Churchill China Regulatory News (CHH)

CHURCHILL CHINA plc

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

PRELIMINARY RESULTS

For the year ended 31 December 2017

Churchill China plc (AIM: CHH), the manufacturer and global distributor of performance ceramic and related products to hospitality and retail markets, is pleased to announce its preliminary results for the year ended 31 December 2017.

Key Highlights:

· Group revenue up 5% to £53.5m (2016: £51.1m)

- Hospitality revenue growth 8% (2016: 13%)

- Group export revenues up 19% (2016: 27%)

- Exports represent 55% (2016: 49%) of Group revenue

· Operating profit before exceptional item up 17% to £7.5m (2016: £6.4m)

· Profit before exceptional item and tax up 15% to £7.5m (2016: £6.5m)

· Adjusted earnings per share up 15% to 55.3p (2016: 48.2p)

· Exceptional profit on disposal of surplus property £0.3m (2016: £nil)

· Profit before tax £7.8m (2016: £6.5m)

· Basic earnings per share up 21% to 58.4p (2016: 48.2p)

· Proposed final dividend up 16% to 17.2p (2016: 14.8p)

· Cash generated from operations £7.7m (2016: £6.7m)

· Good progress against key strategic objectives

Alan McWalter, Chairman of Churchill China, commented:

"I am pleased that I can once again report a strong performance in the year. We have continued to make progress against our long term targets and further invested in our business. We look forward to the coming year with confidence."

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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 that I can once again report a strong performance in the year. We have continued to make progress against our long term targets and have delivered good returns from the development of our strong market position. In export markets we have increased the proportion of value added products within our product range and further invested across our operations. Our aim is always to deliver a balance between improved performance year on year and to maintain investment in support of our long term strategies. We are pleased to have achieved this again during 2017.

Financial Review

Total revenues increased by 5% to £53.5m (2016: £51.1m) with further strong growth in Hospitality export revenues offsetting lower Retail sales as the balance of our business changed in line with our strategic aims. UK revenues were 8% lower at £24.0m (2016: £26.2m). Export revenues were £4.6m higher (+19%) at £29.5m (2016: £24.9m) of which £1.9m was due to more favourable exchange rates.

Gross margins have improved with much of our increased revenue coming from sales of value added product.

Operating profit before exceptional items increased by 17% to £7.5m (2016: £6.4m). Operating margins improved to 13.9% (2016: 12.5%). Operating profit benefitted from a further move towards added value, differentiated products and from favourable exchange rates. We have used much of the additional margin to accelerate our investment in market development and in reorganising our approach to key markets with an overall rise in sales and marketing expenditure of £0.7m .

Earnings before interest, tax, depreciation and amortisation increased by 12% to £9.1m (2016: £8.1m).

Profit before exceptional items and tax rose by 15% to £7.5m (2016: £6.5m), as a result of our improved operating performance.

Adjusted earnings per share improved by 15% to 55.3p (2016: 48.2p).

During the year we disposed of surplus property at Whieldon Road, Stoke on Trent for a total consideration of £1.1m. The proceeds will be reinvested into our main Sandyford site. The profit on disposal of £0.3m has been treated as exceptional.

Profit before tax and after exceptional items rose to £7.8m from £6.5m in 2016.

Basic earnings per share, including the above exceptional profit, improved by 21% to 58.4p (2016: 48.2p)

We have also continued to generate strong operating cash flows. Operating cash generation was £7.7m (2016: £6.7m). Working capital requirements were slightly higher than last year at £0.2m (2017: £0.1m) mainly due to a further increase in inventory to support higher sales, a wider product range and customer service. The cash spend on capital projects was £2.1m (2016: £2.5m). We expect capital spend to rise in 2018 as we continue to invest in capacity, capability and efficiency. At the year end, net cash and deposit balances had risen by £2.9m to £15.6m (2016: £12.7m).

Dividend and shareholder return

The Board is recommending a 16% increase in the final dividend to 17.2p per share (2016: 14.8p), giving a total of 24.6p for the year (2016: 21.1p). We are pleased that the growth in profitability and continued strong cash generation in the year has allowed us to again raise the dividend at an above average rate. If approved, the final dividend will be paid on 24 May 2018 to shareholders on the register on 27 April 2018, with the ex-dividend date being 26 April 2018.

Good shareholder returns have again been achieved, reflecting both dividend growth and share price performance. Overall Total Shareholder Returns were 36% (2016: 22%) during the year.

Business

Revenues have increased across our business with strong progress in Hospitality more than offsetting a further planned contraction in Retail activity. Exports now represent 55% of Group revenues.

Total sales to our Hospitality customers increased by £3.4m (8%) and reached a new record of £47.4m (2016: £44.0m). Hospitality sales now represent almost 90% of Group revenue.

The strong performance in export markets reported in the first half of 2017 has been followed by further growth in the second half. Overall export sales grew by 19%. Whilst there has been some further benefit from currency this year, we continue to generate real growth in our target overseas markets. Progress over the medium term has been very good with exports increasing by a compound annual rate in excess of 20% over the last three years. Targeted new product introductions have been supported by market development covering both extra sales resource and the planned development of our international distribution network. Growth has again been strongest in Europe, the region where we have prioritised development and where we have benefited from Anti-Dumping Duties on imports from China. Growth in North America and the Rest of the World has also been positive.

As we expected, the UK has been affected by more difficult conditions with a reduction in new restaurant openings. Revenues in this market have reduced by 6%. We have reviewed our UK market position and changed our approach to reflect current activity levels. We have adapted our management focus and increased the amount of marketing support, including new product development, allocated to the UK. We have retained our market leading position and continue to benefit from a consistent level of replacement sales. The strength of our established relationships with end users, distributors and agents in the UK and worldwide continues to be of great value to the business.

We have again increased the proportion of our revenue represented by added value products, building on the trend established over several years. Stonecast and Studio Prints continue to perform well and to gain wide market acceptance.

Retail has continued to perform at a satisfactory level in accordance with our strategic targets. Revenues were lower at £6.1m (2016: £7.1m) with the majority of the reduction attributable to the UK. We have maintained margin levels at the expense of lower volumes.

The main drivers of our strategy remain to progressively increase the proportion of revenue represented by higher added value ranges offering profit opportunities both to our customers and to Churchill and additionally to extend the reach of our operations, building a more broad based business. Our products offer a well designed and differentiated range to our customers and deliver considerable technical performance benefits.

Operations

Our manufacturing and logistics operations continue to support the development of the business. The improvement in our market position has generated a matching requirement to change and improve the operation of the fulfilment side of our business to meet revised needs. We have made significant progress in addressing new challenges in relation to capacity, product and process capability, quality and customer service across a wider product range and a more extended geographic footprint.

A number of important manufacturing and logistics projects have been completed during the year. We have increased our capacity to manufacture added value products, improved process flow in production and increased our ability to meet higher customer service requirements during peak demand periods.

We expect to make further progress during 2018 in relation to the expansion of capacity at our UK manufacturing site and in supporting the continued growth of our export business.

People

One of the major objectives in our forward plan is to ensure that we have the right people across our business to meet our aspirations. We continue to believe that we have a skilled, loyal and well motivated workforce and once again I thank them for their effort and commitment across the year.

During the year we have increased our focus on the assessment of future requirements for workforce skills and experience across our business. We have elevated the training and development of our staff as a core element of our strategy and have reflected this in our management structure. We operate a number of continuous improvement programmes which, whilst principally designed to increase our operational effectiveness, also give an important opportunity for staff to learn new skills.

Prospects

We are pleased with the progress we made in 2017 both in terms of the reported performance for the year and, perhaps more importantly, in the progress we have made in support of the future development of Churchill. Additional margin has allowed us to make further investments across a number of areas which we believe will generate profitable growth. We expect to generate a return from this expenditure in 2018 and beyond. We do, however, recognise that there is a higher level of general uncertainty in a number of markets and we have reflected this within our strategic process.

The focus of our strategy remains continued innovation to improve the value our products offer to our customers and investment across the business to allow us to extend the breadth of the markets we serve. We continue to develop new investment opportunities in support of our future aspirations. Our business has a good position in attractive markets, is well invested and has a strong financial base. Performance in the year to date has been good and we look forward to the coming year with confidence.

Alan McWalter

Chairman

27 March 2018

5. Earnings per ordinary share

Basic earnings per ordinary share is based on the profit on ordinary activities after income tax of £6,414,000 (2016: 5,285,000) and on 10,964,462 (2016: 10,972,257) 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 profit on disposal of property of £343,000 (2016: nil) (Note 2).

Diluted basic earnings per ordinary share is based on the profit on ordinary activities after income tax of £6,414,000 (2016: £5,285,000) and on 11,062,013 (2016: 11,067,101) ordinary shares, being the weighted average number of ordinary shares in issue during the year of 10,964,462 (2016: 10,972,257) increased by 97,551 (2016: 94,844) 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 diluted earnings per share is calculated after adjusting for the post tax effect of the exceptional profit on disposal of property of £343,000 (2016: £nil) (Note 2).

7. Dividend

The final dividend, which has not been provided for, has been calculated on 10,962,323 (2016: 10,955,172) ordinary shares, being those in issue at 31 December 2017 qualifying for dividend and at a rate of 17.2p (2016: 14.8p) per 10p ordinary share. The dividend will be paid on 24 May 2018 to shareholders on the register at 27 April 2018, subject to approval at the Company's Annual General Meeting.

The total dividend paid and proposed in respect of the year is 24.6p (2016: 21.1p).

8. Share buybacks

The Company bought back 27,000 shares during the year and may consider making further similar sized, 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.

9. Basis of preparation and accounting policies

The financial information included in the preliminary announcement for year to 31 December 2017 has been audited and an unqualified audit report has been issued.

The preliminary financial statements represent extracts from those audited accounts but do not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006.

The Group's financial statements have been prepared in accordance with IFRS as adopted by the European Union, IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS, under the historical cost convention as modified by the revaluation of land and buildings, available for sale financial assets, and 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 2017.

Statutory accounts for the year ended 31 December 2016 have been delivered to the Registrar of Companies. Statutory accounts for the year ended 31 December 2017 will be delivered to the Registrar of Companies after the Company's Annual General Meeting and will also be available on the Company's website (www.churchill1795.com) on or around 23 April 2018 and will be sent to shareholders on the same date.