Johnson Service Regulatory News (JSG)

4 September 2018

AIM: JSG

Johnson Service Group PLC

('JSG' or 'the Group')

Interim Results for the Six Months ended 30 June 2018

and Acquisition of South West Laundry Ltd

"Another consistently strong performance"

HIGHLIGHTS

§ Strong financial performance:

- reflects both strong organic growth of 7.2%2  together with the benefits of recent acquisitions

- underlying margin in line with H1 2017

§ Interim dividend increased by 11.1% to 1.0 pence per share (June 2017: 0.9 pence)

§ Significant capital investment in the period has increased production capacity at selected sites to support the demand from strong organic growth

§ Acquisition of HORECA linen business, South West Laundry Ltd, completed on 31 August 2018

- extending coverage to South West England

- new well equipped laundry with spare capacity for growth

§ Full year results are expected to be slightly ahead of current market expectations

Notes

1 Excluding amortisation of intangible assets (excluding software amortisation) and exceptional items (see note 5).

2 Excluding the full benefit of acquisitions completed in 2017 and the one off benefit of some £1.1 million of revenue for work processed in 2017 on behalf of a privately owned laundry whose plant was out of commission.

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

"We are delighted to report another consistently strong performance across the Group. Our strategy of driving the quality of growth organically by investing capital in our operations, coupled with selective acquisitions, is delivering encouraging results.

Recent organic growth and margin performance gives us confidence in the outlook for the second half of 2018. As a result, we expect results for the full year to be slightly ahead of current market expectations."

SELL-SIDE ANALYST MEETING

A presentation for sell-side analysts will be held today at 09:30 at Investec, 30 Gresham Street, London, EC2V 7QN. 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 continuing operating profit before amortisation of intangible assets (excluding software amortisation) and exceptional items. 'Adjusted profit before taxation' refers to adjusted operating profit less total finance cost. '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. 'Adjusted EPS' refers to EPS calculated based on adjusted profit after taxation. The Board considers that 'adjusted operating profit', 'adjusted profit before taxation, 'adjusted EBITDA' and 'adjusted EPS', which all exclude the effects of non-recurring items or non-operating events, provide useful information for Shareholders on underlying trends and performance.

FINANCIAL AND OPERATIONAL REVIEW

FINANCIAL REVIEW

Financial Results

Following very strong sales growth and continued high levels of customer retention across all market sectors, organic growth reached 7.2% in the first half of the year. This, combined with a full six months trading from the acquisitions completed in 2017, increased the Group's continuing revenue by 10.3% to £152.2 million (June 2017: £138.0 million). As a result of strong operational controls corresponding adjusted operating profit increased by 7.0% to £19.9 million (June 2017: £18.6 million).

Adjusted profit before taxation increased to £18.2 million (June 2017: £16.8 million) after net finance costs of £1.7 million (June 2017: £1.8 million). The underlying tax rate was 19.5% (June 2017: 19.4%).

The statutory profit before tax after amortisation of intangible assets (excluding software amortisation) of £4.2 million (June 2017: £3.9 million) increased by 8.5% to £14.0 million (June 2017: £12.9 million).

Continuing adjusted diluted earnings per share increased by 8.1% to 4.0 pence (June 2017: 3.7 pence). Diluted earnings per share from continuing operations, after amortisation of intangible assets (excluding software amortisation), increased by 10.7% to 3.1 pence (June 2017: 2.8 pence).

Dividend

Reflecting the Group's strong performance and prospects, the Board is pleased to increase the interim dividend by 11.1% to 1.0 pence (June 2017: 0.9 pence). This is in line with our progressive dividend policy, whilst also maintaining satisfactory dividend cover.

The interim dividend will be paid on 2 November 2018 to those Shareholders on the register of members at the close of business on 5 October 2018. The ex-dividend date is 4 October 2018.

Finances

Total net debt at 30 June 2018 was £91.2 million (December 2017: £91.3 million), slightly better than management expectations, and reflected the strong trading performance in the first half offset by significant investment in new rental stock which was required to support organic growth. The Group's net debt to adjusted EBITDA leverage ratio was 1.6x at the end of June 2018.

The Group renewed its bank facility in August 2018 and now has a £150.0 million revolving credit facility (RCF) which is considerably in excess of the anticipated level of borrowings, with comfortable cover on all bank covenants for the foreseeable future. The facility now comprises of a £135.0 million RCF, which expires in August 2022, and a £15.0 million short term facility, which expires in August 2019.

Interest cover, based on adjusted operating profit and excluding notional pension interest, was 12.4 times (June 2017: 11.6 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 further hedging arrangements, each for £10.0 million, were entered into at the end of June 2016 whereby LIBOR was replaced by a fixed rate of 0.49% to June 2018 and 0.5525% to June 2019.

Post-Employment Benefits

The recorded net deficit after tax for all post-employment benefit obligations, calculated in accordance with IAS 19R, has reduced to £5.0 million at June 2018 from £9.8 million at December 2017. The reduction is due, in part, to the increase in the discount rate and lower inflation rate assumed on liabilities offset, to a lesser extent, by a lower return on scheme assets. We now have a significant portion of scheme assets invested so as to hedge against movements in liabilities, thereby reducing overall scheme volatility.

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 2018, of which £0.9 million was contributed during the first half. The payments are expected to continue at this level until the results of the next triennial actuarial valuation as at 30 September 2019 are finalised.

Acquisition of South West Laundry

After the period end, on 31 August 2018, we were pleased to add another well established, HORECA business to the Group, through the acquisition of the entire share capital of South West Laundry Holdings Limited, together with its trading subsidiary South West Laundry Ltd ('South West Laundry'). The consideration, payable in cash on completion, was £15.5 million on a debt free, cash free basis and subject to an adjustment for normalised working capital.

As reported in the statutory accounts for the year ended 28 February 2018, South West Laundry generated revenue of £5.1 million and profit before taxation of £2.6 million. This included a net exceptional credit item arising from an insurance claim of £1.1 million. The results for South West Laundry are reported on the basis of the accounting policies of the business and will be aligned to the rest of the Group post completion. Reported net assets at February 2018 were £4.1 million.

The company, based in Hayle in Cornwall, predominantly services the hotel and restaurant market. It is located over 175 miles from our nearest HORECA laundry and effectively opens up a new geographical trading area for Johnson Service Group as we have very little existing business in Devon and Cornwall. The laundry was completely refurbished with new equipment following a fire in March 2017 and currently processes some 340,000 pieces of linen per week and employs 100 staff.

We are also very pleased to announce that one of the Directors currently managing the business, Wayne Retallack, will be joining the Stalbridge management team and will continue to run South West Laundry.

OPERATIONAL REVIEW

Our Businesses

The Group had another successful six months, delivering continued strong organic growth and increased profit. The acquisitions made in the second half of 2017 (Professional Linen Services in Edinburgh and StarCounty Textiles in Wrexham) are performing as expected. We continue to invest in many of our laundry facilities to improve productivity and capacity and, given current strong demands, there is further scope to continue this plan.

Our Textile Rental business trades through a number of very well recognised brands which service the UK's Workwear and Hotel Restaurant and Catering ('HORECA') market sectors. The Group's 'Apparelmaster' brand predominantly provides workwear rental and laundry services to corporates across all industry sectors, 'Stalbridge' and 'London Linen' provide premium linen services to the restaurant, hospitality and corporate events market and 'Bourne', 'Afonwen' and 'PLS' provide high volume hotel linen services. Our newly acquired South West Laundry brand will complement our existing Stalbridge business.

As mentioned earlier in the year we are undertaking a review to consolidate branding and extend national brand recognition. This is proceeding to plan and we intend to begin implementation in the near future. This will take up to three years to complete and the modest cost will not have a material impact on Group results.

All of our brands experienced significant new business sales which, combined with high levels of customer retention, resulted in a strong first half performance, generating revenues of £152.2 million (June 2017: £138.0 million), an increase of 10.3%. This increase includes an additional six months of trading from the acquisitions completed in 2017. Our strong underlying organic growth of some 7.2% included the benefit of price increases and adjusts for the one-off benefit in 2017 of approximately £1.1 million of work processed on behalf of a privately owned laundry, whose operations were disrupted by a fire.

Adjusted operating profit from our Textile Rental businesses increased by £1.5 million to £22.2 million (June 2017: £20.7 million), representing an increase of 7.2%, with the operating margin reducing slightly to 14.6% (June 2017: 15.0%). However, excluding the impact of the high margin, one-off work in 2017 referred to above, the operating margin remained unchanged.

Workwear Division 

Operating under the Apparelmaster brand, the Group's workwear division provides workwear rental and laundry services to over 37,000 customers in the UK from small local businesses to the largest companies covering food related and other industrial sectors.

Trading for the first six months of 2018 was strong with revenue increasing by 4.6% to £63.2 million (2017: £60.4 million). Growth was driven by strong new sales, with some large customers returning to the services provided by Apparelmaster, continued high levels of retention, positive development within existing customers and a price increase effective as from 1 April 2018. Growth levels reflect our continued investment in sales and marketing activity but also our focused levels of attention to existing customers, which has once again delivered 95% retention of existing revenues.

With the benefit of strong revenue growth and despite the higher than expected fuel and energy costs the business continued to focus on efficiency with adjusted operating profit increasing by 5.9% to £10.8 million (2017: £10.2 million) and the margin improving to 17.1% (2017: 16.9%).

Our investment in plant and machinery continued during the period with the installation of three modern, highly efficient garment folding machines in the high care food unit at Hinckley, which has increased folding capacity by 17.5%, and the commencement of further work to increase garment production capacity at the high care food unit in Letchworth by a further 35%.

The business continues to invest in the training and development of its employees with the initiative of its own internal training Academy and now 60 people are benefitting from enrolment on apprenticeship schemes in addition to a nationwide customer service development program. This will help to provide internal succession in some of our technical and skilled areas. Uptake on our Academy for management development remains strong and it is pleasing to see the career progression of previous participants.

HORECA Division

Overall revenue within the HORECA division was very strong at £89.0 million (2017: £77.6 million), an increase of 14.7%. After adjusting for revenue from acquisitions completed in the second half of 2017 and also excluding the £1.1 million of high margin revenue in 2017 from processing work of a competitor in distress, underlying revenue increased by 9.0%.

Corresponding adjusted operating profit increased to £11.4 million (2017: £10.5 million) an increase of 8.6%. The operating margin was 12.8%, the same as the margin for the first half of 2017 when calculated to exclude the impact of the high margin work referred to above.

Within our HORECA division the high volume hotel linen laundries experienced increased volumes as new business sales were very strong and ahead of our expectations, despite pricing pressures across the market sector. Now operating with three consolidated brands, Afonwen, Bourne and PLS, the business is recognised as a national provider of quality services to the high volume hotel linen market and as such a number of customers have awarded us additional hotels from within their existing portfolio.

To ensure the high volume linen business can meet productivity demands in the peak season we have completed some modest investments at the laundries in Edinburgh, Chester and Birmingham and, together with some further realignment of customers to improve logistical efficiencies, have also re-balanced production output requirements.

The high volume linen laundries won significant additional business across the country, in particular, in the Midlands and Southern England as the result of the sudden closure of a West Midlands competitor laundry. Our size and scale allows us to have the capability of reacting quickly to market conditions and to secure a number of new contracts with the ability to complete new linen installations very quickly. Given the continuing strong demand for our services we are reviewing opportunities to open an additional facility to complement our existing network.

Following the acquisition of StarCounty Textiles in Wrexham in December 2017 some 170,000 pieces per week of high volume linen work was transferred to Chester for processing with some 50,000 pieces per week of linen from smaller hotels and restaurants moving into Wrexham. The operational changes were well organised and as a result we are pleased to report that overall customer satisfaction and retention levels remain at a very high standard.

The overall outlook for the high volume hotel linen laundries remains positive with a healthy pipeline of new business together with a very busy summer schedule.

Stalbridge has continued to grow with strong new sales in 2018 building on the full year effect of record new sales in 2017. Stalbridge continue to heavily market their "no contract", flexible and responsive service which attracts customers who are new to the market and where service and quality are the primary drivers. Several group customers have signed up to long term extensions of their existing supply arrangements.

The acquisition of StarCounty has given additional capacity to allow for this growth, and we have invested in machinery, buildings and the working environment to ensure it meets the discerning standards of a Stalbridge branded factory. There has been a significant realignment of customer distribution between the Stalbridge operating locations to streamline deliveries and logistics, which was completed in the first half of 2018.

Improved operating efficiency has been achieved in the Dorset factories with two replacement high speed ironer lines and a new continuous batch washer supported by improved chemical and washing technology being installed.

The 'MyStalbridge' portal allows customers to access their account details, billing and stock usage data online and this is proving popular for those customers who wish to manage their stock levels, linen consumption and costs proactively.

A £3.3 million refurbishment and extension of Caterers Linen laundry (previously a London Linen brand) in Southall will be complete by the final quarter of 2018, and will be operated and fully re-branded as Stalbridge, allowing for further consolidation of the customer base. The Southall site is shared with two London Linen laundries with whom Stalbridge continue to co-operate very closely in the restaurant and catering marketplaces.

London Linen is now solely focused on restaurant customers, mainly in the London area, although the national restaurant chains are also supplied via our nationwide network of laundries, providing consistency of service levels and key performance criteria. Revenue increased during the first half as a result of gaining new accounts including a significant contract win (for 92 sites) at the start of the year which has now been fully rolled out.

We have experienced some limited pressures exerted in the restaurant market to consolidate the amount of textile product lines laundered as customers attempt to reduce costs without affecting the services they provide to their own customers front of house.

The £4.5 million capital investment programme which was completed half way through 2017 continues to drive further benefits, providing the capacity to facilitate the increased revenue whilst at the same time generating efficiencies, which have resulted in lower production labour costs per unit compared to 2017, helping to offset the impact of NLW increases. Investment has continued in 2018 with the installation of a new high speed ironer line inclusive of an electronic inspection system which has further increased capacity, productivity, quality and consistency.

Three of our nine ironer lines now have electronic inspection systems and these will continue to be installed to existing ironer lines as it improves efficiency and the quality of the final product dispatched to customers. Further project work is being undertaken to determine ways to improve efficiency within the dispatch process to ensure our high levels of customer service are maintained in a cost effective manner.

Overall across our textile businesses we have experienced higher textile stock spend as we have invested in stock to service the increases in new business sales and this has marginally impacted on depreciation. Costs have been well maintained across the businesses despite the disproportionate increases in fuel and energy costs and so far have been mitigated through the combined effect of pricing, productivity improvements and the realignment of distribution areas. Our margin has therefore been maintained during the prolonged period of hot weather at times of record volumes of pieces processed.

TECHNICAL INNOVATION

Work on the in-house development of new operating systems for both the workwear and high volume hotel linen businesses is progressing to plan and budget. This project, which incorporates the use of Microsoft Dynamics, will further improve our operating systems and customer engagement. The first phase of the system is expected to be installed in the first half of 2019.

EMPLOYEES

The Group now employs some 5,500 people who have all contributed to the performance of the business and to achieving our market-leading customer service standards. We thank them for their significant contribution to another tremendous first half performance.

BOARD CHANGES

As announced on 5 December 2017, Peter Egan joined the Board as Chief Operating Officer on 1 April 2018, ahead of assuming the role of CEO on the retirement of Chris Sander, the current CEO, at the end of 2018. In May 2018, Paul Moody announced his intention to resign from the Board and subsequently left the Group on 3 August 2018. Bill Shannon, formerly the Senior Independent Non-Executive Director, was appointed as Non-Executive Chairman from that date. As announced on 24 August 2018, Chris Girling joined the Board as an Independent Non-Executive Director and Audit Committee Chairman with effect from 29 August 2018.

OUTLOOK

Our investment to date in additional production capacity has enabled us to meet the demands produced by recent strong organic growth. We will continue to invest in the business to support the Board's confidence in the ongoing growth of the Group.

Our strategic vision to continue to grow our business through organic growth supplemented by well planned acquisitions is on track with the latest being South West Laundry in August 2018 in the far South West of England. Whilst we have extended our services over a large part of the UK there are still some geographical regions of the country in which we are not represented as the distances are beyond economic travel from our existing facilities. We therefore believe there are still further opportunities for us to extend our geographical reach through further acquisition when the opportunities arise. We have recently increased our available bank facilities to support this growth.

Our strong sales growth, high levels of customer retention and productivity benefits from recent investments give us confidence in the second half performance and, as a result, we expect results for the full year to be slightly ahead of current market expectations.

Responsibility Statement

The condensed consolidated interim financial statements comply with the Disclosure Guidance 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 2017. Since that date, Peter Egan joined the Board on 1 April 2018 as Chief Operating Officer, ahead of assuming the role of Chief Executive Officer at the end of 2018, and Chris Girling joined the Board on 29 August 2018 as an Independent Non-Executive Director and Audit Committee Chairman. Paul Moody stepped down as Non-Executive Chairman on 3 August 2018 and was replaced by Bill Shannon, formerly the Senior Independent Non-Executive Director, from that date. Details of the Directors are available on the Johnson Service Group PLC website: www.jsg.com

By order of the Board

Chris Sander Yvonne Monaghan

Chief Executive Officer Chief Financial Officer

4 September 2018 4 September 2018

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 15 to 28 form an integral part of these condensed consolidated interim financial statements.

* Including £0.8 million credit (June 2017: £0.7 million credit; December 2017: £1.7 million credit) relating to amortisation of intangible assets (excluding software amortisation) and £nil (June 2017: £nil; December 2017: £0.1 million credit) relating to exceptional items.

Consolidated Statement of Comprehensive Income

Consolidated Statement of Changes in Shareholders' Equity

* The Group has an Employee Benefit Trust (EBT), to administer share plans and to acquire shares, using funds controlled by the Group, to meet commitments to employee share schemes.

Consolidated Balance Sheet

The notes on pages 15 to 28 form an integral part of these condensed consolidated interim financial statements. The condensed consolidated interim financial statements on pages 11 to 28 were approved by the Board of Directors on 4 September 2018 and signed on its behalf by:

Yvonne Monaghan

Chief Financial Officer

Consolidated Statement of Cash Flows

The notes on pages 15 to 28 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 rental and related services across the UK.

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 authorised for issue by the Board on 4 September 2018.

1 BASIS OF PREPARATION

These condensed consolidated interim financial statements of the Group are for the half year ended 30 June 2018. 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 2017 consolidated financial statements, which have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union.

Financial information for the year ended 31 December 2017 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 2, financial information for the half year ended 30 June 2017 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, as at 30 June 2018, ran to April 2020 but which now, following the refinancing of that facility on 9 August 2018, runs to at least 9 August 2022. 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 2018. These segments are the same as those included within the 2017 Annual Report and Accounts. The segmental analysis for the half year ended 30 June 2017 has been restated to reflect the changes made within the 2017 Annual Report and Accounts with the introduction of two new reporting segments, Workwear and Hotels, Restaurant and Catering (HORECA).

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 the reporting in the Annual Report and Accounts.

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 purpose of segmental reporting. Other than as described above, 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, derivative financial 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, post-employment benefit obligations and derivative financial liabilities, all of which are managed on a central basis. These balances are part of the reconciliation to total assets and liabilities.

2 SEGMENT ANALYSIS (continued)

The reporting segment results for the half year ended 30 June 2018, together with comparative figures, are as follows:

2 SEGMENT ANALYSIS (continued)

2 SEGMENT ANALYSIS (continued)

3 EXCEPTIONAL ITEMS

Current year exceptional items

There are no exceptional items in the half year to 30 June 2018.

Prior year exceptional items

Costs in relation to business acquisition activity

During the prior year, professional fees of £0.3 million were paid relating to the acquisitions of Clayfull Limited, which trades as PLS, and StarCounty Textile Services Limited. In addition, costs of £0.2 million were incurred as part of the integration of recent acquisitions.

4 TAXATION

Taxation in relation to amortisation of intangible assets (excluding software amortisation) has reduced the charge for taxation on continuing operations in the half year to 30 June 2018 by £0.8 million (June 2017: £0.7 million reduction in the charge; December 2017: £1.7 million reduction in the charge). Taxation in relation to exceptional items in the half year to 30 June 2018 relating to continuing operations is £nil (June 2017: £nil; December 2017: £0.1 million reduction in the charge).

During the half year to 30 June 2018, a £1.0 million charge relating to deferred taxation (June 2017: £1.2 million charge; December 2017: £0.8 million charge) has been recognised in other comprehensive income.

During the half year to 30 June 2018, there has been no impact relating to current taxation (June 2017: £0.2 million credit; December 2017: £0.2 million credit) recognised directly in Shareholders' equity.

Reconciliation of effective tax rate

Taxation on non-exceptional items for the half year to 30 June 2018 is calculated based on the estimated average annual effective tax rate (excluding prior year items) of 19.5% (June 2017: 19.4%; December 2017: 19.8%). This compares to the weighted average tax rate expected to be enacted or substantively enacted at the balance sheet date of 19.00% (June 2017: 19.25%; December 2017: 19.25%). 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.

Deferred income taxes at the balance sheet date have been 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 18.0% being used to measure all deferred tax balances as at 30 June 2018 (June 2017: 18.5%; December 2017: 18.0%).

5 ADJUSTED PROFIT BEFORE AND AFTER TAXATION

6 DIVIDENDS

On 11 May 2018 a final dividend of 1.9 pence per share in respect of 2017 was paid to Shareholders, utilising £7.0 million of Shareholders' funds.

The Directors are proposing an interim dividend in respect of the year ended 31 December 2018 of 1.0 pence which will reduce Shareholders' funds by £3.7 million. The dividend will be paid on 2 November 2018 to Shareholders on the register of members at the close of business on 5 October 2018. The trustee of the EBT has waived the entitlement to receive dividends on the Ordinary shares held by the trust.

In accordance with IAS 10 there is no payable recognised at 30 June 2018 in respect of this proposed dividend.

7 EARNINGS PER SHARE

* Includes outstanding share options granted to employees.

Basic earnings per share is calculated using the weighted average number of Ordinary shares in issue during the period, excluding those held by the Employee Benefit Trust, based on the profit for the period attributable to Shareholders.

Adjusted earnings per share figures are given to exclude the effects of amortisation of intangible assets (excluding software amortisation) and exceptional items, all net of taxation, and are considered to show the underlying performance of the Group.

For diluted earnings per share, the weighted average number of Ordinary shares in issue is adjusted to assume conversion of all potentially dilutive Ordinary shares. The Company has potentially dilutive Ordinary shares arising from share options granted to employees. Options are dilutive under the SAYE scheme, where the exercise price together with the future IFRS2 charge of the option is less than the average market price of the Company's Ordinary shares during the year. Options under the LTIP schemes, as defined by IFRS 2, are contingently issuable shares and are therefore only included within the calculation of diluted EPS if the performance conditions, as set out in the Board report on remuneration in the 2017 Annual report and Accounts, are satisfied.

Potentially dilutive Ordinary shares are dilutive at the point, from a continuing operations level, when their conversion to Ordinary shares would decrease earnings per share or increase loss per share. For all periods, potentially dilutive Ordinary shares have been treated as dilutive, as their inclusion in the diluted earnings per share calculation decreases earnings per share from continuing operations.

There were no events occurring after the balance sheet date that would have changed significantly the number of Ordinary shares or potentially dilutive Ordinary shares outstanding at the balance sheet date if those transactions had occurred before the end of the reporting period.

8 RETIREMENT BENEFIT OBLIGATIONS

The Group has applied the requirements of IAS 19R, 'Employee Benefits' to its employee pension schemes and post-employment healthcare benefits.

In the half year to 30 June 2018 deficit recovery payments of £0.9 million were paid by the Group to the defined benefit scheme (June 2017: £0.9 million; December 2017: £1.9 million). A one off, deficit recovery payment of £1.5 million was made in April 2017.

Following discussions with the Group's appointed actuary a re-measurement gain of £5.0 million has been recognised in the half year to 30 June 2018. This is principally as a result of asset returns over the period for this scheme having been lower than the assumed interest credit at the year end, resulting in an actuarial loss of £4.4 million, offset, to a greater extent, by the increase in the assumed discount rate from 2.5% per annum to 2.8% per annum combined with a decrease in the CPI and RPI price inflation assumptions by 0.05% per annum resulting in an actuarial gain of £9.4 million.

The post-employment benefit obligation and associated deferred income tax asset thereon is shown below:

The reconciliation of the opening gross post-employment benefit obligation to the closing gross post-employment benefit obligation is shown below: