Johnson Service Regulatory News (JSG)

6 September 2016

Johnson Service Group PLC

Interim Results for the six months ended 30 June 2016

"Significant progress"

Johnson Service Group PLC, the Textile Services group (the 'Group'), announces its interim results for the six months ended 30 June 2016.

FINANCIAL SUMMARY

HIGHLIGHTS

1 Statutory Operating Profit was £12.4 million (June 2015: £2.4 million; December 2015: £15.4 million). 'Adjusted Operating Profit' is before charging £3.0 million (June 2015: £1.3 million; December 2015: £3.5 million) of amortisation and impairment of intangible assets (excluding software amortisation) and net exceptional items of £0.7 million (June 2015: £7.6 million; December 2015: £9.0 million).

2 Statutory Profit Before Tax was £10.4 million (June 2015: £1.2 million; December 2015: £12.7 million). 'Adjusted Profit Before Tax' is Adjusted Operating Profit, less total finance costs.

3 'Adjusted Fully Diluted EPS' is calculated using Adjusted Profit Before Tax and deducting the charge to, or adding the credit for, tax attributable to those items included within Adjusted Profit Before Tax.

4 Pro-forma basis after adjusting for the acquisition of Zip, Chester and Afonwen (£72.4 million plus £0.7 million costs) and the equity fund raising (net proceeds £28.7 million). Reported net debt was £71.2 million.

OUTLOOK

The Board remains confident in the future prospects of the Group and its strategy to further develop a stronger presence within the textile rental market whilst continuing to deliver benefits from recent high quality, earnings enhancing acquisitions.

Although there is increased uncertainty in the economy we expect to make further progress in the second half of the year and the result for the full year to be slightly ahead of current market expectations.

Chris Sander, Chief Executive Officer of Johnson Service Group, commented:

"The Group continues to maintain strong growth with both revenue and adjusted profit before tax significantly up on the same period last year. The recent acquisitions are performing better than we initially expected and have significantly increased our presence in the high volume hotel linen market."

ANALYST MEETING

A presentation for analysts will be held today at 09.30 at Investec, 2 Gresham Street, London, EC2V 7QP. A copy of the presentation will be available on the Company's website (www.jsg.com) following the meeting.

ENQUIRIES

Note: throughout this statement 'adjusted operating profit' refers to operating profit before amortisation and impairment of intangible assets (excluding software amortisation) and exceptional items. 'Adjusted profit before tax' refers to adjusted operating profit less total finance costs. 'Adjusted EBITDA', for gearing purposes, refers to adjusted operating profit for the relevant period plus the depreciation charge for property, plant and equipment and software amortisation.

OPERATIONAL AND FINANCIAL REVIEW

Group Results

Total revenue in the six months to June 2016 was £137.6 million (June 2015: £109.2 million). The first half benefitted from the acquisitions completed in recent months but also reflected the impact of the reduced number of Drycleaning branches following the closures in March 2015. Adjusted operating profit increased by 42.5% to £16.1 million (June 2015: £11.3 million).

Adjusted profit before tax increased to £14.1 million (June 2015: £10.1 million). The underlying tax rate was 20.3% (June 2015: 20.7%).

Net exceptional items in the first half of 2016 amounted to £0.7 million (June 2015: £7.6 million) in relation to a gain on the disposal of a vacated Textile Rental plant in Leeds (£0.5 million), offset by costs incurred in respect of liability management exercises in relation to reducing the defined benefit pension liabilities (£0.3 million) and for business acquisition activity and subsequent restructuring (£0.9 million) with a further £0.5 million of restructuring costs expected to be incurred in the second half.

Net finance costs were £2.0 million (June 2015: £1.2 million) reflecting higher levels of bank borrowings following the recent acquisitions.

After amortisation and impairment of intangible assets (excluding software amortisation) of £3.0 million (June 2015: £1.3 million) the pre-tax profit was £10.4 million (June 2015: £1.2 million).

Adjusted fully diluted earnings per share increased 26.9% to 3.3 pence (June 2015: 2.6 pence) while fully diluted earnings per share after amortisation and impairment of intangible assets (excluding software amortisation) and exceptional items increased to 2.4 pence (June 2015: 0.2 pence).

Dividend

In continuation of our stated intention to adopt a progressive dividend policy, whilst maintaining an adequate level of cover, the Board has proposed an interim dividend of 0.80 pence (June 2015: 0.65 pence), representing an increase of 23.1%, reflecting the earnings accretion from the recent acquisitions, the Board's confidence in the business going forward and a rebalancing of interim and final dividend to be broadly in line with historic ratios.

The interim dividend will be paid on 4 November 2016 to those Shareholders on the register of members at the close of business on 7 October 2016. The ex-dividend date is 6 October 2016.

Pension Deficit

The recorded net deficit after tax for all post-employment benefit obligations has reduced to £11.1 million at June 2016 from £13.0 million at December 2015. The reduction is due, in part, to the higher than expected return on scheme assets offset by the net impact of lower Corporate Bond yields and lower inflation on the valuation of scheme liabilities.

The current agreement with the Trustee of the defined benefit pension scheme requires deficit recovery payments of £1.9 million in the year to December 2016, of which £0.9 million was contributed during the first half.

Finances

Total net debt at the end of the first half was £108.9 million (December 2015: £71.2 million), slightly better than management expectations and reflecting the strong trading performance in the first half, the financing of the Zip, Chester and Afonwen acquisitions and the equity placing. Our net debt to Adjusted EBITDA leverage ratio was 2.21x at the end of June and we remain on track to return to our stated target of a ratio of not more than 2.00x by the first quarter of 2017.

The amended bank facility, agreed prior to the recent acquisitions, matures in April 2020 and comprises of a £120.0 million revolving credit facility with an additional £30.0 million short term facility available to April 2017. The facility is considerably in excess of the anticipated level of borrowings, with comfortable cover on all bank covenants for the foreseeable future.

Interest cover based on adjusted operating profit was 8.1 times (June 2015: 9.4 times), with interest costs on our floating rate borrowings continuing to benefit from the current low levels of LIBOR. Two hedging arrangements, each for £15.0 million of borrowings, are in place whereby LIBOR is replaced by a fixed rate of 1.4725% for the period January 2016 to January 2019 and 1.665% for the period January 2016 to January 2020. Two new hedging arrangements, each for £10.0 million, were entered into at the end of June 2016 whereby LIBOR is replaced by a fixed rate of 0.49% to June 2018 and 0.5525% to June 2019.

OPERATIONAL HIGHLIGHTS

Textile Rental

Our Textile Rental business trades through five very well recognised brands servicing three market sectors within Textile Rental in the UK. These are 'Apparelmaster', which predominantly provides workwear rental and laundry services to all sectors of industry, 'Stalbridge' and 'London Linen', which provide premium linen services to the restaurant, hospitality and corporate events market and 'Bourne' and 'Afonwen', which provide high volume hotel linen.

Textile Rental revenue increased by 35.0% to £115.7 million (June 2015: £85.7 million), whilst adjusted operating profit increased by 39.5% to £17.3 million (June 2015: £12.4 million) helped by the businesses acquired during both 2015 and 2016. The associated margin increased from 14.5% to 15.0%. As it has over many years, the Textile Rental business continues to focus on customer service, in order to maintain its high customer retention levels, and on targeted investment across the division to improve production efficiency and capacity.

In workwear rental, the Apparelmaster business has again seen a period of growth in the first half of the year, both in terms of new business wins and growth within existing customers. The continued focus on customer service along with numerous operational initiatives has helped maintain a high level of customer retention. A combination of the above and effective cost control has contributed to a growth in margin.

The business continues to invest in highly efficient and best in class capital equipment to increase productivity whilst at the same time reducing energy consumption. As part of our ongoing strategy, further investments are being made at our Basingstoke and Letchworth sites to improve productivity and capacity, whilst the recent investment in our new site in Leeds continues to deliver improved margin growth.

The Lancaster plant, which suffered flood damage in late 2015, is being modernised with new equipment and is expected to be fully operational by September 2016. In spite of the significant water damage to processing equipment, customers experienced negligible disruption of delivery and service, the credit for which goes to all employees involved in helping us through a challenging time.

In restaurant and catering, Stalbridge has performed well in the first half of 2016. A new sales management reporting system and database combined with a vigorous, targeted marketing campaign has delivered new sales ahead of expectations. This, together with good customer retention, has contributed to encouraging organic growth. 

Ashbon Laundry in Grantham, acquired at the end of 2015, has been transformed and completely rebranded as a Stalbridge processing plant. A substantial redistribution of customers has been implemented resulting in the closure of a distribution depot in Nuneaton with little disruption to service and the related benefit of reduced operating costs. Stalbridge and London Linen are continuing to work together to streamline their respective product lines, customer relationships and transport distribution links with customers being serviced from the most appropriate processing location. To date, work has been successfully transferred in Scotland, the North East and, more recently, the South West of England.

London Linen, which joined the Group in April 2015, has continued to trade well and as a result of working with Stalbridge, is better able to focus on servicing the London market.

Revenue has continued to increase, with strong sales to existing customers reflecting the focus of the business on delivering excellent service.

Further investment in the restaurant and catering businesses continues with new, modern and highly efficient equipment being installed across the estate to further reduce energy consumption and to continue to improve quality and productivity.

As previously indicated, we have commenced work on the £4.5 million capital project to increase and improve production capacity at the Southall site in West London. The project will be completed in the second half of 2017.

In high volume hotel linen, the first six months of this year have marked a major milestone in our further development in this part of the market under the Bourne and Afonwen brands with the continued successful implementation of the Board's strategy of buying well invested, high quality businesses which increase our presence and geographical coverage in the marketplace.

In January, we successfully completed the acquisition of Zip Textiles in Birmingham, which provides an important strategic fit with strong opportunities to deliver long term increased logistical efficiencies in the Midlands region.

In April, we took an important further strategic step forward through the acquisition of Afonwen as well as the smaller acquisition of Chester Textiles, which together have significantly strengthened our presence in the North West and South East of England and in Wales.

We have already started to integrate the businesses successfully into the wider Johnson Group and, at the end of June, Zip Textiles was rebranded as Bourne and Chester Textiles was rebranded as Afonwen, consolidating the acquisitions into two well-established brands in the marketplace. Afonwen and Bourne are working well together in representing our interests in this key market of high volume hotel linen and the acquisitions have been well received by our customers.

Overall volumes and customer retention across the high volume hotel linen business have been in line with expectations and we expect to see improved logistical benefits and synergies over the coming months.

Drycleaning

Our Drycleaning business is represented across the UK through the highly recognised Johnson Cleaners brand and our London based premium brand, Jeeves of Belgravia.

Revenue was down to £21.9 million (June 2015: £23.5 million) reflecting the change in the portfolio mix following the reorganisation programme completed in early 2015. There were 203 branches and 154 Waitrose locations trading at the end of June 2016. Adjusted operating profit increased to £0.6 million (June 2015: £0.5 million).

Following the restructure of the business last year, the performance in the first half has been solid, with a modest increase in profit and related margin.

The partnership with Waitrose continues to expand and we are pleased with the growth as we enter the second year of trading in many locations. We do anticipate that a small number of additional locations will be opened in the latter part of the year.

Responsibility Statement

The condensed consolidated interim financial statements comply with the Disclosure and Transparency Rules ('DTR') of the United Kingdom's Financial Conduct Authority in respect of the requirement to produce a half-yearly financial report. The interim report is the responsibility of, and has been approved by, the Directors.

The Directors confirm that to the best of their knowledge:

§ this financial information has been prepared in accordance with IAS 34, 'Interim Financial Reporting' as adopted by the European Union;

§ this interim management 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

§ this interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein).

The Directors of Johnson Service Group PLC are listed in the Johnson Service Group PLC Annual Report for 2015. There have been no changes from those listed other than Michael Del Mar who retired from the Board on 5 May 2016. Details of the Directors are available on the Johnson Service Group PLC website: www.jsg.com

By order of the Board

Forward Looking Statements

Certain statements in these condensed consolidated interim financial statements constitute forward-looking statements. Any statement in this document that is not a statement of historical fact including, without limitation, those regarding the Company's future expectations, operations, financial performance, financial condition and business is a forward-looking statement. Such forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. These risks and uncertainties include, among other factors, changing economic, financial, business or other market conditions. These and other factors could adversely affect the outcome and financial effects of the plans and events described in these condensed consolidated interim financial statements. As a result you are cautioned not to place reliance on such forward-looking statements. Nothing in this document should be construed as a profit forecast.

Consolidated Income Statement

The notes on pages 12 to 24 form an integral part of these condensed consolidated interim financial statements.

* Including £0.6 million credit (June 2015: £0.3 million credit; December 2015: £0.8 million credit) relating to amortisation and impairment of intangible assets (excluding software amortisation) and £nil (June 2015: £1.3 million credit; December 2015: £1.7 million credit) in relation to exceptional items of which £nil (June 2015: £nil; December 2015: £0.2 million credit) relates to the prior year.

** Earnings per share from continuing operations are the same as for total operations.

Consolidated Statement of Comprehensive Income

Consolidated Statement of Changes in Shareholders' Equity

Consolidated Balance Sheet

* Comparatives have been restated as a result of guidance issued in March 2016 by the IFRS Interpretations Committee regarding when bank overdrafts in cash-pooling arrangements would meet the requirements for offsetting in accordance with IAS 32: 'Financial instruments: Presentation'. Further details are provided in note 19.

The notes on pages 12 to 24 form an integral part of these condensed consolidated interim financial statements. The condensed consolidated interim financial statements on pages 8 to 24 were approved by the Board of Directors on 6 September 2016 and signed on its behalf by:

Yvonne Monaghan

Chief Financial Officer

Consolidated Statement of Cash Flows

The notes on pages 12 to 24 form an integral part of these condensed consolidated interim financial statements.

Notes to the Condensed Consolidated Interim Financial Statements

Johnson Service Group PLC (the 'Company') and its subsidiaries (together, the 'Group') provide textile related services to both businesses and consumers. The Group has two distinct reporting segments:

Textile Rental

Provision and laundering of workwear, roller towels, corporate apparel and dust mats; premium linen to the restaurant, hospitality and corporate event markets; and linen to the high volume hotel market.

Drycleaning

Provision of retail and commercial drycleaning and other associated support services.

The Company is incorporated and domiciled in the UK, its registered number is 523335 and the address of its registered office is Johnson House, Abbots Park, Monks Way, Preston Brook, Cheshire, WA7 3GH. The Company is a public limited company and has its primary listing on the AIM division of the London Stock Exchange.

The condensed consolidated interim financial statements were approved for issue by the Board on 6 September 2016.

1 BASIS OF PREPARATION

These condensed consolidated interim financial statements of the Group are for the six months ended 30 June 2016. They have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, 'Interim Financial Reporting', as adopted by the European Union.

The condensed consolidated interim financial statements have not been reviewed nor audited, nor do they comprise statutory accounts for the purpose of Section 434 of the Companies Act 2006, and do not include all of the information or disclosures required in the annual financial statements and should therefore be read in conjunction with the Group's 2015 consolidated financial statements, which have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union.

Other than as set out in note 19, financial information for the year ended 31 December 2015 included herein is derived from the statutory accounts for that year, which have been filed with the Registrar of Companies. The auditors' report on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain a statement under Section 498 of the Companies Act 2006.

Other than as described within note 19, financial information for the half year ended 30 June 2015 included herein is derived from the condensed consolidated interim financial statements for that period.

Going Concern

The Group currently meets its day-to-day working capital requirements through committed bank facilities which run to April 2020. Following the recent UK referendum, current economic conditions continue to create uncertainty, particularly over the level of demand for the Group's services. The Group's latest forecasts and projections, taking account of reasonably possible changes in trading performance, show that there is not a substantial doubt that the Group should be able to operate within the level of its current facilities for a period of at least 12 months from the date of these condensed consolidated interim financial statements.

As a consequence, and having reassessed the principal risks and uncertainties, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the condensed consolidated interim financial information.

2 SEGMENT ANALYSIS

Segment information is presented in respect of the Group's operating segments, which are based on the Group's management and internal reporting structure as at 30 June 2016.

The chief operating decision-maker has been identified as the Board of Directors (the 'Board'). The Board reviews the Group's internal reporting in order to assess performance and allocate resources. The Board determines the operating segments based on these reports and on the internal reporting structure. For reporting purposes, in accordance with IFRS 8, the Board aggregates operating segments with similar economic characteristics and conditions into reporting segments, which form the basis of reporting in the Interim and Annual Reports. Details of the Group's segments were provided on page 60 of the 2015 Annual Report. Following the acquisitions on 31 January 2016, 26 April 2016 and 28 April 2016, Zip Textiles (Services) Limited, Chester Laundry Limited and Portgrade Limited (together with its trading subsidiary Afonwen Laundry Limited) respectively are included within the Textile Rental segment.

The Board assesses the performance of the reporting segments based on a measure of operating profit, both including and excluding the effects of non-recurring items from the reporting segments, such as restructuring costs and impairments when the impairment is the result of an isolated, non-recurring or non-operating event. Interest income and expenditure are not included in the result for each reporting segment that is reviewed by the Board. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis, for example, rental income received by Johnson Group Properties PLC is credited back, where appropriate, to the paying company for the purposes of segment reporting. There have been no changes in measurement methods used compared to the prior year.

Other information provided to the Board is measured in a manner consistent with that in the financial statements. Segment assets exclude deferred income tax assets, current income tax assets and cash and cash equivalents, all of which are managed on a central basis. Segment liabilities include non-bank borrowings, but exclude deferred income tax liabilities, current income tax liabilities, bank borrowings and derivative financial liabilities all of which are managed on a central basis. These balances form part of the reconciliation to total assets and liabilities.

Inter-segment pricing is determined on an arm's length basis.  Exceptional items have been included within the appropriate reporting segment as shown on pages 13 to 15.

The reporting segment results for the half year ended 30 June 2016, together with comparative figures, are as follows:

* Comparatives have been restated as a result of guidance issued in March 2016 by the IFRS Interpretations Committee regarding when bank overdrafts in cash-pooling arrangements would meet the requirements for offsetting in accordance with IAS 32: 'Financial instruments: Presentation'. Further details are provided in note 19.

* Comparatives have been restated as a result of guidance issued in March 2016 by the IFRS Interpretations Committee regarding when bank overdrafts in cash-pooling arrangements would meet the requirements for offsetting in accordance with IAS 32: 'Financial instruments: Presentation'. Further details are provided in note 19.

3 EXCEPTIONAL ITEMS

Current year exceptional items

Costs in relation to business acquisition activity

During the period to 30 June 2016, professional fees of £0.4 million and stamp duty of £0.3 million were paid relating to the acquisitions of Zip Textiles (Services) Limited, Chester Laundry Limited and Portgrade Limited, the parent company of Afonwen Laundry Limited. In addition, costs of £0.2 million were incurred as part of the ongoing reorganisation and integration of recent acquisitions. Further information relating to the acquisitions is provided in note 11.

Pension costs

During the period to 30 June 2016, professional fees of £0.3 million were incurred in respect of liability management exercises in relation to the defined benefit pension scheme.

Profit on disposal of freehold property

The site of the former Textile Rental plant in Leeds that was closed in 2015 was disposed of during the period for net proceeds of £0.5 million. The carrying value was previously written down to £nil in 2014.

Prior year exceptional items

Restructuring costs - Textile Rental

A new processing facility has been constructed to replace the previous site in Leeds. The total cost of this relocation in 2014 and 2015, excluding the capital investment, was £2.3 million, of which, £1.0 million was charged to exceptional items in 2015, £0.6 million being in the six months to June 2015.

Restructuring costs - Drycleaning

As previously announced on 6 January 2015, the charge to the Group's Income Statement for the restructuring of the Drycleaning business and associated property provisions was, in aggregate, £6.5 million net, of which £6.2 million was recognised in the first half of 2015.

Costs in relation to business acquisition activity

During the prior year, costs relating to business acquisition activity of £1.5 million were recognised of which £0.8 million were recognised in the first half. Professional fees of £0.5 million and stamp duty of £0.3 million were paid relating to the acquisition of London Linen Group Limited in the first half. Further Professional fees of £0.2 million were incurred in the second half relating to the acquisition of Ashbon Services Limited. Costs of £0.4 million in the second half were in relation to reorganisation and integration costs relating to the two business acquisitions in the year. The remainder of the cost relates to fees and expenses incurred during negotiations with undisclosed targets.

4 TAXATION

Taxation in relation to amortisation and impairment of intangible assets has reduced the charge in the current period by £0.6 million (June 2015: £0.3 million reduction in the charge; December 2015: £0.8 million reduction in the charge). Taxation on exceptional items in the current period relating to continuing operations is £nil (June 2015: £1.3 million reduction in the charge; December 2015: £1.7 million reduction in the charge) of which £nil (June 2015: £nil; December 2015: £0.2 million credit) relates to the prior year.

Reconciliation of effective tax rate

Taxation on non-exceptional items for the six months to 30 June 2016 is calculated based on the estimated average annual effective tax rate (excluding prior year items) of 20.3% (six months ended 30 June 2015: 20.7%; year ended 31 December 2015: 21.3%). This compares to the weighted average tax rate expected to be enacted or substantively enacted at the balance sheet date of 20.0% (six months ended 30 June 2015: 20.25%; year ended 31 December 2015: 20.25%). Taxation on exceptional items is calculated based on the actual tax charge or credit for each specific item.

Differences between the estimated average annual effective tax rate and statutory rate include, but are not limited to, the effect of non-deductible expenses and the effect of tax losses utilised. The adjustment for under or over provisions in previous years is recognised when the amounts are agreed.

Changes in the UK corporation tax rate

Reductions to the UK corporation tax rates were announced in the Chancellor's Budget on 8 July 2015, by 1% to 19% in April 2017 and by a further 1% to 18% in April 2020. These changes were substantively enacted as part of Finance Bill 2015 on 26 October 2015.

Deferred income taxes at the balance sheet date are measured at the tax rate expected to be applicable at the date the deferred income tax assets and liabilities are realised. Management has performed an assessment, for all material deferred income tax assets and liabilities, to determine the period over which the deferred income tax assets and liabilities are forecast to be realised, which has resulted in an average deferred income tax rate of 19% being used to measure all deferred tax balances as at 30 June 2016 (30 June 2015: 20%; 31 December 2015: 19%).

On 16 March 2016, a further reduction was announced replacing the 18% tax rate effective from April 2020 with a 17% tax rate. This further change had not been substantively enacted at the balance sheet date and hence is not reflected in these financial statements. If applied to the deferred tax balances at the balance sheet date, management estimate the impact of this further reduction in the main UK rate of tax would be to reduce the net UK deferred tax liability by £0.4 million.

5 ADJUSTED PROFIT BEFORE AND AFTER TAXATION

6 DIVIDENDS

On 13 May 2016 a final dividend of 1.45 pence per Ordinary share in respect of 2015 was paid to Shareholders, utilising £4.8 million of Shareholders' funds.

The Directors are proposing an interim dividend in respect of the year ended 31 December 2016 of 0.80 pence which will reduce Shareholders' funds by £2.9 million. The dividend will be paid on 4 November 2016 to Shareholders on the register of members at the close of business on 7 October 2016. The Trustee of the EBT has waived its entitlement to receive dividends on the Ordinary shares held by the Trust.

In accordance with International Financial Reporting Standards, these condensed consolidated interim financial statements do not reflect a liability in respect of the proposed interim dividend.

7 EARNINGS PER SHARE