefitobligationsDeferred income (60) (494) (494) (554)tax liabilities Total non (2,824) 0 0 0 0 0 0 (1,678) (1,678) (4,502)currentliabilities Total (9,156) 0 0 17 (52) 0 0 (1,678) (1,713) (10,869)liabilities Net Assets 26,155 0 (34) (34) (52) 0 (382) 0 (502) 25,653 Capital andreservesattributable toequity holdersin CompanyIssued share 1,090 0 1,090capitalShare premium 2,266 0 2,266accountRetained 21,250 (34) (34) (52) 10 (110) 21,140earningsOther reserves 1,549 (10) (382) (392) 1,157 26,155 0 (34) (34) (52) 0 (382) 0 (502) 25,653 Explanatory notes to the adjustments from UK GAAP to IFRS Revenue Previously, Churchill China plc disclosed the cost of annual retrospectiverebates and discounts paid to customers on achievement of revenue and certainother contractual targets as a cost of sale. Following consideration of theterms of the individual contractual arrangements, these retrospective rebatesand discounts are now classified as a reduction to gross revenue, with no changeto profit before tax in the year. Intangible assets Previously, computer software assets were carried in fixtures and fittingswithin Fixed Assets. Under IAS 38, computer software is now classed as anintangible asset. Goodwill Previously, the goodwill acquired on the acquisition of Wren Giftware wasamortised over a twenty year life. Under IAS 36, acquired goodwill is subject toan annual impairment test. Following the application of this impairment test ithas been calculated that as at 31 December 2005 there was no remaining value tothe goodwill acquired. Leases Previously, a lease relating to computer hardware was classed as a financeleases. Under IAS 17, this lease has been reclassified as an operating lease. Employee Benefits Previously, the Group provided for short term employee benefits in relation tounused holiday pay for weekly paid employees, but did not provide for thatassociated with monthly paid employees. Under IAS 19, the Group has provided forliabilities associated with monthly paid employees in addition to provisions forweekly paid employees. Foreign Exchange rates Previously, the Group wrote off translation differences on the consolidation ofits US subsidiary to the profit and loss account. Under IAS 21, thesedifferences must now be written off to a separate currency reserve. The Grouphas taken the transitional exemption under IFRS 1 to restate these differencesfrom 1 January 2006. Valuation of Properties and Deferred Tax Freehold land and buildings were last revalued in 1992. On the introduction ofFRS 15 the Group opted to treat freehold property at cost and the earliervaluation, as modified by subsequent additions and disposals, was classed asdeemed cost. Deferred tax was not provided as it was believed that any suchliability would not crystallise. Under IFRS the Group will adopt the deemed costbasis for land and buildings. Under IAS 12 deferred tax is provided on thepotential taxable gain on the sale of the land at its revalued level and on thedifference between the net book value and tax value of buildings. No credit hasbeen taken for available capital losses as it is not probable that they willcrystallise. Other IAS adjustments The disclosure of the exceptional profit on disposal of property, plant andequipment in the comparative 2006 results was treated under UK GAAP as a lineitem below operating profit. This has been amended to reflect IFRS requirementsand is now treated as an operating exceptional item. This reclassification doesnot affect reported profits in the period. Previously, the Group disclosed its share of the operating profit, interestreceived and tax of the results of its associated company Furlong Mills Limitedseparately on the face of the profit and loss account. Under IAS 1 theseseparate elements are now disclosed as a single figure "Share of results ofassociated company" in the income statement. Previously, the Group disclosed deferred tax assets and liabilities withincurrent assets, provisions for liabilities and charges and on a netted off basisagainst related pension scheme liabilities. Under IAS 12 deferred tax isclassified as non current on a classified balance sheet. A number of other adjustments have been made to reclassify varies assets andliabilities according to IFRS. These reclassifications do not affect reportedprofits in the period. Cash flow statement There were no material adjustments to disclosed figures in the consolidated cashflow statement arising from the implementation of IFRS. 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