Hss Hire Regulatory News (HSS)

HSS Hire Group Plc

Interim report: Half-year results for the 26 week period ended 27 June 2020

Resilient performance, digital strategy accelerated

HSS Hire Group plc ("HSS" or the "Group") today announces results for the 26 week period ended 27 June 2020.

· Decisive response to COVID-19

o Safety and wellbeing measures implemented across the Group including home-working where possible

o Good operational and customer service levels maintained through Customer Distribution Centres (CDC) and OneCall rehire business

o Leveraged recent technology investments, fully utilising digital channels and launch of new low-contact Click-and-Collect service

· Improving revenue and profit trend since April with recovery ahead of expectations

o Group Adjusted EBITDA and Adjusted EBITA returned to pre-COVID levels in September

o Revenue now above 90% of FY19 levels recovering from 63% in Q2

o Group EBITDA remained positive throughout pandemic

· Strengthened liquidity position through pro-active cash and cost management

o Cash and total facility headroom of £68.7m at 27 June, maintained at £66.4m at 26 September

o Net debt leverage at 2.9x (non-IFRS16 basis), 30% headroom against June quarterly covenant test

o Headroom of c0.6x against Q3 covenant test

· Accelerating digital strategy to drive value and create further efficiencies

o Digital platform upgrade completed with ongoing investment to further enhance customer experience

o Customers switching online, c30% of all new contracts raised through digital channels

o Next stage of automated OneCall platform successfully piloted with roll out starting in Q4

o New national coverage operating model being implemented in partnership with regional builders merchants resulting in material reduction in fixed costs and access to increased customer footfall

o Accordingly, the business is now operating above 90% of FY19 levels with 145 branches closed

o Further investment planned in digital platforms to be a more agile, technology-driven business and allow the business to reduce its physical footprint to a leaner branch structure

o Consequently the company proposes to permanently close 134 of its branches and has entered into consultation with around 300 employees

o The Group is working with property restructuring advisors to finalise this site reduction

· Further to our previous announcement on 27 May 2020, the COVID-19 situation is likely to remain uncertain for some time. Accordingly the Group continues to consider it prudent not to provide market guidance in the near-term

Steve Ashmore, Chief Executive Officer, said:

"Our primary concern since the outbreak of COVID-19 has been the safety and wellbeing of our colleagues, customers, suppliers and other stakeholders. We responded quickly and decisively to preserve cash, optimise financial performance and ensure continuity of supply to our customers. I am incredibly proud of all our employees for their dedicated hard work in helping do this.

Whilst COVID-19 had a significant impact on our performance in the first six months, I am encouraged by the resilience of HSS during a very challenging period. Our recent investment in technology has proved critical, allowing us to support our customers during lockdown, our digital channels and Click-and-Collect service providing low-contact alternatives to branches. As a result, we have now seen revenue return to above 90% of 2019 levels with profitability back to pre-COVID-19 levels.

While our strategic ambitions remain unchanged, COVID-19 has demonstrated that we are now ready to accelerate our strategy by further investing in our technological platforms. These investments will allow us to reduce our physical footprint which, whilst regrettably resulting in the loss of around 300 roles, allows us to become a more agile, technology-driven business which is essential in our markets as well as reducing costs and enhancing shareholder value. This will build on our already differentiated commercial proposition and create the most advanced, customer-centric offer in an increasingly competitive marketplace."

Notes

1) Results for H1 20 and H1 19 are for continuing operations and exclude the UK Platforms business which was sold in January 2019

2) Adjusted EBITDA is defined as operating profit before depreciation, amortisation, and exceptional items. For this purpose depreciation includes the net book value of hire stock losses and write offs, and the net book value of other fixed asset disposals less the proceeds on those disposals

3) Adjusted EBITA defined as Adjusted EBITDA less depreciation

4) ROCE calculated as Adjusted EBITA for the 12 months to 27 June 2020 divided by the average of total assets less current liabilities (excluding intangible assets, cash and debt items) over the same period

5) Net debt leverage is calculated as closing net debt divided by adjusted EBITDA for last 12 months (LTM).

6) In adopting IFRS16 the Group has applied the cumulative catch-up ("modified") transition method. As such FY19 has not been restated with ROCE and net debt leverage therefore provided on a non-IFRS 16 basis only.

-Ends-

Disclaimer:

This announcement contains forward-looking statements relating to the business, financial performance and results of HSS Hire Group plc and the industry in which HSS Hire Group plc operates. These statements may be identified by words such as "expect", "believe", "estimate", "plan", "target", or "forecast" and similar expressions, or by their context. These statements are made on the basis of current knowledge and assumptions and involve risks and uncertainties. Various factors could cause actual future results, performance or events to differ materially from those described in these statements and neither HSS Hire Group plc nor any other person accepts any responsibility for the accuracy of the opinions expressed in this presentation or the underlying assumptions. No obligation is assumed to update any forward-looking statements.

Notes to editors

HSS Hire Group plc provides tool and equipment hire, re-hire and related services in the UK and Ireland through a nationwide network and its OneCall re-hire business. It offers a one-stop shop for all equipment through a combination of our complementary rental and re-hire businesses to a diverse, predominantly B2B customer base serving a range of end markets and activities. Over 90% of its revenues come from business customers. HSS is listed on the Main Market of the London Stock Exchange. For more information please see www.hsshiregroup.com.

For further information, please contact:

Chief Executive Officer's report

The first six months of 2020 posed unprecedented challenges for our colleagues, customers, suppliers and other stakeholders. We responded by focusing on the safety of our workforce, ensuring continuity of supply for our customers and optimising our financial performance. While a solid first quarter was followed by a weaker second quarter as a result of the COVID-19 pandemic, the business remained resilient and proactive measures enabled us to return to 90% of prior year revenue during September. Although the situation remains challenging, the period has provided significant insight and given us the opportunity to accelerate our strategic plans set out in 2018: to delever the group, transform the Tool Hire business and strengthen its commercial proposition.

COVID-19 response

Following the publication of Government guidelines on 23 March we took immediate and decisive action to protect our colleagues, preserve cash and maintain continuity of supply to critical customers. Since then our technology investments have enabled our office-based colleagues to successfully work from home, comprehensive social distancing and safety measures have been implemented across all our open locations, and increased communication is in place across the organisation.

We continued to provide a reliable service for our customers, keeping our Customer Distribution Centres open throughout and I am very proud of the dedication shown by our operations teams during this time. To complement this we launched our Click-and-Collect proposition in mid-April, offering customers a low-contact alternative to visiting branches, and the uptake has been strong with around 24% of contracts now fulfilled this way.

Our branch network was closed on 23 March and the majority of this network remains closed today. The closures are not having a significant impact on our levels of trading, with customers placing orders through our digital channels, over the phone and on email, which are then fulfilled through deliveries or Click-and-Collect. This shift away from branches for both ordering and fulfilment is an acceleration of changes in customer behaviour that we have witnessed over several years.

Our OneCall business has proved resilient thanks to the diversity of its supply chain and the efficiency of its new technology platform which has played a significant role in supporting business continuity and keeping our Customer Distribution Centres open throughout. Whilst our training business shrank significantly at the height of lockdown, we continued to offer online training and since the lockdown has eased, we have seen a rapid recovery in demand.

In response to COVID-19, we have also taken swift and decisive actions to reduce costs, conserve cash and strengthen our balance sheet. We took advantage of government job retention schemes, furloughing 60% of colleagues in April. We have since returned two-thirds of these colleagues back to work as demand has returned. Alongside this action, senior management took significant salary reductions throughout quarter two.

We have also worked with landlords to agree rent holidays and taken advantage of VAT payment deferrals and rates relief for our branch network. Whilst capex investment has been reduced, we have continued to invest where there is clear and profitable demand.

As a result of these efforts, liquidity headroom has increased to £68.7m at 27 June and has been maintained at healthy levels since this date. At the half year we have covenant headroom of 29% and, based on Q3 performance, we have passed the next quarterly covenant test.

With the improving revenue trend and cost action, our EBITDA remained positive throughout Q2 and continues to step forward. This resilience is testament to the hard work and dedication of our colleagues who I would like to thank for their efforts during a very challenging period.

Strategy update

Whilst COVID-19 has presented the business with considerable challenges, it has also provided significant opportunities in two key areas:

Firstly, the pandemic has accelerated the shift in customer behaviour with a dramatic increase in the use of digital platforms in the sales and fulfilment channels. Since May 2020, digital channels have consistently accounted for over 30% of all orders. This has dovetailed with our strategy to invest in technology, with our customer app and improved website strengthening our differentiated commercial proposition.

Secondly, the pandemic has demonstrated that there is a lower cost, more agile business model for rental. The technology we introduced last year has been a key enabler in operating this model and we have been delighted by how it has performed throughout the pandemic. As a result, and with the recent launch of HSS Pro, we are now ready to transform and become a more agile, technology-driven business.

On this basis, we now propose to accelerate HSS' digital strategy by making further investment in our technology platforms. Going forward, this investment will allow the business to reduce its physical footprint and operate a leaner branch structure, focused around its core CDC units and key branches. Consequently the Group proposes to permanently close 134 of its branches and is entering into consultation with around 300 colleagues.

To support this initiative, HSS is partnering with regional builders merchants to maintain national coverage at lower cost. Early trials of this model have been successful, not only in improving cost agility by switching fixed costs with variable costs but also in providing the business access to increased customer footfall. These proposed changes will enable us to optimise the efficiency of our network, improve customer service and enhance shareholder value, while driving overall cost agility and reducing overheads. This will build on our already differentiated commercial proposition and create the most advanced, customer-centric offer in an increasingly competitive marketplace.

Group Financial Performance

The Group has adopted IFRS16 Leases in the period, the impact of which is summarised in Note 2 of the condensed consolidated financial statements. The Group has applied the cumulative catch-up ('modified') transition method and, as prescribed by the standard, comparators have not been updated. In the commentary that follows and in the narrative disclosures performance and variance is between the results reported under IFRS16 and the comparator period under IAS 17 and IFRIC 4 unless otherwise noted.

Revenue and segmental contribution

Revenue in H1 20 was £125.8m, 22.1% lower than the previous year (H1 19: £161.4m). On an underlying basis, (after excluding the impact of loss of Services revenue associated with a change to one managed service contract), revenue declined 19.7%. This year on year performance mainly reflects the impact of the COVID-19 pandemic and associated lockdowns in the UK and Ireland.

Turning to segmental performance, Rental and related revenues were £84.6m in H1 20 (H1 19: £110.3m), 23.3% lower than in H1 19. This performance was driven by COVID-19 related lockdowns impacting HSS and our customers. As a result, contribution is 22.3% down at £57.1m (H1 19: £73.5m). Margin has very slightly improved to 67.5% (H1 19: 66.7%) thanks to effective price control, cost action taken and operating lease costs transferring to depreciation as a result of adopting IFRS16.

Services revenues declined on an underlying basis by 7.3% to £41.2m (H1 19: £51.2m) reflecting a resilient OneCall rehire business offset by a significant reduction in Training revenue as a result of centres having to completely close. Contribution decreased to £6.1m (H1 19: £8.2m), with margins reducing to 14.7% (H1 19: 16.0%), reflecting a mix impact from the closed training centres.

Rental and related revenues and Services contribution together benefited from around £2.2m from a total £6.6m of government grant furlough income in the UK and Ireland, with the balance allocated across branch and selling and central costs.

Costs

Cost of sales reduced to £63.6m during the period (H1 19: £75.9m) primarily as a result of the COVID-19 related decline in our Services business. Distribution costs decreased by £3.2m versus the prior year to £13.5m (H1 19: £16.7m). The primary driver was the decisive cost control action taken by the business.

Administrative expenses decreased by £7.9m to £56.5m (H1 19: £64.3m) with the reduction mainly driven by the cost action already noted offset by increased provisions against Trade receivables as the Group adjusted its view of expected credit losses in a post-COVID-19 economy. £1.5m was due to IFRS16 adoption - the majority of operating lease costs are in administrative expenses and under IFRS16 an element of these is replaced by interest on the discounted lease liability.

An exceptional credit of £0.8m was recognised in H1 20 as a result of changes to the Group's onerous lease provisions including £0.3m reversal of rent review accruals on adoption of IFRS16. In H1 19 exceptional costs of £2.8m were recognised including £1.7m accelerated amortisation of debt issue costs following early repayment of debt post the disposal of UK Platforms, a £0.5m increase in the dark stores provision and £0.5m related to cost saving initiatives.

Net finance expenses were in line with the prior year at £12.1m (H1 19: £12.1m) reflecting the £2.0m increase in interest on lease liabilities as a result of adopting IFRS16 largely offset by accelerated amortisation of debt issue costs in the prior year of £1.7m following the sale of UK Platforms.

Other operating income

The increase in Other operating income to £7.1m (H1 19: £0.3m) was driven predominately by the receipt of £6.6m in grant income as a result of participation in the UK Job Retention Scheme and a similar scheme operated in the Republic of Ireland. Rates grants of £0.3m were also received.

Profitability

Adjusted EBITDA of £28.7m in H1 20 is higher than the prior year (H1 19: £27.0m) including an increase of £11.9m due to the adoption of IFRS16 (under which operating lease rental cost is replaced by depreciation and interest). Excluding IFRS16, Adjusted EBITDA was down £10.3m, with the corresponding adjusted EBITDA margin dropping 3.4pp to 13.3% (H1 19: 16.7%) reflecting the impact of COVID-19 on revenues offset by mitigating cost actions.

Adjusted EBITA decreased from £8.8m in H1 19 to £1.1m in H1 20, and to a loss of £0.3m once the impact of IFRS16 is removed, with the margin reducing to (0.2)% (H1 19 5.4%) for the reasons described above.

The result of the drivers noted above is that the Group recognised a loss before tax of £12.9m versus a £7.4m loss in the prior year.

The basic and diluted loss per share was 7.57p in H1 20 versus a basic profit per share of 4.44p in H1 19 with the prior year benefitting from the profit on disposal of UK Platforms. The diluted profit per share was 3.80p in the prior year.

Return on Capital Employed

ROCE (on a non-IFRS16 basis) decreased to 16.2% reflecting the reduction of EBITA driven by COVID-19 (H1 19 21.9%). Although average capital employed did reduce as a result of reduced debtors and careful management of capital expenditure, this wasn't sufficient to fully offset the EBITA impact.

Net debt

Net debt at 27 June 2020 was £236.8m including the impact of adding circa £81.8m of additional lease liabilities on transition to IFRS16. Excluding the IFRS16 impact, Net debt is £156.7m, a reduction of £22.8m from the year end as a result of cash preservation activity following the emergence of COVID-19. Headroom in the Group's total facilities including net cash was £81.8m.

The debt facilities consist of a £182.0m senior finance facility, with £167.0m maturing in June 2023 and £15.0m in January 2021, along with a fully drawn revolving credit facility of £17.2m maturing in January 2023 and an unutilised overdraft facility of £6m.

Dividend

Beyond dealing with the immediate priorities of responding to COVID-19, the Board remains firmly focused on reducing net debt in line with the Group's strategy. As such, it believes that the interests of the shareholders of the Group are best served by not paying a dividend until the net debt leverage ratio falls below 2.5x at the earliest. This is in line with the senior finance facility agreement.

Going concern

While we are encouraged by the resilience HSS has shown during this period of unprecedented disruption, we continue to model a number of scenarios on the potential impact that COVID-19 could have on the Group results. In certain forecasts, there is an indication that financial covenants could be breached, indicating the existence of a material uncertainty in the adoption of going concern should our lenders not support addressing these areas if they arise. These continue to be discussed with our lenders, all of whom express their ongoing commitment and support for the business strategy. Our conclusion on going concern is expanded upon in Note 2 to the condensed consolidated financial statements.

Risks and uncertainties

The principal risks and uncertainties that could have a material impact upon the Group's performance over the remaining 26 weeks of the 2020 financial year have not changed significantly from those described in the Group's 2019 Annual Report and are summarised in note 15 of this interim report.

The main risk expected to affect the Group in the remaining 26 weeks of the 2020 financial year is macro-economic conditions, which includes the impact that COVID-19 and Brexit related developments could have on the business.

Responsibility Statement

We confirm to the best of our knowledge that:

(a) the condensed interim set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union;

(b) the Interim Report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c) the Interim Report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board

Steve Ashmore

Director

7 October 2020

HSS Hire Group plc

Unaudited condensed consolidated income statement

 (1) Adjusted EBITDA is defined as operating profit before depreciation, amortisation, and exceptional items. For this purpose

depreciation includes the net book value of hire stock losses and write offs, and the net book value of other fixed asset disposals less the proceeds on those disposals. Adjusted EBITA is defined as operating profit before amortisation and exceptional items.

The notes form part of these condensed consolidated financial statements.

HSS Hire Group plc

Unaudited condensed consolidated statement of comprehensive income

The notes form part of these condensed consolidated financial statements.

HSS Hire Group plc

Unaudited condensed consolidated statement of financial position

The notes form part of these condensed consolidated financial statements.

HSS Hire Group plc

Unaudited condensed consolidated statement of changes in equity

The notes form part of these condensed consolidated financial statements.

HSS Hire Group plc

Unaudited condensed consolidated statement of cash flows

The notes form part of these condensed consolidated financial statements.

Notes forming part of the unaudited condensed consolidated financial statements

1. General information

The Company is a public limited company which is listed on the London Stock Exchange and is incorporated and domiciled in the United Kingdom. The address of the registered office is Oakland House, 76 Talbot Road, Old Trafford, Manchester, England, M16 0PQ. These condensed consolidated financial statements comprise the Company and its subsidiaries (the 'Group') and cover the 26 week period ended 27 June 2020.

The Group is primarily involved in providing tool and equipment hire and related services in the United Kingdom and the Republic of Ireland.

The condensed consolidated financial statements were approved for issue by the Board on 7 October 2020.

The condensed consolidated financial statements do not constitute the Statutory Accounts within the meaning of Section 434 of the Companies Act 2006 and have not been subject to audit by the Group's auditor. Statutory Accounts for the year ended 28 December 2019 were approved by the Board on 26 May 2020 and delivered to the Registrar of Companies. The auditor's report on those accounts was unqualified and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006. The report did draw attention to the Directors' conclusion that a material uncertainty existed that may cast significant doubt on the Group and Parent Company's ability to continue as a going concern. As set out in Note 2 the Directors have reached the same conclusion on approving these condensed consolidated financial statements.

2. Basis of preparation and significant accounting policies

The condensed consolidated financial statements for the 26 weeks ended 27 June 2020 have been prepared in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority and relevant International Financial Reporting Standards ('IFRS') as adopted by the European Union (including IAS 34 Interim Financial Reporting). The condensed consolidated financial statements should be read in conjunction with the Group's Annual Report and Accounts for the year ended 28 December 2019, which were prepared in accordance with IFRS as adopted by the European Union.

Accounting policies are consistent with those in the Statutory Accounts for the year ended 28 December 2019 other than for IFRS16 which was adopted in the period, and Government grants which is a policy that applied to a new transaction type in the period. Both are included in this note.

IFRS16 Implementation

IFRS 16 Leases is mandatory for periods beginning on or after 1 January 2019 and accordingly the Group has adopted the standard from the 29 December 2019 (the date of initial adoption or DIA). The Group has worked with third party specialists to develop IFRS 16 policies along with processes and systems to manage their successful implementation.

Adoption of IFRS16 has had a significant impact on the Condensed consolidated income statement and Condensed consolidated statement of financial position as set out in the tables below. There is no impact on the Group's underlying cash flows.

Impact of IFRS 16 on the Condensed consolidated income statement

The adoption has resulted in an increase of £0.3m in the loss before tax that would have been reported under IAS17. Administrative expenses reduced by £1.2m, the result of discounting lease liabilities with the discount unwind being reflected in net finance expense. Cost of sales and distribution costs reduced for the same reason (largely on vehicle leases). In addition to the impact of discounting, £0.3m of rent review accruals were released to administrative expenses on transition. As variable lease costs these are not accounted for under IFRS16 until agreed. Other operating income decreases on adoption with sub-lets income replaced by depreciation on the net investment in sub-lease created.

The increase in net finance expense is driven by discounting as noted above, with the front-end loading of the discount resulting in an additional £0.6m of interest versus the equivalent operating lease cost that would have been recognised under IAS17.

Adjusted EBITDA, which the Group reports as an additional performance measure is significantly increased (£12m) under IFRS16 as a result of operating lease costs being replaced by depreciation and interest.

Under the adoption method chosen by the Group (see below) comparators are not restated and as a result the Group has included commentary on a non-IFRS 16 basis in the financial review and CEO report where required to explain the underlying performance of the business.

Impact of IFRS 16 on the Condensed consolidated statement of financial position

Right of use assets totalling £104m were created on transition with £24.8m of this being the result of reclassifying hire stock assets held under finance lease from property, plant and equipment. Lease liabilities of £98m were created with £16.6m being the equivalent transfer of finance lease liabilities. The difference between lease liability and asset is the impact of adjusting the right of use asset for prepayments, accruals and onerous lease provisions. A net investment in sub-leases, representing where the Group has sub-let excess space or properties under a finance lease, was created totalling £1.9m.

Capitalisation of lease contracts

Under IFRS 16, the Group capitalises the right of use of all its property leases, vehicle leases, hire and other equipment leases previously held under operating leases.

The Group has applied the cumulative catch-up ('modified') transition method. Under this option the Group has applied the option that calculates the right-of-use asset as equal to the lease liability for leases previously accounted for as operating leases. The comparative information has not been restated and continues be reported under IAS 17 and IFRIC 4. The Group has recognised a right of use (ROU) asset representing its right to use the underlying asset and a corresponding lease liability representing its obligation to make lease payments. The ROU asset is adjusted for any prepaid or accrued lease payments relating to that lease that were recognised in the statement of financial position immediately before the DIA. The company has taken the practical expedient available to rely on its assessment of whether a lease is onerous by applying IAS 37 immediately before the date of initial application, reducing the carrying value of its ROU asset at the DIA.

Operating lease expenses are replaced by a depreciation of right of use assets expense and an interest expense as the interest rate applied to the Group's lease liabilities unwinds.

Lease term

The lease term will correspond to the duration of the contracts signed except in cases where the Group is reasonably certain that it will exercise contractual termination or extension options.

For property, the Group's policy is to use the full lease term (as opposed to first exercisable break date) for trading branches, distribution centres and offices unless there is an intention to exit the property at the reporting date. Had lease liabilities been calculated to the first break rather than lease end date the transition liability would have reduced by around £23m.

For properties which are occupied beyond lease end date, liabilities are calculated based on specific extension clauses if they exist. Where they do not the Group reviews leases at twice annually and extends for a maximum of six months provided notice has not been served by the Group or relevant landlord. The increase in liabilities as a result of this judgement was less than £1m on transition.

Given the tenures and values involved, any similar judgements applied to vehicle and equipment leases are immaterial.

Discount rates

The Group has assessed that the interest rate implicit in the lease is not readily determinable for leases other than hire fleet financed via the lines agreed for that purpose with the Group's lenders. The Group therefore uses an incremental borrowing rate for all other leases, taking advantage of the expedient available to apply a single rate to leases of similar characteristics.

The incremental borrowing rate in use at transition and for new leases in the period is 3.5% for vehicles and equipment and between 5.1% and 6.0% for property leases.

The discount rate selected for non-property leases is the rate at which the Group expects to finance assets of a similar class. For property, rates are those at which the Group might expect to borrow at if acquiring an interest in property, over five and ten year tenures. These rates are adjusted upwards for properties considered to be higher risk because of geographic region or age.

Lessor accounting

The Group acts as intermediate lessor on vacant properties it sublets to assist in covering costs until the lease term ends or a break clause can be triggered. The Group has assessed whether the sub-lease is a finance or operating lease in the context of the ROU asset being leased. When the sublet is identified as a finance lease, a net investment in the sublease is created and included in Trade and other receivables and the corresponding ROU asset is accounted for as a disposal.

Sale and leaseback transactions

Under IFRS 16 the Group continues to account for any sale and leaseback transactions entered into for large hire equipment prior to 28 December 2019 as a sale and leaseback transaction. The Group has recognised a lease liability and ROU asset on 29 December 2019 measured in the same way as other finance leases on this date.

IFRS16 and COVID-19 concessions

The Group has not yet adopted any of the practical reliefs available to preparers as a result of the amendment to IFRS16 published by the IASB in May 2020 (COVID-19-Related Rent Concessions). The amendment had not been adopted by the EU at the balance sheet date. The Group is likely to review this approach in its Annual report and accounts for FY20 and may adopt one or more of the reliefs available.

Going concern

At 27 June 2020, the Group's financing arrangements consisted of a fully drawn senior finance facility of £182.0m, undrawn overdraft facilities of £6.0m, fully drawn revolving credit facilities of £17.2m and finance lease lines to fund hire fleet capital expenditure, of which £13.1m had not been utilised. Both the senior finance facility and revolving credit facility are subject to a net debt leverage financial covenant test every quarter. At the balance sheet date the Group had 29% headroom against this covenant.

The Group's forecasts and projections taking into account current trading post COVID-19, strategic initiatives and reasonably possible changes in trading performance, show that the business will be able to operate within the level of its facilities for at least 12 months from the approval date of these condensed consolidated interim financial statements.

In the first 12 weeks of FY20 COVID-19 did not have a material impact on the Group's performance. However, the first signs of a trading slowdown were detected in week 13, following the Government's lockdown instruction. In response to this instruction, the Group temporarily closed the majority of its UK branches and moved to a delivery-only operation through its national network of Customer Distribution Centres (CDCs) and its OneCall re-hire business, providing essential equipment to critical customers. Since this date, and after establishing additional safe working practices, the Group has added Click-and-Collect capability at each CDC and re-opened key branches.

Whilst it is difficult to quantify the impact COVID-19 will have on the Group's financial results, the Directors have considered a number of downside scenarios. In preparing these, key revenue assumptions have been applied for the period from October 2020 to October 2021; namely reductions in core hire revenue of between 12% and 25% against the Group's original forecasts for Q4 FY20 followed by between 10% and 15% from January 2021 to December 2022.

These downside scenarios have been mitigated by the expected impact of the restructuring action taken to migrate to the Group's new operating model and by the close management of capex to demand. Liquidity headroom had increased to £68.7m at the balance sheet date and been maintained at healthy levels since then. The Group could sustain between 12% and 14% reduction in core hire revenue against pre-COVID-19 forecasts without breaching financial covenants.

There are certain forecast scenarios which indicate that financial covenants would be breached. Should a breach occur, the Group would seek to obtain a waiver agreement with the senior finance facility and revolving credit facility lenders. Given the lack of certainty on reaching agreement with the lenders on a waiver in the event of a breach, the existence of a material uncertainty which may cast significant doubt on the Group's and Parent Company's ability to continue as a going concern is indicated. The Directors have noted that discussions with the Group's lenders have resulted in ongoing commitment being expressed to the business and support for the Board's response to the COVID-19 pandemic. Accordingly, the Group continues to adopt the going concern basis in preparing its Consolidated Financial Statements.

The financial statements do not include the adjustments that would be required should the going concern basis of preparation no longer be appropriate.

Government Grants

The Group reports any government grant income within Other operating income. The income is recognised when there is a reasonable assurance that the relevant entity or the wider Group will comply with the conditions attached to the grant and that the grants will be received.

The grant income is recognised in the same period as any related costs for which the grants are intended to compensate.

Fair value measurement

A number of the Group's accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Set out below is an analysis of the valuation method of the Group's financial instruments.

The different levels in the fair value hierarchy have been defined as follows:

· Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities.

· Level 2: inputs other than quoted prices included within level 1 that are observable, for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

· Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Fair values have been determined for measurement purposes based on the following methods:

Derivative instruments (level 2)

The fair values of interest rate swaps are calculated as the present value of the estimated future cash flows based on the terms and maturity of each contract and using market interest rates as applicable for a similar instrument at the measurement date. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and counterparty where appropriate.

The fair values of interest rate swap contracts are calculated by management based on external valuations received from the Group's bankers and are based on anticipated future interest yields.

3. Segmental reporting

The Group's operations are segmented into the following reportable segments:

- Rental and related revenue.

- Services.

Rental and related revenue comprises the rental income earned from owned tools and equipment, including powered access, power generation and HVAC assets, together with directly related revenue such as resale (fuel and other consumables), transport and other ancillary revenues.

Services comprise the Group's HSS OneCall rehire business and HSS Training. HSS OneCall provides customers with a single point of contact for the hire of products that are not typically held within HSS' fleet and are obtained from approved third party partners; HSS Training provides customers with specialist safety training across a wide range of products and sectors.

Contribution is defined as segment operating profit before branch and selling costs, central costs, depreciation, amortisation and exceptional items. In the 26 weeks ending 27 June 2020 the Group received £6.6m in grant income (26 weeks ending 29 June 2019: nil) as a result of participation in the UK COVID-19 Job Retention Scheme and a similar scheme operated in the Republic of Ireland. Income has been allocated to segments based on where the underlying costs were incurred. This resulted in £1.6m being allocated to Rental and related contribution and £0.6m to Services contribution, £4.2m to Branch and Selling Costs and £0.2m to Central costs. £0.3m of grant income related to property rates was allocated to Branch and Selling Costs.

All segment revenue, operating profit, assets and liabilities are attributable to the principal activity of the Group being the provision of tool and equipment hire and related services in, and to customers in, the United Kingdom and the Republic of Ireland. Revenue from one customer was 10% or more of Group Revenue in the period ending 27 June 2020 (26 weeks ending 29 June 2019: one customer was 10% or more of Group Revenue).

4. Other operating income

During the period ended 27 June 2020 the Group received £6.6m (2019: nil) as a result of participation in the UK COVID-19 Job Retention Scheme and a similar scheme operated in the Republic of Ireland. Rates grants of £0.3m were also received (2019: nil). The balance of £0.2m represents sub-let rental income of vacant properties that are not deemed onerous (2019: sub-let income of £0.3m).

5. Exceptional items

Items of income or expense have been shown as exceptional because of their size and nature or because they are outside the normal course of business. An analysis of the amount presented as exceptional items in the consolidated income statement is given below.

During the period ended 27 June 2020, the Group has recognised a net exceptional credit as follows:

During the period ended 29 June 2019, the Group recognised net exceptional costs as follows:

Exceptional items incurred in 2020 and 2019

Costs related to onerous properties: branch and office closures

An exceptional credit of £0.5m has been recognised in the 26 weeks ended 27 June 2020 relating to an opening release of onerous lease provision (prior to adoption of IFRS16). An additional credit of £0.1m from lease liability was recognised as a result of surrendering properties. This was offset by £0.1m of non-lease costs incurred related to onerous properties. There have been three branch closures during the period as a result of a change in business model whereby HSS utilises space in third-party builders merchant locations (26 weeks to 29 June 2019: no branch closures).

On adoption of IFRS16 £0.3m of onerous lease provision was released, mainly related to rent-review accruals, which, as variable lease costs, are not included in lease liabilities under the standard.

Provisions are created net of expected sub-let income. During the 26 weeks to 27 June 2020, sub-let income of £0.2m was received and recognised as negative provision utilisation.

Cost reduction programme

During 2019 the Group reacted to market headwinds by taking initiatives to reduce costs which included internal restructuring and in the 26 weeks ended 27 June 2020 the Group incurred minor costs related to the completion of that activity.

In 2019 the Group recognised a charge of £0.5m related to the closure of a centre used for hire fleet refurbishment and exiting contracts related to the operation of the cross-dock facility used to redistribute assets across the network as well as internal restructuring.

Exceptional item incurred in 2019 only

Accelerated amortisation of debt issue costs

During 2019 an element of the proceeds from the UK Platforms disposal was used to repay debt. The early repayment resulted in accelerated amortisation of debt issue costs of £1.7m.

6. Finance income and expense

7. Earnings per share

Basic (loss)/earnings per share is calculated by dividing the result attributable to equity holders by the weighted average number of ordinary shares in issue for that period.

All of the Group's potentially dilutive equity derivatives were anti-dilutive for the purpose of diluted basic loss per share for the 26 week period ended 27 June 2020 and dilutive for the 26 week period ended 29 June 2019, with the exception of the 2017 options which were anti-dilutive in both periods.

For the 26 week period ended 27 June 2020 the diluted loss per share is calculated using the loss for the year divided by the weighted average number of shares in issue. For the 26 week period ended 29 June 2019 diluted earnings per share is calculated using the profit for the year divided by the weighted average number of shares in issue assuming the conversion of its potentially dilutive equity derivatives outstanding, being nil-cost share options (LTIP shares), market value options, warrants and Sharesave Scheme share options.

The following is a reconciliation between basic loss per share from continuing operations and adjusted basic loss per share from continuing operations.

 (1) Exceptional items per share are calculated as total finance and non-finance exceptional items divided by the weighted average number of shares in issue through the period.

 (2) Amortisation per share is calculated as the amortisation charge divided by the weighted average number of shares in issue through the period.

8. Intangible assets

The Group tests property, plant and equipment, goodwill and indefinite life brands for impairment annually and considers at each reporting date whether there are indicators that impairment may have occurred. The emergence of COVID-19 and the resulting reduction in revenue and closure of HSS locations is considered to be an indicator of impairment and accordingly an impairment review has been performed.

The Group has three CGUs: HSS Core, HSS Power and Climate Control. The recoverable amounts of the goodwill and indefinite life brands, which are allocated to CGUs, are estimated from value in use (VIU) calculations which model pre-tax cash flows for the next four and a half years together with a terminal value using a long-term growth rate. The key assumptions underpinning the recoverable amounts of the CGUs tested for impairment are those regarding the discount rate, forecast revenue, EBITDA, and capital expenditure including cash flows required to maintain the Group's right of use assets.

The key variables applied to the VIU calculations were determined as follows:

· Cash flows were derived based on a post COVID-19 forecast for H2 2020 and model of the business for the following two years (to the end of 2022). Operational activity and capital expenditure then had a long-term growth rate applied to it giving a model of four and a half years in total after which a terminal value was calculated. The long-term growth factor used was 1.8% for each of the CGUs (2019: 1.4%).

· A pre-tax discount rate of 9.1% (2019: 9.1%), calculated by reference to a weighted average cost of capital (WACC) based on an industry peer group of quoted companies. The discount rate used has not been updated from that in use at year end due to the calculated risk-free and market returns decreasing as a result of COVID-19 leading to a lower WACC figure. The Directors felt that using this lower WACC was inappropriate in the current economic climate - this would have significantly increased headroom. The approach will be revisited in the impairment review to be carried out in advance of year-end reporting.

An impairment may be identified if changes to any of the factors mentioned above become significant, including underperformance of the Group against forecast, negative changes in the UK tool hire market or deterioration in the UK economy, which would cause the Directors to reconsider their assumptions and revise their cash flow projections.

Based on the VIU modelling and impairment testing, the Directors do not consider an impairment charge to be required in respect of any of the property, plant and equipment, right-of-use, goodwill and indefinite life brand assets carried in the balance sheet at 27 June 2020 for any of the CGUs.

Sensitivity analysis performed on the model does not result in an impairment charge. For the Group, at 27 June 2020, the headroom between VIU and carrying value of the related assets was £138.2m (2019: £291.3m). The Directors' sensitivity analysis shows that an increase in the discount rate to 16.61% (2019: 26.7%) or a long-term growth rate of negative 0.72% (2019: negative growth rate of 4.2%) would require impairment of the most sensitive CGU.

In addition, the Directors assessed a downside scenario which assumed further lock-down restrictions as a result of COVID-19. Given the level of headroom in VIU these calculations show, the Directors did not envisage reasonably possible changes, either individually or in combination, to the key assumptions that would be sufficient to cause an impairment charge at the balance sheet date.

On the 8th October 2020 the Group announced a programme of restructuring which includes the permanent closure of around 130 of its branches. All the impacted branches are allocated to the HSS Core CGU due to their dependence on the wider group to generate income. Once a branch ceases trading it is no longer dependent on the wider network and as such becomes a standalone asset and subject to impairment testing on that basis. Since the decision to permanently close branches was made after the balance sheet date the branches are included within the HSS Core CGU in the impairment testing carried out.

As a result of the decision to close branches the Group expects a reduction in right of use assets of around £13m. Since the forecasts used in the impairment review already assume the operation of a reduced branch network the headroom calculated will increase by approximately the same amount.

9. Property, plant and equipment

The results of the impairment review for property, plant and equipment are included in Note 8.

10. Right of use assets