Churchill China Regulatory News (CHH)

CHURCHILL CHINA plc

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

PRELIMINARY RESULTS

For the year ended 31 December 2019

Further delivery of strategic plan in 2019. Response to COVID-19 underway

Further to the trading update issued in relation to summary level results and COVID-19 on 24 March 2020, Churchill China plc (AIM: CHH), the manufacturer of innovative performance ceramic products serving hospitality markets worldwide, is pleased to announce its Preliminary Results for the year ended 31 December 2019.

Key Highlights:

Financial 2019

· Operating profit before exceptional items up 22% to £11.2m (2018: £9.2m)

o including £0.4m from ten months of ownership of Furlong Mills

· Profit before exceptional items and tax up 19% to £11.2m (2018: £9.4m)

· Reported profit before tax after exceptional items £11.3m (2018: £8.8m)

· Adjusted earnings per share up 17% to 81.7p (2018: 69.6p)

· Basic earnings per share 82.6p (2018: 65.6p)

· Cash generated from operations £11.3m (2018: £8.3m)

· Net cash and deposits of £15.6m (2018: £17.4m)

Business 2019

· Total revenues up 17% at £67.5m (2018: £57.5m)

o including £4.8m from ten months of ownership of Furlong Mills

· Ceramics (like for like) revenue growth 9% (2018: 7%)

· Export revenues up 13%

· Increased sales of Hospitality added value product

· Higher levels of investment in capital expenditure, acquisition of Furlong Mills and purchase of products and brand from Dudson

· Performance continues long term growth trend

COVID-19

· Action taken to safeguard staff and mitigate short term impact on the business

· Manufacturing operations temporarily suspended, substantial reduction in short term cash cost of operation

· Cash reserves conserved, final dividend suspended

· Strong business, financial position and forward debt capacity supports resilience

· Continuous appraisal of operational response

Alan McWalter, Chairman of Churchill China, commented:

"Churchill has in the past proved itself to be a well run and resilient business capable of dealing with significant external shocks. This reflects our strong, well resourced operations, our experienced management team and our long term approach to business.

Whilst our immediate actions are focused on the short term, we believe that our core strategies remain sound and that we are well positioned to continue to prosper in the longer term."

Analyst conference call

A conference call for analysts will be held at 11.00am this morning, 8 April 2020. Analysts who require dial-in details please contact Buchanan at ChurchillChina@buchanan.uk.com or telephone 020 7466 5000. 

For further information, please contact:

This announcement contains information which, prior to its disclosure, was considered inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 (MAR)

CHAIRMAN'S STATEMENT

Introduction

I am pleased to report that our performance in 2019 maintained the strong record of progress we have established in recent years. Our business strategy, emphasising innovation, differentiation and service, has continued to deliver value to all our stakeholders and to demonstrate long term resilience and sustainability.

We have acted quickly to face the challenges presented by COVID-19 and the rapidly changing business environment. Churchill has prioritised the safety of its employees and other stakeholders and has acted quickly to ensure this. Our contingency planning process is underway based on the assessment of a number of business scenarios and we have begun to adjust our plans accordingly. Our exposure to the hospitality industry will undoubtedly impact our performance in the immediate future, but we have implemented appropriate actions to substantially reduce the cash cost of our operations in the short term.

Churchill has a strong, ungeared balance sheet including high levels of liquid cash. We have further undrawn facilities and the opportunity to utilise our substantial asset base to secure additional facilities if required.

The current business climate is as uncertain as it has been for many years. Whilst the medium and long term effects of the present crisis are as yet unclear, Churchill is a well invested, resilient and highly responsive business led by an experienced management team. We are well positioned to meet the current challenges and we have a considerable ability to adjust our forward strategy to ensure that we continue to deliver value to our stakeholders.

Financial Review 2019

Total revenues increased by 17% to £67.5m (2018: £57.5m) with further strong growth in Hospitality ceramics export sales and the inclusion of revenue of £4.8m from Furlong Mills for ten months of the period.

Ceramic revenue growth, excluding the effects of the acquisition of Furlong Mills, was 9% (2018: 7%) with sales rising to £62.7m (2018: £57.5m). UK revenues increased by 3% to £23.6m (2018: £23.0m). Export revenues were £4.6m higher (+13%) at £39.1m (2018: £34.5m).

Within these figures there was, mainly in the second half year, a contribution from the purchase of products and IP from Dudson. Sales from Dudson products were marginally above our initial targets at £1.2m (2018: £0.0m). Retail sales, as forecast, were lower than in 2018.

Gross margins grew within our Ceramics business as we continued to increase sales of added value product.

Operating profit before exceptional items increased by 22% to £11.2m (2018: £9.2m) with Furlong Mills contributing £0.4m (4%) of this increase. On a like-for-like basis operating profit increased by 18%. Operating profit margins increased to 16.7% (2018: 16.0%). Growth in operating profit arose mainly from improved revenues and a further increase in the proportion of our business represented by added value products. We have continued to invest in the extension of distribution in our export markets, in product development and in improved customer service.

Profit before exceptional items and income tax rose by 19% to £11.2m (2018: £9.4m), largely as a result of the increase in operating profit. This strong performance maintains our record of profit growth. In the five years to the end of 2019 we have increased profit before income tax at a compound rate of 21% per annum.

Adjusted earnings per share improved by 17% to 81.7p (2018: 69.6p).

During the year we purchased, in two stages, the remaining equity in our associate company, Furlong Mills Limited, at a net cash cost of £2.9m. As a result of this we now consolidate Furlong Mills as a subsidiary of Churchill. As we acquired a higher value of assets than the overall consideration paid, negative goodwill of £0.1m was generated. In accordance with accounting standards, this has been credited to the Income Statement and treated as an exceptional item.

Reported profit before tax rose to £11.3m from £8.8m in 2018.

Basic earnings per share, including the above exceptional items, improved by 26% to 82.6p (2018: 65.6p)

We have continued to generate a good operating cash flow of £11.3m in the year (2018: £8.3m). Working capital requirements were slightly higher reflecting an increased level of inventory attributable to the establishment of a stock holding in our new European warehouse and a higher level of sales.

Capital expenditure rose to support the increased level of activity within our business. In addition to the £2.1m spent on the purchase of equipment and intellectual property from Dudson, we have invested a further £3.7m (2018: £2.1m) in developing our operations. This expenditure includes projects to extend our manufacturing space and to provide additional kiln capacity for added value production which we expect will be completed in the first half of 2020. All our operations are well invested.

We continue to enjoy a strong, ungeared, balance sheet with net assets of £41.8m. Despite the significant level of investment during the year net cash and deposits remained high at £15.6m (2018: £17.4m). Churchill's business model emphasises the generation of cash and this provides flexibility in adverse conditions. Our assets are largely tangible and also give us a high degree of short term liquidity. We retain significant forward capacity to manage our cash flow and to raise additional finance if necessary.

Dividend

The Board is aware of the importance of dividend income to shareholders and our long term policy remains that the owners of the business should receive an appropriate return. However, given the current levels of uncertainty in relation to COVID-19, the Board believes the most appropriate position at this time is not to propose a final dividend in respect of 2019 (2018: 20.3p per ordinary share). Whilst the Group continues to maintain high levels of cash and deposit balances, it has put in place a number of actions to preserve its operational position. We plan to retain cash within the business to provide forward flexibility at present. The Board will review its dividend policy at the earliest opportunity once the overall impact of COVID-19 is more certain.

Business 2019

Ceramics

We have continued to make good progress within our Ceramics business in line with the strategies that we have articulated. As 2019 demonstrates, we now enjoy a much wider spread of revenue from a number of different markets.

Export revenues increased by 13% and now represent 62% of Ceramics sales (2018: 60%). The business' progress in overseas markets has been maintained, with Europe and the USA both contributing strongly to growth. Our established market positions have further developed and we have continued to invest in regional operations. This export growth is the outfall of consistent investment in new product development and in the building of appropriate distribution channels.

Our UK sales have also increased after a period of consolidation. The actions implemented in the last eighteen months to improve our competitive position have worked well and revenues in the UK increased by 3%. We benefit from wide distribution across a range of sectors and have a deep and long established presence in what is a replacement orientated market.

In April 2019 we purchased product and brand intellectual property from Dudson in order to accelerate two key elements of our strategic development; growing sales of added value product and the extension of our distribution channels overseas. The Dudson range has now been integrated into our Hospitality offering and we have established a number of separate distribution arrangements in key market sectors. Total sales under the Dudson brand in the period following acquisition were £1.2m, slightly ahead of our original estimates.

The translation of sales from standard to added value product remains an important part of our long term strategy and we have achieved a further increase in the proportion of our revenue attributable to added value product which now represents over 47% of our Hospitality sales. This increase reflects the substantial investment in innovation, product and market research and new product development made in recent years. Stonecast continues to grow strongly and our Studio Prints range has made further progress. The purchase of intellectual property in the Dudson Evo and Harvest products, which use distinctive glaze technology, will provide additional opportunities to continue to grow added value product revenues.

Churchill's core values are innovation, technical performance and service. The strength of our established relationships with end users, distributors and agents in the UK and worldwide is of great value to the business.

Materials

The acquisition of control of Furlong Mills in February 2019 has secured an important part of our supply chain. Furlong is a ceramic materials manufacturer based in Stoke on Trent and provides processed clay body and glaze to Churchill and other major manufacturers. Longer term we wish to maintain our position of producing a high quality technical performance ceramic and continuing to innovate and differentiate our product and we believe our increased investment in Furlong and its leading position in applied material science will support this.

Furlong Mills has traded in line with our expectations during the ten months of our ownership, total revenues were £7.8m, of which £3.0m was sold to Churchill. Operating profit for the period was £0.4m.

Operations

We have continued to make substantial progress in the evolution of our manufacturing and logistics operations, again in line with our established strategies and business plan.

The growth of our business in 2019 and continued orientation towards differentiated product provided several challenges for our operational team. Activity levels remained high and the acceleration of our capital investment programme also brought additional demands. We have also prioritised initiatives aimed at improving the sustainability of our operations. New product development has continued. We expect to complete two major projects in the first half of 2020 which will provide additional production space and first stage kiln firing capacity. Both of these projects represent important long term investments and will improve our efficiency and flexibility as well as increasing overall capacity.

The integration of Dudson product manufacture into our operations, including new technologies and processes, has been completed successfully.

During the year we established a third party logistics facility in Rotterdam. This investment allows us to provide further service improvements to our European customer base and to mitigate the potential impact of Brexit on our delivery security. Long term we continue to expect that Europe will provide further growth opportunities and the ability to supply within market will support this development.

Brexit

We have reviewed our exposure to the ongoing Brexit process. A major part of our revenue is earned outside the UK and our manufacturing process, in part, relies upon materials and equipment sourced from overseas. We believe we have identified, developed and implemented, where appropriate plans to mitigate the effect of potential disruption on our business where possible.

People

As I commented on earlier in this statement, 2019 was a record year for our business. This performance reflects the knowledge, strength and commitment of our team at all levels of our operations. We have built a strong business with a sound, long term, business plan. I once again thank all our employees for their contribution to Churchill's success. The qualities inherent within the Churchill team will stand the business in good stead in the coming months.

We have continued to invest in the development of all our staff and have maintained our commitment to increased training and to continuous improvement programmes. We have a high level of engagement with our workforce and it is encouraging to see the result of this in their performance.

COVID-19

The short and long term impact of COVID-19 is not yet clear. The Company has acted quickly to assess the impact on its business and to develop and implement a set of immediate responses to the impact upon our operations in the short term. Our first priority was to ensure the safety of our employees. To that end we commenced a programme of distancing within certain operations on 19 March and on 25 March we suspended production at our Sandyford site and furloughed the majority of our workforce. We retain the ability to meet short term demand from inventories held in our logistics operations in the UK, Rotterdam and Chicago.

Given that the majority of our costs are represented by production materials, labour and energy, the suspension of manufacturing operations, supported by the Government's Coronavirus Job Retention Scheme has, in the short term, substantially lowered the cash cost of our operations to below £1m per month. We anticipate that our current cash reserves, which are highly liquid, will provide a significant level of forward cover during and beyond the present lock down period.

We are continually reviewing medium and longer term business scenarios as part of our contingency planning process. As a business we enjoy a wide spread of revenue both in terms of geography, distribution channels and product range and we are developing forward plans to provide flexibility should future market performance change from that previously experienced. Whilst we expect that Hospitality revenues may be lower in the short term and may take several months to recover to normal levels we retain the ability to optimise our UK manufacturing operations through a renewed focus on other sectors within the tableware market and other alternative measures.

Our record of consistent cash generation, regular investment and strong balance sheet gives us a significant level of flexibility in the medium term. We believe that, if necessary, we may reduce the ongoing level of expenditure on revenue and capital projects without significantly impacting our ability to re-focus or grow our business.

Outlook

2019 was a very successful year, reinforcing the substantial progress made in developing and implementing long term growth strategies. Churchill has been repositioned as a business and offers innovative and differentiated products across a wide spread of markets. 2020 had started well with performance ahead of our expectations and in other circumstances this would be the basis of a further improvement in performance. However, the as yet unknown impact of COVID-19 on our markets will undoubtedly have an impact on current year performance, particularly in the first half year.

Churchill has in the past proved itself to be a well run and resilient business capable of dealing with significant external shocks. This reflects our strong, well resourced operations, our experienced management team and our long term approach to business. We enjoy a high degree of operational and financial flexibility in the short and medium term. We have already adjusted our forward plans both to manage our cash and reduce costs where appropriate, but also to prepare for changes in our market environment longer term. Whilst our immediate actions are focused on the short term, we believe that our core strategies remain sound and that we are well positioned to continue to prosper in the longer term.

As a result of the evolving COVID-19 position and consequent lack of forward visibility, no formal guidance will be given on future financial performance at the present time. We intend to reinstate guidance as soon as practicable and, in the meantime, will continue to update investors as appropriate.

Alan McWalter

Chairman

8 April 2020

5. Earnings per ordinary share

Basic earnings per ordinary share is based on the profit on ordinary activities after income tax attributable to shareholders of £9,063,000 (2018: £7,198,000) and on 10,974,010 (2018: 10,966,996) ordinary shares, being the weighted average number of ordinary shares in issue during the year. Adjusted earnings per share is calculated after adjusting for the post tax effect of the exceptional items detailed (Note 2).

Diluted earnings per ordinary share is based on the profit on ordinary activities after income tax attributable to shareholders of £9,063,000 (2018: £7,128,000) and on 11,076,990 (2018: 11,069,061) ordinary shares, being the weighted average number of ordinary shares in issue during the year of 10,974,010 (2018: 10,966,996) increased by 102,980 (2018: 102,065) shares, being the weighted average number of ordinary shares which would have been issued if the outstanding options to acquire shares in the Group had been exercised at the average price during the period. Adjusted earnings per share is calculated after adjusting for the post tax effect of the exceptional items detailed (Note 2).

7. Dividend

The Directors do not currently propose a final dividend for 2019. The Company's dividend policy will be reviewed at the earliest opportunity once the overall impact of COVID-19 is more certain.

The total dividend paid and proposed in respect of the year is 10.3p (2018: 29.0p).

8. Acquisition of subsidiary

On 25 February 2019 Churchill acquired a further 9.5% of the issued ordinary share capital of Furlong Mills Limited for a total consideration of £454,000. Churchill's shareholding in Furlong Mills prior to the purchase was 46.1% and it had previously been accounted for as an associate company. As the February purchase increased Churchill's overall holding to 55.6% of the issued ordinary share capital, a controlling interest, it has been accounted for as a subsidiary from that date.

Furlong Mills is a ceramic materials manufacturer based in Stoke on Trent, providing processed clay body and glazes to Churchill and to other ceramic manufacturers.

The amounts recognised at fair value in respect of the identifiable assets acquired and liabilities assumed are as follows:

9. Share buybacks

The Company did not buy back any shares during the year, but may consider making ad hoc share buybacks going forward at the discretion of the Board and subject to shareholder authorities being renewed at the forthcoming Annual General Meeting.

10. Basis of preparation and accounting policies

The financial information included in the preliminary announcement for year to 31 December 2019 has been approved by the Board on 7 April 2020.

The preliminary financial statements do not constitute the statutory accounts of the Company within the meaning of section 434 of the Companies Act 2006, but are derived from those accounts, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed and adopted for use in the United Kingdom and European Union.

This information has been prepared under the historical cost convention as modified by the revaluation of land and buildingsand financial assets and liabilities (including derivative instruments) at fair value through the profit and loss account. The same accounting policies, presentation and methods of computation are followed in the preliminary financial statements as were applied in the Group's financial statements for the year ended 31 December 2018, save for the adoption of IFRS 16 'Leases' effective from 1 January 2019.

The asset and corresponding liability on implementation on 1 January 2019 amounted to £234,000. In the year to 31 December 2019, IFRS 16 resulted in a £23,000 increase to operating profit and an £36,000 increase in interest payable.

Statutory accounts for the year ended 31 December 2018 have been delivered to the Registrar of Companies. Statutory accounts for the year ended 31 December 2019 will be delivered to the Registrar of Companies after the Company's Annual General Meeting on 11 June 2020 and will also be available on the Company's website (www.churchill1795.com) in May 2020. The auditors have reported on those accounts. Their report was not qualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and did not contain a statement under section 438 (2) or (3) of the Companies Act 2006.