Preliminary Results

Churchill China PLC 01 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 ceramic tableware and household goods to the hospitality and retail markets, is pleased to announce its preliminary results for the year ended 31 December 2007. Key Points: O Group turnover of Â£46.9m (2006: Â£45.9m) O Profit before exceptional items and tax of Â£4.0m (2006 : Â£3.1m) up 31% O Profit before tax of Â£4.8m (2006 : Â£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 Â£11.4m (2006 : Â£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 for Churchill, exceeding our expectations, with strong growth in profitability, exceptionally strong cash flows and encouraging activity levels in both our hospitality and retail businesses.' For further information, please contact: Churchill China plc Today on: 020 7466 5000 Andrew Roper/David Taylor thereafter on: 01782 577566 Buchanan Communications Tel No: 020 7466 5000 Tim Anderson/Lisa Baderoon/Rebecca Skye Dietrich Brewin Dolphin Investment Banking Tel No: 0845 270 8610 Andrew 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, exceptionally strong cash flows and encouraging activity levels in both our hospitality and retail businesses. This result reflects the successful implementation of key strategies to deliver attractive product ranges backed by specific new product development, high service levels and tight management of our cost base. This was against a backdrop of healthy customer demand in a number of geographical markets especially in the UK. FINANCIAL REVIEW Group revenues rose by Â£1.0m to Â£46.9m (2006: Â£45.9m) reflecting good growth in many key Hospitality accounts adjusted by lower levels of retail contract business and higher rebates to certain customers. Group operating profit before exceptional items increased by 15% to Â£3.2m (2006: Â£2.8m) and our profit before exceptional items and taxation improved by over 30% to Â£4.0m (2006: Â£3.1m). The results also include an exceptional profit of Â£0.8m relating to the disposal of surplus land at Marlborough in December 2007. In 2006, net exceptional profits totalled Â£2.7m. Profit after exceptional items, but before taxation, was Â£4.8m (2006: Â£5.7m). Adjusted earnings per share have increased by 30% to 26.5p (2006: 20.5p). Basic earnings per share, including exceptional items, were 33.8p (2006: 37.7p) Overall cash balances rose by Â£5.0m to Â£11.4m (2006 Â£6.4m) and accounted for over one third of year end net assets of Â£29.7m. DIVIDEND In the light of the strong overall performance of the business the Board is pleased 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 total dividend declared in respect of 2007 of 13.7p an increase of 14% on the corresponding figure for 2006. We will continue to manage our dividend policy to deliver progressive, long term, shareholder value creation. In 2007 taking into account capital growth and uplifted dividends, our Total Return to Shareholders in 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 comparative figures have been restated to reflect these changes. There has been no significant impact on reported profit figures from the adoption of IFRS. The major impact on our balance sheet has been the requirement to provide for deferred taxation on previous revaluation gains. Revenue figures have also been restated, without any impact on profit, to reflect a change in the classification of certain rebates given to customers. The rebates, which were previously treated as costs, are now accounted for as a reduction from disclosed revenues. Full details of the effect of the above changes on the Group's financial statements are shown later in this report in 'Transition statements'. HOSPITALITY BUSINESS REVIEW Revenues from the sale of Churchill Super Vitrified and Alchemy Fine China dinnerware increased by 10% to Â£28.6m (2006: Â£26.0m). Churchill consolidated its position as the market leader in the UK as domestic sales increased by 17% to almost Â£19m, benefiting from our strategy of innovative NPD and close end user collaboration. The introduction of non smoking legislation boosted our sales, particularly in the first half of 2007,to the pub sector as many clients sought to increase their food revenues with a superior tabletop offering. Churchill now has broad and clear differentiation of its product offering to all segments of the growing dining out market. Our end users and distribution partners place high value on Churchill's brand values characterised by good design, exemplary service and outstanding product performance in use. Sales to Europe improved by 7% to Â£6.2m whilst sales in the USA where we are relatively underweight declined by 5% to Â£1.9m but yielded better margins. Whilst export sales growth tends to be more fragmented the same core brand values of design, product performance and service remain important to our growing customer base. We have increased our marketing manpower and coverage in selected export markets to sustain our growth plans. MANUFACTURING AND TECHNICAL Demand for Churchill super vitrified and our prestige fine china Alchemy was above our expectations. In response we increased production volumes and succeeded in maintaining and indeed improving service levels to our distributors and end users. Effective use of available kiln capacity restricted the increase in gas and electricity costs in 2007 to Â£400k. As the ceramic industry in Staffordshire has declined we are increasingly mindful of the need to retain skill levels of both management and operatives and have instituted a number of initiatives to safeguard our long term position. Set against external trends Churchill continues to invest in quality people and new working methodologies to maintain and develop our technical excellence in ceramic dinnerware production. CAPITAL EXPENDITURE In 2007 we initiated the first in a series of capital investments designed to increase our manufacturing capacity to develop and produce more complex new product groups. This will enable us to deliver a more efficient and cost effective service to our customers in both divisions. We have invested substantially in the latest manufacturing technologies. Working closely with executive chefs has led us to the development of ever more complicated and innovative shapes for our prestige restaurant, hotel and catering customers. We will continue to make further investment in this area. During 2008 we will complete the transfer of all manufacture of Alchemy fine china items to the main Marlborough site. Cost benefits generated from operating on one site will start to feed through to the bottom line towards the end of 2008.The total cost of these projects, including an energy efficient kiln and expanded state of the art logistics facilities, is approximately Â£6m. These investments are expected to substantially improve our core operating platform for the future. RETAIL BUSINESS REVIEW Revenues from the sale of Queens and Churchill retail products, which are all sourced from outside the UK, was Â£18.3m (2006: Â£19.9m) with the decline being entirely due to a planned withdrawal from low contribution business. This resulted in an improved net contribution before central costs compared to last year. It is pleasing to record our plans to gradually increase margins in our retail activities are being delivered and further progress is expected this year. Our key objective remains to increase margins, principally by expanding our middle market 'Queens' business to departments stores and independents. Supply to UK volume channel customers can be by both full service and direct ship basis for Churchill branded and bespoke product. Most export customers opt to buy on a direct ship basis in which case containers are shipped direct from the country of supply. A core element of our approach has been to develop licence partnerships with other companies including Disney, Sanderson and Cath Kidston. These highly respected businesses are attracted to Churchill by our ability to transform brand and design expertise into sales of mugs and dinnerware on an international stage. Churchill has the capability and reputation to deliver the guarantees and technical 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 further development 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, the withdrawal of Chinese government export subsidies and the dramatic increases in global energy and raw material costs. We also source product to our own specifications from a range of markets in Asia, Europe and Latin America where producer price inflation is only a couple of percentage points behind China in US$ terms. However, the effect on our net revenue is broadly neutral. We have matched price increases to direct ship customers in line with cost increases. We have aimed to differentiate our approach to the market from that of pure trading companies. Churchill can provide both suppliers and customers with a high level of technical expertise and depth of understanding of all ceramic related issues. Teams from both our Shanghai office and the UK are responsible for quality, shipping, order processing and fulfilment. The consumer expects to be able to purchase safe ceramics manufactured in ethically sound sources. Compliance with all international Health and Safety legislation is in itself not enough, 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 on the experience, knowledge base and skills of our talented team. We are keen to augment these qualities through training and development at all levels from NVQ's, Health and Safety, to MBA's and beyond. In addition to an experienced workforce we are very fortunate to have a highly professional operational management team and they have delivered an excellent result in 2007. The Board is 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 strong balance sheet and robust business plan, Churchill is capable of achieving its objectives for the full year. Demand has been weaker in the first quarter of 2008 when compared to the corresponding period of 2007 which was characterised by a number of significant installation sales to the Hospitality sector, although repeat sales to established customers are performing to expectations. As a result it is unlikely that gross revenue and profits for the first half of 2008 will reach the exceptional levels achieved last year. We have several opportunities to grow our revenues across a number of markets in both our businesses. We are actively pursuing projects aimed at increasing near term sales and broadening both our distribution and product range. CONSOLIDATED INCOME STATEMENT for 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 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Revenue 46,930 - 46,930 45,930 - 45,930 Operating profit before 2 3,230 - 3,230 2,795 - 2,795 exceptional items Exceptional items 3 - 798 798 - 2,660 2,660 Operating profit after 2 3,230 798 4,028 2,795 2,660 5,455 exceptional items Share of results of 120 - 120 (7) - (7) associates company Finance income 730 - 730 294 - 294 Finance 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 37.7 share Diluted basic earnings per 6 33.6 37.7 ordinary share Adjusted earnings per share figures excluding the effect of exceptional items shown in note 5 All the above figures relate to continuing operations Restated to reflect the adoption of IFRS CONSOLIDATED BALANCE SHEET As at 31 December 2007 Audited Audited 31 December 2007 31 December 2006 As restated Â£000 Â£000 Assets Non Current Assets Plant, property and equipment 10,813 10,693 Intangible assets 34 35 Investment in associates 814 797 Available for sale financial assets - 22 Deferred income tax assets 318 1,597 11,979 13,144 Current Assets Inventories 6,660 6,857 Trade and other receivables 9,606 10,111 Cash and cash equivalents 11,440 6,410 27,706 23,378 Total Assets 39,685 36,522 Liabilities Current Liabilities Trade and other payables (7,779) (6,177) Current income tax liabilities (493) (190) (8,272) (6,367) Non current liabilities Deferred 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 to equity holders in Company Issued share capital 1,095 1,090 Share premium account 2,332 2,266 Retained earnings 25,124 21,140 Other reserves 1,180 1,157 29,731 25,653 Restated to reflect the adoption of IFRS STATEMENT OF RECOGNISED INCOME AND EXPENSE For the year ended 31 December 2007 Audited Year to Audited Year to 31 December 2007 31 December 2006 As restated Â£000 Â£000 Net of tax Actuarial gain on retirement benefit obligations 1,655 777 Currency translation differences 3 (10) Impact of change in UK tax rate on deferred tax 26 - Net income recognised directly in equity 1,684 767 Profit 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 STATEMENT For the year ended 31 December 2007 Audited Year to Audited Year to 31 December 2007 31 December 2006 As restated Note Â£000 Â£000 Cash generated from operations 8 6,307 2,725 Interest received 491 230 Interest paid (14) - Income tax paid (225) (316) Net cash from operating activities 6,559 2,639 Investing activities Purchase of property, plant and equipment (1,413) (736) Proceeds on disposal of property, plan and equipment 1,107 3,053 Purchase of intangible assets (25) (11) Dividends received 103 - Net cash used in financing activities (228) 2,306 Financing activities Issue of ordinary shares 71 63 Dividends 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 been audited and an unqualified audit report has been issued. The preliminary financial statements represent extracts of those audited accounts, but do not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. Prior to the 1 January 2007, the Group was required to prepare its consolidated financial statements under UK GAAP. For the year ending 31 December 2007 the Group is required to prepare its annual consolidated financial statements in accordance 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 been prepared in accordance with the accounting policies set out below, taking into account the requirements and options set out in IFRS 1 'First time adoption of International Financial Reporting Standards. The Group has not sought to adopt the IAS 1 transitional guidance on business combinations and cumulative translational differences retrospectively. The transition date for the Group's application of IFRS is 1 January 2006 and comparative figures for 31 December 2006 have been restated to reflect IFRS. Reconciliations of the income statement and balance sheet from those previously reported under UK GAAP to the restated IFRS figures are given later in this report. The preliminary financial statements have been prepared on the historic cost basis as modified by the revaluation of certain land and buildings and available for sale financial assets and financial liabilities (including derivative financial 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 Â£000 Â£000 Â£000 Â£000 2007 Revenue 28,576 18,354 - 46,930 Contribution to group overheads 4,909 1,112 - 6,021 Group overheads (2,791) (2,791) Exceptional items 798 798 Operating profit (1,993) 4,028 Share of results of associated company 120 120 Finance 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 - 5,139 Group 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 with centralised functions of the parent company board, finance and administration and information technology. 3. EXCEPTIONAL ITEMS As stated in the Group's accounting policies the Directors regard certain material 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 Â£000 Â£000 Restructuring costs - (366) Curtailment benefit - defined pension scheme - 1,150 Profit 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 surplus land at Sandyford in November 2007. A taxation charge of Â£nil has been charged in the Group's overall tax charge in the year in respect of this disposal. Net receipts of Â£1,042,000 were received in respect of this disposal during the year. The profit on disposal recognised in 2006 is in relation to the sale of the Alexander Pottery, Cobridge in January 2006. A taxation charge of Â£550,000 was been charged in the Group's overall tax charge in 2006 in respect of this disposal. Net receipts of Â£2,898,000 were received in respect of this disposal during 2006. A charge of Â£nil (2006: Â£235,000) has been included in the taxation charge in relation 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 Â£000 Â£000 Other interest receivable 491 230 Net finance credit: pensions 239 64 Finance 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 Â£000 Â£000 Current taxation 528 188 Deferred taxation: origination and reversal of 626 1,443 temporary differences Deferred 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 on 10,933,561 (2006: 10,867,167) ordinary shares, being the weighted average number of ordinary shares in issue during the year. Adjusted earnings per ordinary share is based on the profit after income tax and 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 Basic earnings per share 33.8 37.7 Adjustments: 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 income tax and on 11,007,289 (2006: 10,910,580) ordinary shares, being the weighted average 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 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 year. Diluted adjusted earnings per ordinary share is based on the profit after tax and 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 37.7 Adjustments: 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 on 10,947,876 shares being those in issue at 31 December 2007 qualifying for dividend and at a rate of 9.2p per 10p ordinary share. The dividend will be paid on 28 May 2008 to shareholders on the register on 11 April 2008. 8. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM CONTINUING ACTIVITIES Audited Year to Audited Year to 31 December 2007 31 December 2006 As restated Â£000 Â£000 Continuing operating activities Operating profit 4,028 5,455 Adjustments for Depreciation 1,002 1,298 Profit on disposal of property, plant and equipment (719) (1,892) Share based payment 3 8 Decrease in retirement benefit obligations (240) (1,150) Changes in working capital Inventory 197 1,789 Trade and other receivables 505 (9) Trade and other payables 1,531 189 Net cash inflow before additional pension payments 6,307 5,688 Additional 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 guidance in IAS 14 and considers the business should be disclosed in two primary segments, Hospitality and Retail. Additional disclosure has been made detailing the trading performance and assets of each of these segments. Accounting policies The accounting policies set out below and used in the preparation of the preliminary financial statements represent an extract of the principal policies that apply to the preparation of the financial statements for the year ending 31 December 2007. Basis of consolidation The consolidated financial statements of Churchill China plc include the results of the Company, its subsidiaries and associated companies. The financial statements of each undertaking in the Group are prepared to the balance sheet date under UK GAAP. Subsidiaries accounting policies are amended, where necessary, to ensure consistency with the accounting policies adopted by the Group. Intra group transactions are eliminated on consolidation. (a) Subsidiaries Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group'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 the subsidiary acquired, the difference is recognised directly in the income statement. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (b) Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group's investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss. The Group's share of its associates' post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group's share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. Dilution in gains and losses arising in investments in associates are recognised in the income statement. Segment Reporting A business segment is a Group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. Income and expenditure arising directly from a business segment are identified to that segment. Income and expenditure arising from central operations which relate to the Group as a whole or cannot reasonably be allocated between segments are classified as unallocated. Revenue Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, rebates and sales related taxes. Sales of goods are recognised when goods have been delivered and title in those goods has passed. Rebates are recognised at their anticipated level as soon 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 principal outstanding and at the effective interest rate applicable. Dividend income is recognised when the Group's right to receive payment has been established. Leases Management review all new leases and classify them as operating or finance leases in accordance with the guidance in the standard. Lease payments made under operating leases are charged to income on a straight line basis over the term of the lease. Operating profit and exceptional items Operating profit is stated both before and after the effect of exceptional items but before the Group's share of results in associate companies, impairment of investment in associate companies, finance income and costs and taxation. The Group has adopted a columnar income statement format which seeks to highlight significant items within the Group results for the period. Such items are considered by the Directors to be exceptional in size and nature rather than being representative of the underlying trading of the Group, and may include such items as restructuring costs, material impairments of non current assets, material profits and losses on the disposal of property, plant and equipment and material increases or reductions in pension scheme costs. The Directors apply judgement in assessing the particular items, which by virtue of their size and nature are separately disclosed in the income statement and notes to the financial statements as 'Exceptional items'. The Directors believe that the separate disclosure of these items is relevant in understanding the Group's financial performance. Dividends Dividends to the Company's shareholders are recognised as a liability in the Group's financial statements in the period in which the dividends are proposed and approved by the Company's shareholders. Interest received / paid Interest received and paid is treated in the cash flow statement as a cash flow from 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 contribution pension schemes. The defined benefit scheme is valued every three years by a professionally qualified independent Actuary. In intervening years the Actuary reviews the continuing appropriateness of the valuation. Schemes liabilities are measured using the projected unit method and the amount recognised in the balance sheet is the present value of these liabilities at the balance sheet date. The discount rate used to calculate the present value of liabilities is the interest rate attaching to high quantity corporate bonds. The assets of the scheme are held separately from those of the Group and are measured at fair value. The accrual of further benefits under the scheme ceased on 31 March 2006. The regular service cost of providing retirement benefits to employees during the year, together with the cost of any benefits relating to past service and any benefits arising from curtailments, is charged or credited to operating profit in the year. These costs are included within staff costs. A credit representing the expected return on the assets of the scheme during the year is included within finance income. This is based on the market value of the assets of the scheme. A charge representing the expected increase in the present value of the liabilities in the scheme is included within finance cost. This arises from the liabilities of the scheme being one year closer to payment. The difference between the market value of assets and the present value of accrued pension liabilities is shown as an asset or liability in the balance sheet. Differences between actual and expected return on assets during the year are recognised 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 contributions payable by the Group during the year and are charged to the Income Statement as incurred. Share based payments Where share options have been issued to employees, the fair value of options at the date of grant is charged to the profit and loss account over the period over which the options are expected to vest. The number of ordinary shares expected to vest at each balance sheet date are adjusted to reflect non market vesting conditions such that the total charge recognised over the vesting period reflects the number of options that ultimately vest. Market vesting conditions are reflected within the fair value of the options granted. If the terms and conditions attaching to options are amended before the options vest any change in the fair value of the options is charged to the profit and loss account over the remaining period to the vesting date. National insurance contributions payable by the Company in relation to unapproved share option schemes are provided for on the difference between the share price at the balance sheet date and the exercise price of the option where the share price is higher than the exercise price. Foreign currencies The individual financial statements of each Group company are presented in the currency of the primary economic environment in which the company operates (its functional currency). For the purpose of the consolidated financial statements the results of each entity are expressed in sterling, which is the functional currency of the Group and is the presentation currency for the consolidated financial statements. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Non monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group's foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at average exchange rates for the period. Exchange differences arising, if any, are dealt with through reserves. In order to manage its exposure to certain foreign exchange risks, the Group enters 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 exchange rates. The Group uses forward currency contracts to mitigate this exposure. The Group does not use derivative financial instruments for speculative purposes. Changes in the fair value of derivative financial instruments are recognised immediately in the income statement as soon as they arise. Gains and losses on all derivatives held at fair value outstanding at a balance sheet date are recognised in the income statement to that balance sheet date. Hedge accounting is not considered to be appropriate to the above currency risk management 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 liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for, if it arises from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction there is no effect on either accounting or taxable profit or loss. The Group's liability for deferred tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date or are expected to apply when the related deferred income tax asset is realised or deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax assets and liabilities are not discounted. Deferred tax assets and liabilities may be set off against each other provided there is a legal right to do 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 adjusted for the revaluation of certain land and buildings. Depreciation is calculated so as to write off the cost, less any provision for impairment, of plant, property and equipment, less their estimated residual values over the expected useful economic lives of the assets concerned. The principal annual rates used for this purpose are: % Freehold buildings 2 on cost or valuation Plant and machinery 10-25 on cost Motor vehicles 25 on reducing net book value Fixtures and fittings 25-33 on cost Freehold land is not depreciated. The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater 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 for impairment, of intangible assets, less their estimated residual values over the expected useful economic lives of the assets concerned. The principal annual rate 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 to exercise significant influence over, taking part in, but not controlling, the financial and operational management of the entity. The Group's share of post acquisition profits less losses of the associate, is included in the consolidated profit and loss account, and the Group's share of its net assets after any impairment to the carrying value of those assets is included in the consolidated balance sheet, using the equity method of accounting. These amounts are taken from the latest financial statements of the undertaking concerned, which has the same accounting reference date as the Group. Since the accounting policies of the associate do not necessarily conform in all respects to those of the Group, adjustments are made on consolidation 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 that an asset may be impaired. If any such indicator exists the Group tests for impairment by estimating the recoverable amount of the asset. If the recoverable amount is less than the carrying value of an asset an impairment loss is required. In addition to this, assets with indefinite lives are tested for impairment at least annually. The recoverable amount is measured as the higher of net realisable value or value in use. Available for sale financial assets Available for sale financial assets are non derivatives that are either designated in this category or not classified to any of the other financial asset categories. They are included in non current assets unless the Directors intend to dispose of the investment within twelve months of the balance sheet date. At each reporting date the Directors assess whether there is an indication an asset may be impaired. If any such indicator exists the Group tests for impairment by estimating the recoverable amount of the asset. If the recoverable amount is less than the carrying value of an asset an impairment loss is required. In addition to this, assets with indefinite lives are tested for impairment at least annually. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined on a first in first out basis and includes, where appropriate, direct materials, direct labour, overheads incurred in bringing inventories to their present location and condition and transport and handling costs. Net realisable value is the estimated selling cost less all further costs to sale. Provision is made where necessary for obsolete, slow moving and defective inventories. Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment is established where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated 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 with banks, other short term highly liquid investments with original maturities of three 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 is expected to be recovered through disposal rather than continuing usage within the business. This is generally held to be where there is a high probability of sale in the near future. Management must be committed to sale which should be expected to be completed to qualify for recognition as a completed sale within one year from the date of classification. Non current assets are measured at the lower of carrying value and fair value less disposal costs. Provisions Provisions are recognised when (i) the Group has a present legal or constructive obligation as a result of past events, (ii) it is probable that an outflow of resources will be required to settle the obligation and (iii) the amount has been reliably estimated. The Directors estimate the amount of provisions required to settle any obligation at the balance sheet date. Provisions are discounted 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 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 December 2006 Revenue 47,757 (1,827) (1,827) 45,930 Operating Profit 2,777 22 (5) 1 18 2,795 before exceptional items Exceptional items 784 1,876 1,876 2,660 Operating profit 3,561 22 (5) 1,876 1,894 5,455 after exceptional items 1 Share of results 5 (12) (12) (7) of associated company Profit on 1,876 (1,876) (1,876) 0 disposal of property, plant and equipment Finance Income 305 (11) (11) 294 Profit before 5,747 0 22 (5) 1 0 (23) (5) 5,742 Income Tax Income Tax (1,659) 1 4 23 28 (1,631) expense Profit for the 4,088 0 22 (4) 1 4 0 23 4,111 period Attributable to: Equity holders of 4,088 0 22 (4) 1 4 0 23 4,111 the 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 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Non Current Assets Plant, Property 11,485 (53) (68) (121) 11,364 and Equipment Goodwill and 56 53 (56) (3) 53 intangible Assets Investment in 825 (22) (22) 803 Associates Available for 22 22 22 sale financial assets Deferred income (386) 3,727 3,341 3,341 tax assets 12,366 0 (56) (68) 0 0 (386) 3,727 3,217 15,583 Current Assets Inventories 8,646 0 8,646 Trade and other 10,537 (435) (435) 10,102 receivables Cash and cash 2,629 0 2,629 equivalents 21,812 0 0 0 0 0 0 (435) (435) 21,377 Non current 1,022 0 1,022 assets held for sale 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 Current liabilities Trade and other (6,268) 22 (53) 318 287 (5,981) payables Current income (318) (318) (318) tax liabilities Provisions for (6) 0 (6) other liabilities and charges (6,274) 0 0 22 (53) 0 0 0 (31) (6,305) Non current liabilities Hire purchase (16) 16 16 0 Retirement (6,464) (2,771) (2,771) (9,235) benefit obligations Deferred income (521) (521) (521) tax liabilities Total non (6,480) 0 0 16 0 0 0 (3,292) (3,276) (9,756) current liabilities 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 and reserves attributable to equity holders in Company Issued share 1,086 0 1,086 capital Share premium 2,207 0 2,207 account Retained 17,600 (56) (30) (53) (139) 17,461 earnings Other 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 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Non Current Assets Property, plant 10,779 (35) (51) (86) 10,693 and equipment Goodwill and 34 35 (34) 1 35 intangible Assets Investment in 819 (22) (22) 797 Associates Available for 22 22 22 sale financial assets Deferred income (382) 1,979 1,597 1,597 tax assets 11,632 0 (34) (51) 0 0 (382) 1,979 1,512 13,144 Current Assets Inventories 6,857 0 6,857 Trade and other 10,412 (301) (301) 10,111 receivables Cash and cash 6,410 0 6,410 equivalents 23,378 0 0 0 0 0 0 (301) (301) 23,378 Non current 0 assets held for sale 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 Current liabilities Trade and other (6,332) 16 (52) 191 155 (6,177) payables Current income 1 (191) (190) (190) tax liabilities Provisions for 0 0 other liabilities and charges (6,332) 0 0 1 (52) 0 0 0 (35) (6,367) Non current liabilities Hire purchase 0 0 Retirement (2,764) (1,184) (1,184) (3,948) benefit obligations Deferred income (60) (494) (494) (554) tax liabilities Total non (2,824) 0 0 0 0 0 0 (1,678) (1,678) (4,502) current liabilities 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 and reserves attributable to equity holders in Company Issued share 1,090 0 1,090 capital Share premium 2,266 0 2,266 account Retained 21,250 (34) (34) (52) 10 (110) 21,140 earnings Other 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 retrospective rebates and discounts paid to customers on achievement of revenue and certain other contractual targets as a cost of sale. Following consideration of the terms of the individual contractual arrangements, these retrospective rebates and discounts are now classified as a reduction to gross revenue, with no change to profit before tax in the year. Intangible assets Previously, computer software assets were carried in fixtures and fittings within Fixed Assets. Under IAS 38, computer software is now classed as an intangible asset. Goodwill Previously, the goodwill acquired on the acquisition of Wren Giftware was amortised over a twenty year life. Under IAS 36, acquired goodwill is subject to an annual impairment test. Following the application of this impairment test it has been calculated that as at 31 December 2005 there was no remaining value to the goodwill acquired. Leases Previously, a lease relating to computer hardware was classed as a finance leases. 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 to unused holiday pay for weekly paid employees, but did not provide for that associated with monthly paid employees. Under IAS 19, the Group has provided for liabilities associated with monthly paid employees in addition to provisions for weekly paid employees. Foreign Exchange rates Previously, the Group wrote off translation differences on the consolidation of its US subsidiary to the profit and loss account. Under IAS 21, these differences must now be written off to a separate currency reserve. The Group has taken the transitional exemption under IFRS 1 to restate these differences from 1 January 2006. Valuation of Properties and Deferred Tax Freehold land and buildings were last revalued in 1992. On the introduction of FRS 15 the Group opted to treat freehold property at cost and the earlier valuation, as modified by subsequent additions and disposals, was classed as deemed cost. Deferred tax was not provided as it was believed that any such liability would not crystallise. Under IFRS the Group will adopt the deemed cost basis for land and buildings. Under IAS 12 deferred tax is provided on the potential taxable gain on the sale of the land at its revalued level and on the difference between the net book value and tax value of buildings. No credit has been taken for available capital losses as it is not probable that they will crystallise. Other IAS adjustments The disclosure of the exceptional profit on disposal of property, plant and equipment in the comparative 2006 results was treated under UK GAAP as a line item below operating profit. This has been amended to reflect IFRS requirements and is now treated as an operating exceptional item. This reclassification does not affect reported profits in the period. Previously, the Group disclosed its share of the operating profit, interest received and tax of the results of its associated company Furlong Mills Limited separately on the face of the profit and loss account. Under IAS 1 these separate elements are now disclosed as a single figure 'Share of results of associated company' in the income statement. Previously, the Group disclosed deferred tax assets and liabilities within current assets, provisions for liabilities and charges and on a netted off basis against related pension scheme liabilities. Under IAS 12 deferred tax is classified as non current on a classified balance sheet. A number of other adjustments have been made to reclassify varies assets and liabilities according to IFRS. These reclassifications do not affect reported profits in the period. Cash flow statement There were no material adjustments to disclosed figures in the consolidated cash flow statement arising from the implementation of IFRS. 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