Johnson Service Regulatory News (JSG)

2 September 2020

AIM: JSG

Johnson Service Group PLC

('JSG' or 'the Group')

Interim Results for the Six Months ended 30 June 2020

"Encouraging start to the year before COVID-19 impact.

Strong Balance Sheet, confident of long-term growth."

Impact and management of business through COVID-19 crisis

- Workwear continued to operate throughout lockdown with 12% reduction in volume in April, steadily improving to 6% in August. Customer retention levels were 93.8% at the end of July.

- Mothballing of the majority of HORECA plants throughout the lockdown period.

- Coronavirus Job Retention Scheme (CJRS) utilised to enable continued employment of furloughed employees.

- Strengthened balance sheet and liquidity with bank facilities increased to £175 million, temporary alternative financing arranged through Covid Corporate Financing Facility (CCFF) and £82.7 million equity placing in June 2020.

- Phased re-opening of HORECA plants as volumes began to increase to 25% of typical levels in July and climbing to 45% in August.

Financial Performance

- Total revenue of £114.8 million (June 2019: £167.1 million).

- Organic revenue down 34.7% (2 months to February 2020 up 5.6%).

- Adjusted EBITDA1 of £24.9 million (June 2019: £55.2 million) with Adjusted EBITDA1 margin of 21.7% (June 2019: 33.0%).

- Adjusted loss before tax2 of £12.6 million (June 2019: Adjusted profit before tax £20.1 million).

- Loss before tax of £18.6 million (June 2019: Profit before tax £15.2 million).

- Net debt pre IFRS16 at June 2020 £0.2 million (December 2019: £87.7 million).

- Net debt at June 2020 £39.5 million (December 2019: £127.7 million).

- No interim dividend declared.

Notes

1 Adjusted EBITDA refers to operating (loss)/profit excluding amortisation of intangible assets (excluding software amortisation) and exceptional items (defined as "Adjusted Operating (Loss)/Profit") plus the depreciation charge for property, plant and equipment, textile rental items and right of use assets plus software amortisation.

2 Adjusted Loss before tax or Adjusted PBT refers to Adjusted Operating (Loss)/Profit less total finance costs.

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

"Our performance during the period reflects the challenging market conditions inflicted on the business by COVID-19 following a strong start to the year. The management team have been highly active in addressing the impact, by taking decisive action to ensure the long-term preservation of the business, shoring up the Group's finances and mothballing sites to ensure that JSG is well placed to react quickly as end markets continue to recover.

Our new Leeds high volume linen plant is scheduled to open in October and we have identified a new Workwear site to replace the Exeter plant destroyed by fire in January 2020, which should open mid-2021. Both of these investments demonstrate our long-term commitment to investing for future growth.

It remains very difficult to predict with any accuracy the timing of a recovery to pre-COVID levels. However, with our strong balance sheet, established market position and reputation for quality service, we remain confident in the Group's medium-term growth prospects as the economy and markets that we serve recover."

SELL-SIDE ANALYST MEETING

A virtual presentation for sell-side analysts will be held today at 9.30am, 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

Note: Throughout this statement 'adjusted operating loss/profit' refers to continuing operating loss/profit before amortisation of intangible assets (excluding software amortisation) and exceptional items. 'Adjusted loss/profit before taxation' refers to adjusted operating loss/profit less total finance cost. 'Adjusted EBITDA' refers to adjusted operating loss/profit plus the depreciation charge for property, plant and equipment, textile rental items and right of use assets plus software amortisation. 'Adjusted EPS' refers to earnings per share calculated based on adjusted loss/profit after taxation. The Board considers that 'adjusted operating loss/profit', 'adjusted loss/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.

OPERATIONAL AND FINANCIAL REVIEW

Following very strong performances over recent years the Group had an encouraging start to 2020 with well laid plans to increase processing capacity in both Workwear and HORECA.

The impact of COVID-19, particularly on our HORECA business, has delayed many of those growth investment plans with our focus being on protecting the business, safeguarding our employees and customers and strengthening our finances in readiness for a return to more normal trading conditions.

Actions Taken During Lockdown

Positive momentum into the first months of the year was brought to a halt from mid-March as the impact of COVID-19 began to affect our customers. On 20 March we announced that we were starting to see a significant reduction in HORECA processing volumes with more limited impact on Workwear. In May we updated the market that HORECA revenue had fallen by some 97% in April whilst Workwear was down 12%.

We confirmed that we had mothballed the vast majority of our 18 HORECA sites, furloughed a significant proportion of our employees from the end of March, most notably within the HORECA division, and implemented temporary salary reductions for the Board, Senior Management and a number of administrative roles.

Our initial focus, once sites were mothballed, was the preservation of cash resources and a plan to reduce non-essential capital and revenue spend was implemented.

An increased bank facility of £175 million and revised bank covenants were agreed in May 2020 and eligibility to access the CCFF was also confirmed to provide an alternative source of funding. An equity placing for £82.7 million (net) was completed in June 2020.

Financial Performance

Our results for the first half of 2020 reflect the mothballing of a significant number of our HORECA sites for 3 months of the reporting period. Revenue was £114.8 million, down from £167.1 million in 2019. Adjusted EBITDA was £24.9 million (June 2019: £55.2 million) giving a margin of 21.7% (June 2019: 33.0%).

Total finance costs increased to £3.1 million (June 2019: £2.5 million) largely due to the accelerated recognition of non-qualifying hedging costs of £0.6 million.

Exceptional costs were £0.5 million and relate to the write off of plant, machinery and textile items following the fire at our Exeter workwear plant in January 2020. The increased cost of working for Exeter under the temporary arrangements is covered by Business Interruption insurance. There may be further exceptional items relating to the Exeter fire and the flood at the Treforest Workwear plant in February 2020 in the second half of the year as we reach a financial settlement with the insurer.

Adjusted loss before tax was £12.6 million (June 2019: £20.1 million profit).

Statutory loss before tax, after amortisation of intangibles (excluding software amortisation) of £5.5 million (June 2019: £4.9 million) was £18.6 million (June 2019: £15.2 million profit before tax).

Adjusted loss per share was 2.8 pence (June 2019: adjusted earnings per share 4.4 pence).

A number of factors have affected the reported results for the period to June 2020:

- The Group continues to draw on support from the CJRS and this amounted to £16.6 million in the first half, of which £1.8 million was in respect of the Workwear division and £14.8 million was in respect of the HORECA division. £9.7 million was received in cash during the period. Our current plans indicate that we will continue to draw on this support, but to a lesser extent, as we gradually return furloughed workers.

- The Board and Senior Management team accepted a temporary salary reduction of 20% from 1 April 2020 and certain other employees in support and administration roles, who have not been furloughed, accepted a temporary salary reduction of 10%. This total cost saving amounted to £0.3 million in the first half.

- Some 300 commercial vehicles not being utilised during lockdown were temporarily taken off the road to save costs.

- Recognition of a partial discontinuation of hedge accounting in respect of diesel hedging to reflect the lower diesel usage for 2020 of £0.6 million.

- Cash flow has benefited from the deferral of VAT (£10.2 million deferral to March 2021).

- Recognition of £0.6 million in respect of interest rate hedges no longer qualifying as effective hedges.

Dividend

The final 2019 dividend was withdrawn saving approximately £8.7 million. Due to the current situation it is not proposed to declare a dividend in respect of the first half of 2020. The Board is aware of the importance of dividends to Shareholders and will reinstate dividend payments as soon as practicable although, as stated at the time of the Placing, the Board anticipates that there will be no dividend in respect of 2020.

Finances

As announced on 29 May 2020 the Group increased its RCF from its incumbent banks to £175 million and amended its bank covenants up to and including the test date on 31 December 2021. The Group also has access to Government funding under the CCFF of up to £150 million, although none is currently drawn.

Bank covenants, tested quarterly, include a maximum level of net debt of £155 million from September 2020 to September 2021, decreasing to £145 million at December 2021. A minimum EBITDA test also applies from the quarter ended December 2020 to December 2021 which is significantly below our current scenario planning and where EBITDA is defined as Adjusted EBITDA less right of use asset depreciation.

On 29 May 2020 JSG announced it had raised gross proceeds of £85.0 million through the issue of 73.9 million new Ordinary shares at a placing price of 115 pence per share.

Consequently, total net debt (excluding IFRS 16) at 30 June 2020 was £0.2 million (December 2019: £87.7 million) reflecting the net placing proceeds received of £82.7 million. After including the impact of IFRS 16, net debt at June 2020 was £39.5 million (December 2019: £127.7 million).

Free cash flow in the first half was £38.6 million after capital lease payments compared to £50.8 million in the first half of 2019.

Post-Employment Benefits

The recorded net surplus after tax for all post-employment benefit obligations, calculated in accordance with IAS 19, was £1.1 million at June 2020, from a deficit of £6.1 million at December 2019. The improvement in the position is due, in part, to a higher return on scheme assets partially offset by a reduction in the discount rate assumed on liabilities. 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 2019 was completed during the period. We are tracking ahead of the recovery plan put in place at the previous valuation and we have therefore agreed with the Trustee to continue with the existing deficit recovery payments of £1.9 million per annum until the next review in three years' time.

BUSINESS REVIEW

Our Businesses

The Group comprises Textile Rental businesses which trade through a number of very well recognised brands servicing the UK's Workwear and Hotel Restaurant and Catering ('HORECA') market sectors. The 'Johnsons Workwear' brand predominantly provides workwear rental, protective wear and laundry services to corporates across all industry sectors, 'Stalbridge', 'London Linen' and 'South West Laundry' provide premium linen services to the restaurant, hospitality and corporate events market and Johnsons Hotel Linen, our high volume linen business, comprises of Johnsons Hotel Linen by 'Afonwen', by 'PLS' and by 'Fresh', on a regional basis.

Changes have been made to ensure continuity of operations and to manage the health, safety and welfare of our employees, the majority of which were instigated prior to Government guidance being announced. Our proactive actions have included supplies of sanitiser, anti-bacterial wipes, floor stickers and posters for social distancing, increased cleaning regimes, supply of face shields and reusable, washable face masks, temperature checks, screening in both factory and office environments, vehicle and cage disinfection, split breaks and removing items of furniture in offices and canteens to maintain social distancing. We continue to review our operations, update risk assessments and implement new processes and procedures where necessary and are reviewing further actions for winter operations. We would like to acknowledge the efforts of our employees and thank them for their support.

All employees returning from furlough undertake a reintroduction to the business to ensure that they are familiarised with the COVID-19 preventative measures and changes since they were last at work. Various initiatives are in place for sales and service personnel and new virtual tools have been provided to ensure we can effectively communicate with customers, new and existing, either digitally or in person.

We have also made significant progress in developing our new national brand and this continues to be rolled out across the businesses. This roll out will take several years to fully implement and will be at a modest cost.

Workwear Division 

Operating as Johnsons Workwear, we provide workwear rental, protective wear and laundry services to some 36,000 customers in the UK from small local businesses to the largest corporates covering food related and other industrial sectors.

Workwear revenue in the first half was £64.6 million (June 2019: £67.5 million) reflecting the impact of COVID-19 from mid-March. Adjusted EBITDA was £24.4 million (June 2019: £24.3 million) and adjusted operating profit was £11.6 million (June 2019: £12.1 million).

All of our Workwear sites remained open and continued to operate throughout the period although some 550 largely non-production employees were furloughed at the peak. Volumes have continued to improve steadily increasing from a 12% reduction in April to a 6% reduction in August. Some 91% of customers who advised they were closed during lockdown have now returned at varying levels of activity.

Whilst much of the focus of the last few months has been on ensuring the safety of our employees and customers we have continued to plan for the future and focus on customer retention and service.

Customer retention levels remain high and were 93.8% at the end of July. Despite the impact of COVID-19 our service teams have performed well and continued to organically grow business within existing customers. Our 'Existing Customer Satisfaction Survey' undertaken in the first quarter of the year maintained the high score of 86% and a second survey has been completed during August.

Whilst capital investment has largely been delayed, some investment was already underway in January and February. Orders for new vehicles were placed in early 2020, which included the first double decker unit for our Perth to Aberdeen trunking route, required due to growing volumes. Two large washing machines were added in the Perth plant and our additional industrial unit in Basingstoke is now operational.

As we reported in March, our Exeter Workwear plant was significantly damaged by fire and taken out of action. We have continued to service all customers from alternative processing locations using a temporary depot in Exeter. We continue to work closely with our insurers in relation to the insurance claim and have identified an existing new build site for fit-out. It is expected the new site will be operational in the third quarter of 2021. Our factory in Treforest was flooded by the highest level recorded of the River Taff on 16 February 2020. Once again both senior and local management swiftly assessed the damage, made the necessary arrangements to ensure that there was no adverse impact to customer service levels, as well as managing the health, safety and welfare of everyone on site. Plans are in place to refurbish and install new machinery which will be completed in the final quarter of 2020. In both instances the support and flexibility of our employees, not only at Exeter and Treforest but other plants who have assisted, has been excellent. The camaraderie, teamwork and support displayed by all in such unexpected circumstances are a true reflection of the culture we nurture within our business.

Following our Employee Engagement Survey in 2019, various initiatives were launched during the beginning of 2020. Feedback has been extremely positive and further initiatives will be rolled out during the remainder of 2020.

HORECA Division

Total revenue for the HORECA division was £50.2 million (June 2019: £99.6 million), the reduction reflecting the closure of a significant number of HORECA plants for three months of the period. Adjusted EBITDA was £2.7 million (June 2019: £33.2 million). Adjusted operating loss was £18.8 million (June 2019: £12.9 million profit) of which an operating loss of £20.2 million was incurred in the second quarter.

Our hotel, restaurant and catering business, which includes Johnsons Stalbridge, London Linen and South West Laundry, has had a very challenging first half of 2020. During January to mid-March, new sales activity was strong, customer retention good, and some major capital projects to support growth and capacity were completed or underway. A new continuous batch washer, dryers and ironing line were installed in our Milborne Port factory to replace obsolete and high maintenance machinery, and a new ironer line and towel folding equipment were installed in Shaftesbury to support capacity growth across the three Dorset factory locations. At Grantham, we expanded the footprint of the factory in order to handle the increasing growth of the business.

The impact of COVID-19 was rapid and substantial as volumes dropped to a low of 3% of normal demand in the space of 2 weeks at the end of March. Operations ceased completely in most plants, although some operations continued mainly to support the Ministry of Defence, the Ministry of Justice and similar government agency locations. We also supported some local healthcare locations with a free scrub suit processing service to support their effort in dealing with the pandemic. Approximately 1,350 employees were placed on the Government's furlough scheme at the peak, and all incidental spend was ceased immediately. Customer communication during the shutdown was maintained in order to foster our strong, long-term relationships, and we have shown great flexibility in supporting the hospitality industry in general through stock management and reduced charging for items on rental.

With restrictions in the hospitality market being lifted in early July in most geographies, volumes are beginning to recover, especially in rural and coastal holiday destination locations across the UK. Metropolitan areas are seeing a slower return to business, especially in London, where there is a current dearth of office workers and tourist numbers.

Within Johnsons Hotel Linen the continued integration of the various acquired businesses has largely now been completed with a successful migration to a single management structure and financial reporting system with the finance department consolidating into our Preston Brook offices.

The start of the year progressed favourably with new sales and revenue being slightly ahead of our expectations due to a combination of factors including positive trading and continued new business wins from current and new customers across the country. This continued up to the point of the COVID-19 outbreak and thereafter business volumes dropped dramatically to almost nothing as the United Kingdom entered lockdown. The management team took decisive action to reduce costs and take the benefit of the UK Government's furlough scheme for the majority of employees, totaling approximately 2,000, whilst a remaining team of approximately 60 individuals continued to maintain plant and equipment, undertake finance, national accounts and other on-going management activities.

Significant work was undertaken to reduce non-essential spend as well as to keep focus on cash collection.

After the half year end, hotels and restaurants in the UK exited the lockdown period in England with Wales and Scotland following a few weeks later. The opening of gyms followed at the end of July. Whilst it is too early to draw any long term conclusions, it is true to say that with increased interest in the Staycation holiday in the UK, seaside and other core regional tourist locations in the South Coast, the South West, East Anglia, the Lake District and tourism areas of Wales are recovering. The Scottish market has remained more subdued reflecting a longer period of lockdown and a greater dependency upon international tourism events. Across the UK, major city locations such as London, Birmingham, Manchester and Edinburgh remain softer, reflecting the lack of inbound international tourism and major events such as sporting fixtures and music festivals being cancelled this year.

However, trading in July and August is slightly more encouraging than initially anticipated, despite a general lack of confidence in international travel. Hotels in the core tourist areas are anecdotally reporting continued healthy bookings into September and October. We remain more cautious on the general outlook for city centres and the general lack of international travel. The widespread cancellation of events, conferences and weddings will mean that we do not expect business activity within high volume hotel linen to fully return until potentially the first half of 2022.

Construction of the new Leeds production facility remained on schedule and on budget albeit we agreed to suspend a final installation and commissioning of the equipment from June to September in light of the global pandemic. The long-term investment plan has effectively been fully completed and ready for commissioning which will commence in September before becoming fully operational in October. The site volumes will gradually ramp up as we migrate customers into the new site and reduce trunking and extended logistical costs.

We have continued to invest, despite the lockdown, in the ongoing modernisation of equipment to ensure the business is well placed to exploit market conditions going forward. In June we completed the first phase of modernisation of our most recently acquired business, Fresh Linen, with the installation of a new washer and drying capacity. Further investment is planned for September 2020 in order to complete the project and ensure long term operational resilience of the site.

TECHNICAL INNOVATION

The project for updating and improving our IT systems in parts of the HORECA division and in Workwear is ongoing. The new laundry operating system has been successfully installed in Reading and is currently being installed in our new Leeds site together with Pwllheli and Chester sites, with the other Hotel Linen sites to follow over the next six months. The design of the new Workwear system is progressing well with a test site expected to be live later this year.

EMPLOYEES

The past months have been extremely challenging for all of our employees and we would like to thank them for their flexibility and professionalism.

BREXIT

The main potential impact on the Group from Brexit and the ongoing uncertainty around the post Brexit arrangements depends on the extent to which it has a negative effect on the macroeconomic environment. We consider that the potential risks we may have to mitigate against would be a change in consumer confidence, a reduction in levels of employment or a reluctance to invest from within our customer base. We do recognise, however, that the services we provide are, in many cases, essential for our customers to continue in operation. The Group continues to review and monitor the potential impacts of Brexit as they develop but has already determined a number of potential mitigating actions that it could take if required.

OUTLOOK

Since the end of June we have continued to see a further gradual reopening of some of our Workwear customers who had temporarily closed operations and we expect that to continue, albeit we remain vigilant as to the potential impact of ongoing employment levels of Workwear customers.

HORECA revenue has benefitted from summer staycations, which have been slightly ahead of our initial expectations, but it is too early to forecast the anticipated volumes for the remainder of this year. Performance in the final quarter of the year will remain closely correlated with the wider level of economic activity.

Given this uncertainty we are constantly assessing the anticipated volumes as we move into the autumn with a view to matching our resources to processing requirements. We have entered into consultation with employees at some of our HORECA sites with a view to changing working practices to minimise potential headcount reduction.

We anticipate that there will continue to be further opportunities for consolidation of the market.

In view of the ongoing impact of COVID-19 and the resultant uncertainty around HORECA we remain unable to give guidance on the outcome for 2020 although we currently anticipate that the Adjusted EBITDA margin for the full year will be similar to that in the first half.

It remains very difficult to predict with any accuracy the timing of a recovery to pre COVID-19 levels. However, with our strong balance sheet, established market position and reputation for quality service, we remain confident in the Group's medium-term growth prospects as the economy and markets that we serve recover.

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 2019. 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

2 September 2020 2 September 2020

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

Consolidated Statement of Comprehensive Income

The notes on pages 15 to 31 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 2020, the EBT held 8,388 shares (June 2019: 12,468; December 2019: 12,468).

Consolidated Balance Sheet

The notes on pages 15 to 31 form an integral part of these condensed consolidated interim financial statements. The condensed consolidated interim financial statements on pages 11 to 31 were approved by the Board of Directors on 2 September 2020 and signed on its behalf by:

Yvonne Monaghan

Chief Financial Officer

Consolidated Statement of Cash Flows

The notes on pages 15 to 31 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 2 September 2020.

1 BASIS OF PREPARATION

These condensed consolidated interim financial statements of the Group are for the half year ended 30 June 2020. 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 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 2019 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 2019 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.

Financial information for the half year ended 30 June 2019 included herein is derived from the condensed consolidated interim financial statements for that period.

Going Concern

The Group has reacted quickly and decisively to the COVID-19 pandemic, implementing a range of prudent cost management and cash preservation actions, securing additional funding facilities, revising bank covenants and raising equity in order to protect the business from any potential adverse impact. Notwithstanding all of these actions, there continues to be uncertainty surrounding the resolution of the pandemic and the impact on the wider economy.

The current and plausible future impact of COVID-19 and the related macroeconomic environment on the Group's activities and performance has been considered by the Board in preparing its going concern assessment. The Group has prepared a number of scenarios reflecting trading performance in the first half of the year and various, more pessimistic, expectations for market developments over the remainder of 2020 and 2021 to reflect subdued trading conditions.

After considering the current financial projections, available facilities and the sensitivities, the Directors of the Company are satisfied that the Group has sufficient resources for its operational needs and will remain in compliance with the financial covenants in its bank facilities for at least the next 12 months from the date of approving 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 in preparing the condensed consolidated interim financial statements.

The process and key judgments in coming to this conclusion are set out below. The Board is required to assess going concern at each reporting period. These assessments are significantly more difficult currently given the uncertainties about the impact of COVID-19, the extent and duration of social distancing measures and the impact on the markets in which we operate. The level of judgment to be applied has therefore increased considerably. The Directors have considered three main factors in reaching their conclusions on going concern, as set out below.

1) Cash Flows and Sensitivity Analysis

In assessing going concern, the Directors considered a variety of scenarios in the context of the COVID-19 pandemic. These scenarios are not the forecasts of the Company but are designed to stress test liquidity and covenant compliance. EBITDA used within the scenarios is that used for bank covenant purposes, which is defined as adjusted operating profit before property, plant and equipment depreciation, rental stock depreciation and software amortisation. The three most relevant scenarios, in ascending order of severity, reviewed to test going concern are as follows:

Base Case Scenario

The base case scenario assumed that the HORECA market slowly began to reopen from July 2020, initially with modest levels of revenue which gradually increased during 2020 and 2021. Revenue at the start of the recovery was assumed at 25% of typical activity levels, gradually improving each month to reach 75% of typical activity by the end of 2020 with further incremental increases throughout 2021. In Workwear, it was assumed that organic revenue of (12%) in April 2020 gradually improves to (9%) in Q4 2020, with further incremental increases throughout 2021.

Severe but Plausible Scenario

In this scenario, the gradual recovery in the HORECA market referred to above is slower and only reaches 60% of typical activity by the end of 2020, with further incremental increases throughout 2021.

Extreme Scenario

In this scenario, the gradual recovery in the HORECA market is subdued, as for the 'severe but plausible scenario' above, together with a further 30% reduction in the Group EBITDA.

1 BASIS OF PREPARATION (continued)

2) Covenants

At the same time as extending its bank facilities, the Group renegotiated its banking covenants such that the pre-existing covenants were replaced, up to and including until the December 2021 covenant test date, with a maximum net debt and a minimum EBITDA threshold. The original covenants will return from March 2022. In all three scenarios, the Group should be able to meet its financial covenants throughout the period to December 2021.

A decline in underlying EBITDA well in excess of that contemplated in the scenarios would need to persist throughout the period to 31 December 2021 for a covenant breach in relation to minimum EBITDA to occur. The Directors do not consider such a scenario plausible. The Group also has a number of mitigating actions under its control (which were not included in the scenarios) including minimising capital expenditure to critical requirements, further reducing levels of discretionary spend and rationalising its overhead base in order to be able to meet the covenant tests.

3) Liquidity

The Group extended its committed debt facilities in May 2020. The revised facilities comprise a £135 million revolving credit facility, which matures in August 2023, together with a £40 million accordion facility, which is due to mature in May 2022 but which may be extended for a further one year, subject to lender approval. Quarterly covenant tests allow for maximum bank borrowings of £155 million at each quarter end from September 2020 through to September 2021, reducing to £145 million for the quarter ending December 2021.

Following the successful equity placement that raised net proceeds of £82.7 million (see note 15), the Group repaid its bank borrowings. As a consequence, the available bank facilities provide ample liquidity when judged against drawn borrowings of £0.4 million at 30 June 2020. In all scenarios modelled, the Group should be able to operate within the level of its current bank facilities.

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 2020. These segments are the same as those included within the 2019 Annual Report and Accounts.

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. The Board has identified two main reporting segments, being Workwear and Hotel, Restaurants and Catering ('HORECA'). Discontinued Operations are reported separately. Results, assets, liabilities and other information not included within Workwear, HORECA or Discontinued Operations are reported separately within All Other Segments.

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. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Any right-of-use assets, lease liabilities and depreciation relating to internal property leases with Johnson Group Properties PLC are eliminated on consolidation. Interest income and expenditure are not included in the result for each reporting segment that is reviewed by the Board.

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, post-employment benefit 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 current income tax liabilities, bank borrowings, derivative financial liabilities, post-employment benefit obligations 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 2020, together with comparative figures, are as follows:

2 SEGMENT ANALYSIS (continued)

2 SEGMENT ANALYSIS (continued)

3 EXCEPTIONAL ITEMS

Current year exceptional items

During the half year to 30 June 2020, the net book value of plant, machinery and textile items destroyed in a Workwear processing plant fire has been charged to exceptional items.

Prior year exceptional items

During the prior year, professional fees of £0.1 million were paid relating to the acquisition of Fresh Linen Holdings Limited, together with its trading subsidiary Fresh Linen Limited and a further dormant company Pure Laundry Limited ('Fresh Linen'). Further information relating to the acquisitions is provided in note 33 of the 2019 Annual Report and Accounts. This has been offset by £0.1 million of prior year credits relating to previous acquisitions. There were no exceptional items in the half year to 30 June 2019.

4 FINANCE COST

The charge for the half year to 30 June 2020 includes £0.6 million in respect of interest rate derivatives which no longer qualify for hedge accounting following the reduction of bank debt.

5 DIVIDENDS

An interim dividend in respect of the year ended 31 December 2019 of 1.15 pence was proposed and paid in November 2019 at a cash cost of £4.3 million.

A final dividend payment in respect of the year ended 31 December 2019 of 2.35 pence per Ordinary share was proposed but later cancelled. The cash benefit to the Group of this action was some £8.7 million.

Furthermore, the Board anticipates that no dividend will be payable in respect of the current financial year.

6 ADJUSTED (LOSS) / PROFIT BEFORE AND AFTER TAXATION

7 TAXATION

Taxation in relation to amortisation of intangible assets (excluding software amortisation) has increased the credit for taxation on continuing operations in the half year to 30 June 2020 by £0.3 million (June 2019: £0.9 million reduction in the charge; December 2019: £1.9 million reduction in the charge). Taxation in relation to exceptional items in the half year to 30 June 2020 was £nil (June 2019: £nil; December 2019: £nil).

During the half year to 30 June 2020, a £1.0 million credit relating to deferred taxation (June 2019: £1.5 million credit; December 2019: £0.7 million credit) has been recognised in other comprehensive income.

During the half year to 30 June 2020, £nil relating to current taxation (June 2019: £0.3 million credit; December 2019: £0.3 million credit) and a £0.3 million charge relating to deferred taxation (June 2019: £0.1 million charge; December 2019: £0.2 million credit) has been recognised directly in Shareholders' equity.

Reconciliation of effective tax rate

Taxation on non-exceptional items for the half year to 30 June 2020 is calculated based on the estimated average annual effective tax rate (excluding prior year items) of 16.7% (June 2019: 18.9%; December 2019: 20.0%). This compares to the weighted average tax rate expected to be enacted or substantively enacted at the balance sheet date of 19.0% (June 2019: 19.0%; December 2019: 19.0%). 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. 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 19.0% being used to measure all deferred tax balances as at 30 June 2020 (June 2019: 17.5%; December 2019: 17.0%).

8 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 (loss) / 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 earnings per share if the performance conditions, as set out in the Board Report on Remuneration in the 2019 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 the periods to 30 June 2019 and 31 December 2019, 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. For the period to 30 June 2020, potentially dilutive Ordinary shares have not been treated as dilutive as their inclusion in the diluted earnings per share calculation reduces the loss 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.

9 GOODWILL

In accordance with International Financial Reporting Standards, goodwill is not amortised, but instead is tested at least annually for impairment and carried at cost less accumulated impairment losses.

Impairment tests for goodwill

The allocation of goodwill to Cash Generating Units (CGUs) is as follows: