Johnson Service Regulatory News (JSG)

5 September 2023

AIM: JSG

Johnson Service Group PLC

('JSG' or 'the Group')

Interim Results for the Six Months ended 30 June 2023

Intention to Launch a further Share Buyback Programme

"Continuing strong organic growth.

Confidence for the full year and for longer term growth."

FINANCIAL PERFORMANCE

- Total revenue increased by 22.0% to £215.0 million (June 2022: £176.2 million).

- Organic revenue up 20.6% compared to H1 2022.

- Adjusted EBITDA1 of £57.7 million (June 2022: £42.8 million); margin of 26.8% (June 2022: 24.3%).

- Adjusted operating profit1 of £19.0 million (June 2022: £12.8 million).

- Operating profit of £16.1 million (June 2022: £6.7 million).

- Adjusted profit before taxation2 of £16.4 million (June 2022: £11.2 million).

- Profit before taxation of £13.5 million (June 2022: £5.1 million).

- Adjusted diluted EPS of 2.9 pence (June 2022: 2.3 pence).

- Diluted EPS of 2.3 pence (June 2022: 1.1 pence).

- Interim dividend of 0.9 pence (June 2022: 0.8 pence) in line with our progressive dividend policy.

- Full year outturn expected to be slightly ahead of current market expectations.

FINANCING

- Initial share buyback completed with £19.7 million deployed since 1 January 2023; £25.3 million returned to Shareholders since the programme commenced.

- Intention to launch a further share buyback programme of up to £10.0 million.

- Strong balance sheet with capital available for further investment.

OPERATIONAL HIGHLIGHTS

- Continuing strong organic growth in HORECA with increased number of locations serviced.

- Increasing sales activity and strengthening pipeline in both Workwear and HORECA.

- Inflationary cost increases offset by improved efficiency and pricing.

- Energy costs remain high but are being proactively managed.

- Sustainability targets in place for 2023, including carbon, water and waste reduction.

- Capital projects being progressed to add further capacity in both divisions.

- £5.75 million acquisition of Regency Laundry in February 2023 and €31.5 million acquisition of Celtic Linen in August 2023, both on a debt free, cash free, basis.

Notes

1 'Adjusted EBITDA' refers to operating profit before amortisation of intangible assets (excluding software amortisation), goodwill impairment and exceptional items (defined as 'adjusted operating profit') plus the depreciation charge for property, plant and equipment, textile rental items and right of use assets plus software amortisation.

2 'Adjusted profit before taxation' refers to adjusted operating profit less total finance costs.

Peter Egan, Chief Executive Officer of Johnson Service Group, commented:

"The Group's strong performance during the first six months of the year, with a significant improvement in revenues, profits and margins, reflects the return to more normal and predictable trading patterns alongside proactive management of our cost base and improving production efficiencies.

So far this year, and in line with our targeted buy and build growth strategy, we have continued to develop our strong M&A pipeline through the acquisition of Regency and Celtic Linen. We have also invested £12.9 million across the estate and committed to a new state-of-the-art site in the South-East to further improve operational efficiencies, increase capacity and support innovation. Our intention to increase our bank facility from £85.0 million to £120.0 million in the coming months provides us with the ability to fund further investment opportunities that may arise.

The Board was pleased to indicate an outlook for the year ahead of market expectations when the Group released its pre-close trading update in mid-July. Recognising the volumes processed over the busy summer months, improving efficiencies and a somewhat more predictable outlook on the cost base, together with our assumption that the trading environment remains unchanged, we expect the full year outturn to be slightly ahead of the guidance provided in our July trading update. This improved outlook is in addition to the positive contribution expected from Celtic Linen."

SELL-SIDE ANALYSTS' MEETING

A presentation for sell-side analysts will be held today at 09:30, details of which will be distributed by Camarco. A copy of the presentation will be available on the Company's website (www.jsg.com) following the meeting.

ENQUIRIES

Financial And Operational Review

BASIS OF PREPARATION

Throughout this statement, and consistent with prior years, a number of alternative performance measures ('APMs') are used to describe the Group's performance. APMs are not recognised under UK-adopted international accounting standards. Whilst the Board uses APMs to manage and assess the performance of the Group, and believes they are representative of ongoing trading, facilitate meaningful year on year comparisons, and hence provide useful information to stakeholders, it is cognisant that they do have limitations and should not be regarded as a complete picture of the Group's financial performance. APMs, which include adjusted operating profit, adjusted profit before taxation, adjusted EBITDA, adjusted EPS, adjusted EPS excluding super-deduction and adjusted net debt are defined within note 1 (Basis of Preparation) and are reconciled to statutory reporting measures in notes 2, 5, 8 and 18.

PERFORMANCE

Organic revenue growth was strong at 20.6% compared to 2022, which was still impacted by COVID-19. Workwear remained stable and, encouragingly, some positive signs on new sales have started to materialise. Within Hotel, Restaurant and Catering ('HORECA'), volumes have continued to increase and follow more predictable patterns which allows for improving efficiency.

Cost pressures remain, particularly in relation to energy and, to a lesser extent, labour. Energy continued to be a significantly higher cost than has been experienced historically and we have proactively fixed prices for the coming months to obtain and manage some degree of certainty over cost of supply.

Adjusted operating profit margin was 8.8%, reflecting energy costs at 10.3% of revenue and labour at 45.1% of revenue. Had energy and labour, two significant drivers of cost increase, been at the same percentage of revenue as for 2019, adjusted operating profit margin would have been 14.5% (June 2019: 13.5%). As we continue to improve the recovery of these costs, through increasing volumes, efficiencies and price increases, the Board remains of the opinion that the operating margin of each individual Division can return to the historic levels achieved in 2019.

Overall, we are encouraged with the Group's performance as we plan to further expand capacity in each of our businesses.

ACQUISITION OF CELTIC LINEN

As announced on 1 September 2023, we recently completed the purchase of Celtic Linen for a consideration of €31.5 million (£27.1 million) on a debt free, cash free, basis. This leading supplier of textile rental services to the Healthcare and HORECA sectors in the Republic of Ireland represents a significant step in our strategy to expand the range and scale of services we offer and complements our existing Lilliput business in Northern Ireland.

FINANCIAL REVIEW

Financial Results

Revenue in the period increased by 22.0% to £215.0 million (June 2022: £176.2 million). Adjusted EBITDA was £57.7 million (June 2022: £42.8 million) giving an improved margin of 26.8% (June 2022: 24.3%). Adjusted operating profit increased by 48.4% to £19.0 million (June 2022: £12.8 million).

The exceptional charge of £0.3 million (June 2022: £0.5 million) relates to costs in relation to business acquisition activity.

Total finance costs were £2.6 million (June 2022: £1.6 million) reflecting higher interest rates and borrowing over the period.

Adjusted profit before taxation increased by 46.4% to £16.4 million (June 2022: £11.2 million). Statutory profit before taxation, after amortisation of intangible assets (excluding software amortisation) of £2.6 million (June 2022: £4.2 million), goodwill impairment of £nil (June 2022: £1.4 million) and an exceptional charge of £0.3 million (June 2022: £0.5 million) was £13.5 million (June 2022: £5.1 million).

The tax rate on the adjusted profit before taxation, excluding exceptional items, amortisation of intangible assets (excluding software amortisation) and goodwill impairment, was 25.1% (June 2022: 9.7%). The rate is above the headline corporation tax rate for the full year of 23.5%, due to the effect of expenses not deductible for taxation and short-term timing differences, and ahead of the rate in 2022, which was significantly impacted by the capital allowance super-deduction. The super-deduction allowance, which ended in March 2023, has little impact on the 2023 tax rate.

Adjusted diluted earnings per share was 2.9 pence (June 2022: 2.3 pence). Excluding the impact of the capital allowances super-deduction, the adjusted diluted earnings per share in the period to 30 June 2022 was 1.7 pence.

Dividend

An interim dividend of 0.9 pence per share (June 2022: 0.8 pence per share) will be paid on 3 November 2023 to those Shareholders on the register of members on 6 October 2023. The ex-dividend date is 5 October 2023. The increased dividend is in line with our progressive dividend policy and it remains the Board's current intention to reduce dividend cover from our historical level of cover of 3 times in 2022 to 2.5 times by financial year 2024.

Cash Flow and Net Debt

Free cash flow (calculated as net cash generated from operating activities, less net spend on textile rental items, less the capital element of leases) in the first half of the year was £17.9 million compared to £8.5 million in the first half of 2022. This is largely reflective of the continuing improvement in trading performance.

Total net debt (excluding IFRS 16 liabilities) at 30 June 2023 was £40.5 million (December 2022: £13.7 million). The increase is largely attributed to the share buyback and significant capital investment in the business together with the cost of the acquisition of Regency in February 2023. After including the impact of IFRS 16, net debt at June 2023 was £83.7 million (December 2022: £48.0 million).

Bank Facility

In May 2023, the Group extended the tenure of its existing £85.0 million revolving credit facility by 12 months such that it now expires in August 2026. The Group has also received approval from its banks to increase the facility to £120.0 million and it is our intention to do this in the coming months. The enlarged facility will ensure that we have access to capital to fund our existing investment plans and other opportunities that may arise.

In addition to the above, the terms of the facility provide for an option to extend the tenure for a further year and an option to increase the facility by up to a further £15.0 million, both subject to bank consent.

The current margin on the facility is 1.45% over SONIA or the relevant EURIBOR rate, as applicable. Covenants remain unchanged and comprise a leverage covenant (total debt to EBITDA) of less than three times and interest cover of not less than four times. At 30 June 2023, the leverage ratio was 0.7 times. On a pro-forma basis, to include the approximate impact of Celtic Linen had it been acquired on that date, the leverage ratio would have been 0.9 times.

Capital Structure and Share Buyback Programme

Our Capital Allocation policy remains unchanged. The Group's objective is to employ a disciplined approach to investment, returns and capital efficiency to deliver sustainable compounding growth whilst also maintaining a strong balance sheet. We continue to see exciting opportunities to deploy capital organically and have a good M&A pipeline. Over the last 12 months we have completed an initial share buyback programme returning £25.3 million to Shareholders, announced the commitment to the opening of a new plant in Crawley and commenced significant capital investment in several of our plants. The acquisition of Regency in February 2023 and Celtic Linen in August 2023 has further utilised available capital. Even after taking into consideration these investments and the payment of dividends, the Group has significant headroom under its committed facilities and target leverage of 1-1.5 times.

As a result, the Board announces that, later this month, it intends to launch a second share buyback programme of the Company's ordinary shares for up to a maximum aggregate consideration of £10.0 million, excluding expenses, during the period up until and including 1 March 2024. A further announcement will be made in due course.

Defined Benefit Pension Scheme ('the Scheme')

The recorded net deficit after tax for the Scheme, calculated in accordance with IAS 19, was £5.3 million at June 2023 compared to a net deficit of £7.1 million at December 2022. The improvement in the position is due, in part, to a higher discount rate assumed on liabilities and higher assumed inflation. We continue to have a significant portion of scheme assets invested so as to hedge against movements in liabilities, thereby reducing overall scheme volatility.

The triennial valuation of the defined benefit pension scheme as at 30 September 2022 is in progress with an initial indication that the Scheme was showing a small surplus on the Technical Provisions basis. We remain in discussion with the Trustee regarding the future deficit contributions to the Scheme and the potential for working towards a buy out of the Scheme in the medium term.

OPERATIONAL REVIEW

Our Businesses

The Group comprises of Textile Rental businesses which trade through a number of very well recognised brands, servicing the UK's Workwear and Hotel, Restaurant and Catering ('HORECA') sectors. The 'Johnsons Workwear' brand predominantly provides workwear rental, protective wear and laundry services to corporates across all industry sectors. Within HORECA, 'Stalbridge' and 'London Linen' provide premium linen services to the restaurant, hospitality and corporate events market, Johnsons Hotel Linen, our high volume linen business primarily serves the corporate four star and budget hotel market and Regency serves the luxury / bespoke segment of the HORECA sector. Also within HORECA, our Northern Ireland business, Lilliput, predominantly services hotels and restaurants as well as a number of healthcare customers. Since the period end we have acquired Celtic Linen which serves both the Healthcare and HORECA sectors in the Republic of Ireland.

Energy

Energy costs (comprising gas, electricity and diesel) have remained volatile over the period and, although energy unit prices have gradually fallen, still remain at higher levels than historically. Costs for the first half of 2023 represented 10.3% of revenue and were significantly higher than the equivalent period in both 2022 and 2019 (June 2022: 9.3%; June 2019: 6.5%).

Our policy in the UK has always been to fix gas and electricity prices on a rolling basis, building a position so that the upcoming months are largely fixed. This provides certainty but also means that costs do not immediately reflect falls, or increases, in spot prices. We currently have, on average, some 92% of our anticipated electricity usage and some 86% of our anticipated gas usage fixed for the remainder of 2023. Looking ahead, approximately 80% of our anticipated electricity requirement is fixed for the first half of next year with around 48% for the remainder of 2024. Similarly, we have fixed pricing in place for some 63% of our anticipated gas requirement in the first half of 2024 and some 38% for the remainder of 2024. In addition, we have hedged 95% of our anticipated diesel requirement for the second half of 2023. We have also started to build positions in gas and electricity into 2025 and 2026 and will continue to follow our current policy as we go forward.

Notwithstanding the fixed pricing arrangements we have already put in place, we continue to expect that energy costs for the full year, as a percentage of revenue, will remain at a similar level to the first half as fixed pricing benefits enjoyed in 2022 roll off and average pricing remains elevated.

Labour

In the six months to 30 June 2023, labour as a percentage of revenue reduced to 45.1%, compared to 47.5% in the six months to 30 June 2022, although this was still higher than the 43.2% in the six months to 30 June 2019. We are, however, encouraged by the improving efficiency as volumes continue to return and, accordingly, expect labour, as a percentage of revenue, to reduce even further by the end of the year.

Workwear Division

Total revenue for the Workwear division was £71.1 million (June 2022: £66.0 million), an increase of 7.7%. Organic growth was 7.5%. Adjusted EBITDA was £24.4 million (June 2022: £22.2 million) giving a margin of 34.3% (June 2022: 33.6%). Adjusted operating profit was £11.1 million (June 2022: £10.0 million).

Our pricing structure, which supports our high levels of customer service, has been maintained during contract renewal negotiations with customers. On occasion, this has naturally led to some shrinkage in our customer base. In addition, the economic climate continues to provide challenges with some customers reducing their spend alongside an increase in terminations in the first half of the year, in particular with a number of smaller customers ceasing to use a rental service at all. Overall, retention was 92.3% (December 2022: 94.3%). Positively, our sales team and support centre has seen an increase in activity in recent weeks, with more encouraging news on new sales, whilst our dedicated service teams remain focused on renewing customer contracts and adding additional services. Our National Accounts team is also successfully installing additional sites from both new and existing group customers. In the period to June 2023, 26% of new sales have been generated from new to rental customers.

Our commitment to providing exceptional customer service remains steadfast and we continue to achieve strong independent customer satisfaction results at 82.4% for new business and 82.9% for existing customers. These scores confirm our position as the market sector leader in providing a first-class service. To further improve our service we have invested in customer service training programmes to equip our colleagues with additional skills and knowledge to enable them to deliver an even greater customer service and to continue to promote a customer centric culture towards customer satisfaction.

By identifying emerging trends and collaborating with key customers, we have developed and launched a range of innovative garments for specific sectors that combine functionality with sustainability. Further garment ranges are under development and will be launched in the coming months. A key factor in developing the range was the ability to recycle and repurpose the garments, which aligns with our vision of creating a greener future.

Our continuous improvement programmes regularly evaluate our operational efficiencies, processes, systems and supply chain to streamline our operational costs. Our investment programme of replacing existing equipment with more advanced technological and energy efficient capabilities, has seen the installation of new washer extractors, tunnel finishers and garment folders across several sites. The installation of the automated sortation systems in Perth and Hull is progressing in line with expectations. A major refurbishment of our Manchester site is planned for early 2024 with a capital investment of £4.0 million. This will significantly improve operational efficiency and processing capacity. We are also continuing to update our commercial fleet, with over 40 new vehicles expected in 2023.

The responses to the employee engagement survey at the start of the year have provided us with an invaluable insight into the areas where we are excelling and support the introduction of further initiatives around reward and recognition programs, which are scheduled to be launched into the business over the coming months.

The recruitment and retention of employees remains challenging in some areas, particularly in administrative and supporting roles. The importance of personal growth and development for all colleagues is vital and in recognition of these, new training programmes have been successfully implemented to enhance core skills and to provide a supportive environment with pathways for career advancement and succession planning.

HORECA Division

Total revenue for the HORECA division increased significantly to £143.9 million from £110.2 million in 2022, which was still impacted by COVID-19. Organic growth was 28.4% reflecting both improved price per piece and increasing volume. Adjusted EBITDA was £36.3 million (June 2022: £23.3 million) giving an improved margin of 25.2% (June 2022: 21.1%). Adjusted operating profit was £10.9 million (June 2022: £5.5 million).

Volumes have been stronger and more predictable in the first six months of the year due to no impact from COVID-19, the large number of new customer contracts and organic growth within existing customers. 

Our primary focus is to continue to deliver on time and in full to our customer base, with employee recruitment and retention being a key component in achieving this. Engagement initiatives have resulted in a more stable workforce with flexible working patterns and the introduction of additional employee learning and development opportunities aiding recruitment.

The successful working partnership with His Majesty's Prison Service continues at some of our Hotel Linen sites, providing employment for prisoners qualifying for Release on Temporary Licence. We are proud to have received Platinum Partner status for our support of this very important initiative. 

Hotel, Restaurant and Catering, which includes Stalbridge and London Linen, has continued to invest in several of its locations to create extra space and capacity to support the returning volumes and continuing growth of the business. In Shaftesbury and Grantham we have extended the floorspace and the installation of additional ironers in Grantham and Glasgow will enable us to accommodate greater throughput. The same technology that is successfully recycling 75% of water at our Shaftesbury site is currently being installed at our site in Cornwall and we expect this new equipment to be fully operational in the final quarter of this year.  We are also evaluating opportunities to install the technology across other sites.

Our new location in Crawley, Sussex, which is due to be operational in the second half 2024, will allow for accelerated growth and greater access to the London and South-East markets. Included in the development will be the latest state-of-the-art energy efficient machinery and water recycling processes which will help in our carbon reduction journey. Of the estimated £16.0 million total capital investment, we anticipate some £8.0 million will be incurred this year, with £0.2 million having been spent in the first half of the year. Operating costs of £0.3 million were incurred in the first half with a further £0.6 million expected in the second half.

Our very active sales team are delivering great results and presently the sales pipeline is very strong in most geographical locations. We have continued to achieve commercially improved terms with independent and group customers and are signing renewal agreements with many of the latter.

Regency, which serves the luxury / bespoke segment of the HORECA sector, joined the Group in February 2023 and continues to operate under the same brand. The business is now enjoying the advantages of being part of the Johnsons family. Since acquisition, there have been some key wins with almost 350 new rooms added, an increase of some 8%. Over £1.4 million of capital investment has been approved to strengthen the resilience of the two operational units, to further improve efficiencies and quality and to increase capacity of the site by over 30%. We expect this investment to be completed by mid-2024.

Within Hotel Linen, a net 6,000 rooms were installed in the first half of the year such that, at 30 June 2023, it serviced over 206,000 rooms.

In terms of capital investment, we await the delivery of innovative robotic machinery in the third quarter for two of our sites, have replaced a number of pieces of equipment across the estate and continue to upgrade employee welfare facilities such as café style canteens and outside seating areas. The new dynamic production data capture trial at Bourne has been successful and will be rolled out across all other sites in due course, with Cardiff being the next site for installation.

Lead times for delivery of new vehicles have improved, with around 60 vehicles expected to be delivered by the end of 2023. A new HGV tractor unit and double decker trailer will join the fleet this year and another trailer is planned for next year to improve transport reliability and efficiency.

The roll out of our on-line customer portal has continued with excellent feedback from our customer base and achieving our objective of "being easy to do business with". The Linen Room has been developed further to provide more online information to our customers, with customised platforms for large hotel groups, and will be rolled out during the second half of the year. 

The National Accounts team continue to develop strong relationships with our hotel groups and, again, most have been accepting of cost pressures facing the industry during price increase discussions. Successfully building strong relationships and strategic partnerships has been reflected in significant growth with both existing and new customers.

The availability of timely data is key to developing a quality service. The support from our IT department has continued with sourcing of innovative software to support our business functions including business process mapping, production data capture, Linen Room development, use of Power BI and Customer Visit App reporting. The teamwork shown by all departments in contributing towards a collaborative and proactive culture is the key to future growth.

EMPLOYEES

Our employees are the foundation of our business. The Board would like to thank them for their support, hard work and significant contribution to the success of the business over the last six months. The teamwork, dedication and determination demonstrated in order to deliver a professional and on time service to our customers is a credit to each and every one of them. The Board also welcomes the employees of Regency Laundry and Celtic Linen into the Johnsons family.

SUSTAINABILITY

We continue to make excellent progress with embedding our sustainability programme across the Group and are working to create a long-term road map for delivery of performance improvement in line with our stated 2030 targets.

Key highlights of the programme so far this year include:

§ We continue to explore opportunities to reduce the carbon emissions generated through our vehicle fleet. Electric vehicles are being deployed where practicable and we are also successfully using HVO (Hydrotreated Vegetable Oil), which is a fossil-free alternative to diesel resulting in up to a 90% reduction in Greenhouse Gas emissions, in a number of our vehicles.

§ We have begun a phased transition to a single waste management provider across mainland UK to enable us to more effectively manage the materials generated through our operations. We envisage that this relationship will support us in achieving our landfill reduction targets.

§ Various volunteering initiatives, support of local charities and working within our local communities have been undertaken by our employees with beach litter picking, donations to children's charities, collections for food banks and support for the homeless to name but a few.

§ We continue to formally develop our approach and strategy in respect of a 'circular economy', by sourcing core products with an increased sustainable content and identifying how we can further integrate a closed loop approach to the end-of-life management of our textiles. We are currently undertaking a number of feasibility studies and projects, some of which are providing very promising results, with the intention that our end-of-life textiles go back into the product cycle, either by being reused, repurposed or recycled.

§ We have begun active engagement with our value chain around sustainability related topics, beginning with communicating our new Guiding Principles to key customers and suppliers.

§ We have seen an improvement in our external Sustainability ratings including our submissions to the CDP Climate Change and Water Security questionnaires both being awarded a "C" rating and our Sustainalytics rating moving to "Low Risk" and a score of 18.

§ We have made further progress on calculations for our Scope 3 Emissions and anticipate reporting these more fully in our 2023 Annual Report.

BOARD CHANGES

As announced on 14 July 2023, Kirsty Homer joined the Board on 1 August 2023 as an additional Non-Executive Director.

OUTLOOK

The Board is pleased with the progress made by the Group in the first half of the year and with the results reported today.

During the first six months, we have added the Regency business to our portfolio to better serve the luxury/bespoke segment of the HORECA sector and have committed to a £16.0 million investment in a new site in Crawley, Sussex, which will allow for accelerated growth and greater access to the London and South-East markets for our HORECA business.

Our recent investment in a leading linen business in the Republic of Ireland, which itself is a growing market, represents a significant step in our strategy to expand the range and scale of services we offer. The acquisition is expected to be immediately earnings enhancing and, in addition to collaboratively sharing best practice across the enlarged organisation, allows us to explore operational synergies with our Northern Ireland based business, Lilliput.

We continue to believe that investing in our estate will give us an advantage in the market in delivering unrivalled service to our customers in the most efficient way.

Whilst the challenges of cost pressures continue to persist, they are being proactively managed. The Board remains of the opinion that the operating margin of each individual Division can return to the historic levels achieved in 2019 however, the timing of achieving this is dependent on where a number of inflationary pressures, most notably energy and labour, settle over the medium term.

The Board was pleased to indicate an outlook for the year ahead of market expectations when the Group released its pre-close trading update in mid-July. Recognising the volumes processed over the busy summer months, improving efficiencies and a somewhat more predictable outlook on the cost base, together with our assumption that the trading environment remains unchanged, we expect the full year outturn to be slightly ahead of the guidance provided in our July trading update. This improved outlook is in addition to the positive contribution expected from Celtic Linen.

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 condensed consolidated interim financial statements are the responsibility of, and have been approved by, the Directors.

The Directors confirm that to the best of their knowledge:

§ the condensed consolidated interim financial statements have been prepared in accordance with IAS 34, 'Interim Financial Reporting' as adopted by the United Kingdom;

§ 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 of the financial year and a description of the 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 2022 and, other than for the appointment of Kirsty Homer on 1 August 2023, remain unchanged. Details of the Directors are available on the Johnson Service Group PLC website: www.jsg.com

By order of the Board

Peter Egan Yvonne Monaghan

Chief Executive Officer Chief Financial Officer

5 September 2023 5 September 2023

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

See note 8 for Adjusted basic earnings per share and Adjusted diluted earnings per share.

Consolidated Statement of Comprehensive Income

The notes on pages 17 to 32 form an integral part of these condensed consolidated interim financial statements.

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 contributed by the Group, to meet commitments to employee share schemes. As at 30 June 2023, the EBT held 9,024 shares (June 2022: 9,024 shares; December 2022: 9,024 shares).

Consolidated Balance Sheet

* Restated to reflect the inclusion of a £4.4 million provision in respect of third-party claims made against the Group, offset by an equal and opposite corresponding reimbursement asset. Further details are set out within note 1.

The notes on pages 17 to 32 form an integral part of these condensed consolidated interim financial statements. The condensed consolidated interim financial statements on pages 13 to 32 were approved by the Board of Directors on 5 September 2023 and signed on its behalf by:

Yvonne Monaghan

Chief Financial Officer

Consolidated Statement of Cash Flows

The notes on pages 17 to 32 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 5 September 2023.

1 BASIS OF PREPARATION

Overview

These condensed consolidated interim financial statements of the Group are for the half year ended 30 June 2023. 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 United Kingdom.

The condensed consolidated interim financial statements have not been reviewed or 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 2022 Annual Report and Accounts, which was prepared in accordance with UK-adopted international accounting standards.

Financial information for the year ended 31 December 2022 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 below, financial information for the half year ended 30 June 2022 included herein is derived from the condensed consolidated interim financial statements for that period.

Accounting Policies, Presentation and Computation

The condensed consolidated interim financial statements have been prepared applying the accounting policies, presentation and methods of computation applied by the Group in the preparation of the published consolidated financial statements for the year ended 31 December 2022.

(a) Taxation

Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual earnings before exceptional items. Taxation on exceptional items is accrued as the exceptional items are recognised. Prior year adjustments in respect of taxation are recognised when it becomes probable that such adjustment is needed.

(b) Seasonality of operations

Seasonality or cyclicality could affect all of the businesses to varying extents however, the Directors do not consider such seasonality or cyclicality to be significant in the context of the condensed consolidated interim financial statements.

(c) Critical accounting estimates and assumptions

The preparation of the condensed consolidated interim financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

Prior Year Adjustment

The Balance Sheet as at 30 June 2022 has been restated to reflect the inclusion of a £4.4 million provision in respect of third-party claims made against the Group, but which are indemnified under the terms of its insurance policies. A corresponding reimbursement asset of £4.4 million has also been recognised as at the same date. As the Group expects, on average, insurance claims to be settled within one year, which is driven by a review of the historic claims data, recognition of these balances is made within current assets and current liabilities.

Going Concern

Background and Summary

After careful assessment, the Directors have adopted the going concern basis in preparing these condensed consolidated interim financial statements. The process and key judgments in coming to this conclusion are set out below.

The Group's business activities, together with details of the financial position of the Group, its cash flows, liquidity position and borrowing facilities, are described in the Financial and Operating Review.

Going Concern Assessment

Cash Flows, Covenants and Stress Testing

For the purposes of the going concern assessment, the Directors have prepared monthly cash flow projections for the period to 31 December 2024 (the assessment period). The Directors consider 18 months to be a reasonable period for the going concern assessment as it enables them to consider the potential impact of macroeconomic and geopolitical factors over an extended period. The cash flow projections show that the Group has significant headroom against its committed facilities and can meet its financial covenant obligations.

The Group has also performed a reverse stress test against the base monthly cash flow projections referred to above in order to determine the performance level that would result in a reduction in headroom against its committed facilities to nil or a breach of its covenants. The interest cover covenant would be breached in the event that adjusted operating profit reduced to approximately 70% of 2022 levels. The Directors do not consider this scenario to be likely.

As a further stress test, the Group considered the impact of increasing interest rates. The Directors do not consider the magnitude of the increase in interest rates that would be required in order for a covenant to be breached to be plausible.

1 BASIS OF PREPARATION (continued)

Each of the stress tests assume no mitigating actions are taken. Mitigating actions available to the Group, should they be required, include reductions in discretionary capital expenditure and ceasing dividend payments.

Liquidity

The Group has access to a committed Revolving Credit Facility of £85.0 million (the 'Facility') which matures in August 2026. The terms of the Facility provide an option to extend the term for a further year and an option to increase the Facility by up to a further £50.0 million, both with bank consent. The Facility is considerably in excess of our anticipated borrowings and provides ample liquidity for current commitments.

Going Concern Statement

After considering the monthly cash flow projections, the stress tests and the facilities available to the Group, the Directors have a reasonable expectation that the Group has adequate resources for its operational needs, will remain in compliance with the financial covenants set out in the bank facility agreement and will continue in operation for at least the period to 31 December 2024. Accordingly, and having reassessed the principal risks and uncertainties, the Directors considered it appropriate to adopt the going concern basis in preparing the condensed consolidated interim financial statements.

Alternative Performance Measures (APMs)

Overview of APMs

Throughout this Interim Statement, and consistent with prior years, we refer to a number of APMs. APMs are used by the Group to provide further clarity and transparency of the Group's financial performance. The APMs are used internally by management to monitor business performance, budgeting and forecasting, and for determining Directors' remuneration and that of other management throughout the business. The APMs, which are not recognised under UK-adopted international accounting standards, are:

§  'adjusted operating profit', which refers to continuing operating profit/(loss) before amortisation of intangible assets (excluding software amortisation), goodwill impairment and exceptional items;

§  'adjusted profit before taxation', which refers to adjusted operating profit less finance cost;

§  'adjusted EBITDA', which refers to adjusted operating profit plus the depreciation charge for property, plant and equipment, textile rental items and right of use assets plus software amortisation;

§  'adjusted EPS', which refers to EPS calculated based on adjusted profit after taxation;

§  'adjusted EPS excluding super-deduction', an additional measure introduced for 2021 and 2022 only which amends the 'adjusted EPS' to exclude the short-term benefit of the capital allowance super-deduction; and

§  'adjusted net debt', which refers to net debt excluding IFRS 16 lease liabilities.

The Board considers that the above APMs, all of which exclude the effects of non-recurring items or non-operating events, provide useful information for stakeholders on the underlying trends and performance of the Group and facilitate meaningful year on year comparisons.

Limitations of APMs

The Board is cognisant that APMs do have limitations and should not be regarded as a complete picture of the Group's financial performance. Limitations of APMs may include, inter alia:

§  similarly named measures may not be comparable across companies;

§  profit-related APMs may exclude significant, sometimes recurring, business transactions (e.g. restructuring charges and acquisition-related costs) that impact financial performance and cash flows; and

§  adjusted operating profit, adjusted profit before taxation, adjusted EBITDA, adjusted EPS and adjusted EPS excluding super-deduction all exclude the amortisation of intangibles acquired in business combinations, but do not similarly exclude the related revenue.

Reconciliation of APMs to Statutory Performance Measures

Reconciliations between the above APMs and statutory performance measures are reconciled within this Interim Statement as follows:

§  Adjusted operating profit - note 2

§  Adjusted profit before taxation - note 5

§  Adjusted EBITDA - note 5

§  Adjusted EPS - note 8

§  Adjusted net debt - note 18

2 SEGMENT ANALYSIS

The chief operating decision-maker (CODM) has been identified as the Executive Directors. The CODM reviews the Group's internal reporting in order to assess performance and allocate resources. The CODM determines the operating segments based on these reports and on the internal reporting structure. 

For reporting purposes, the CODM considered the aggregation criteria set out within IFRS 8, 'Operating Segments', which allows for two or more operating segments to be combined as a single reporting segment if:

1) aggregation provides financial statement users with information that allows them to evaluate the business and the environment in which it operates; and

2) they have similar economic characteristics (for example, where similar long-term average gross margins would be expected) and are similar in each of the following respects:

§  the nature of the products and services;

§  the nature of the production processes;

§  the type or class of customer for their products and services;

§  the methods used to distribute their products or provide their services; and

§  the nature of the regulatory environment (i.e. banking, insurance or public utilities), if applicable.

The CODM deems it appropriate to present two reporting segments (in addition to 'Discontinued Operations' and 'All Other Segments'), being:

1) Workwear: comprising of our Workwear business only; and

2) Hotel, Restaurant and Catering ('HORECA'): comprising of our Stalbridge, Hotel Linen, Lilliput and Regency businesses, each of which are a separate operating segment.

The CODM's rationale for aggregating the Stalbridge, Hotel Linen, Lilliput and Regency operating segments into a single reporting segment is set out below:

§ the gross margins of each operating segment are within a similar range, with the long-term average margin expected to further align;

§ the nature of the customers, products and production processes of each operating segment are very similar;

§ the nature of the regulatory environment is the same due to the similar nature of products, processes and customers involved; and

§ distribution is via the same method across each operating segment.

The CODM 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 CODM. 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 (the property holding company of the Group) is credited back, where appropriate, to the paying company for the purpose of segmental reporting. There have been no changes in measurement methods used compared to the prior period.

Other information provided to the CODM is measured in a manner consistent with that in the financial statements. Segment assets exclude post-employment benefit assets, derivative financial 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 bank borrowings, post-employment benefit obligations, derivative financial liabilities, current income tax liabilities and deferred income tax 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 2023, together with comparative figures, are as follows:

2 SEGMENT ANALYSIS (continued)

2 SEGMENT ANALYSIS (continued)