Johnson Service Regulatory News (JSG)

3 September 2019

AIM: JSG

Johnson Service Group PLC

('JSG' or 'the Group')

Interim Results for the Six Months ended 30 June 2019

"Continued organic growth delivers another consistent and strong financial performance"

"Full year results expected to be slightly ahead of current expectations"

HIGHLIGHTS

§ Strong financial performance

- organic growth of 7.5%3 together with the benefits of recent acquisitions

- adjusted operating margin2 increased to 13.5% (June 2018: 13.1%)

§ Interim dividend increased by 15.0% to 1.15 pence per share (June 2018: 1.00 pence) reflecting the Board's confidence for the future

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

§ Leeds plant on time and on budget with opening scheduled for Q2 2020

§ Performance in the two months since the period end means that full year results are expected to be slightly ahead of current market expectations

Notes

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

2 Figures for H1 2019 include the impact of adopting IFRS 16 (Leases), which increased operating profit and adjusted operating profit by £0.6 million, reduced profit before taxation and adjusted profit before taxation by £0.2 million and increased net debt by £37.9 million. The Group has applied the modified retrospective approach in adopting IFRS 16 and, therefore, the comparative numbers for 2018 have not been restated. Excluding the impact of IFRS 16, adjusted operating profit increased by 10.6% and adjusted profit before taxation increased by 11.5%.

3 Excluding the benefit of the acquisition completed in 2018 and revenue from contracts acquired in January 2019. 

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

"This is a strong performance reflecting excellent sales growth, the benefits of recent acquisitions and continued high levels of customer retention across all market sectors. We are particularly pleased with the strength and quality of our organic performance which has been achieved by investing capital in our operations giving increased production capacity to meet growing customer demand.

We will continue to invest in our sites, including the completion of the new Leeds plant, allowing us to benefit from production efficiency gains as well as creating additional capacity in order to further increase revenues going forward.

There is good momentum in the Group and we have started the second half strongly. In view of the encouraging performance over the summer months we anticipate that the results for the year will be slightly ahead of current expectations."

SELL-SIDE ANALYST MEETING

A presentation for sell-side analysts will be held today at 9.30am at Investec, 30 Gresham Street, London, EC2V 7QN. A copy of the presentation will be available on the Company's website (www.jsg.com) following the meeting.

ENQUIRIES

Note: Throughout this statement 'adjusted operating profit' refers to continuing operating profit before amortisation of intangible assets (excluding software amortisation) and exceptional items. 'Adjusted profit before taxation' refers to adjusted operating profit less total finance cost. 'Adjusted EBITDA', for gearing purposes, refers to adjusted operating profit for the relevant period plus the depreciation charge for property, plant and equipment and software amortisation. 'Adjusted EPS' refers to EPS calculated based on adjusted profit after taxation. The Board considers that 'adjusted operating profit', 'adjusted profit before taxation, 'adjusted EBITDA' and 'adjusted EPS', which all exclude the effects of non-recurring items or non-operating events, provide useful information for Shareholders on underlying trends and performance.

FINANCIAL AND OPERATIONAL REVIEW

FINANCIAL REVIEW

Financial Results

Following very strong sales growth and continued high levels of customer retention across all market sectors, organic revenue growth reached 7.5% in the first half of the year. This, combined with a full six months trading from the South West Laundry acquisition completed in August 2018, together with the benefit of acquiring a number of contracts in January 2019, increased the Group's revenue by 9.8% to £167.1 million (June 2018: £152.2 million).

The increase of 13.6% in adjusted operating profit for the first half to £22.6 million (2018: £19.9 million) reflects the revenue growth, ongoing efficiency improvements and a modest benefit of £0.6 million following the adoption of IFRS 16.

Total finance costs increased to £2.5 million (June 2018: £1.7 million). Whilst underlying borrowing costs and notional interest remained unchanged, the implementation of IFRS 16 resulted in an additional cost of £0.8 million in respect of recognised lease liabilities.

Adjusted profit before taxation increased to £20.1 million (June 2018: £18.2 million) and was slightly adversely impacted by a net cost of £0.2 million from the adoption of IFRS 16. The underlying tax rate was 18.9% (June 2018: 19.5%).

The statutory profit before taxation, after amortisation of intangible assets (excluding software amortisation) of £4.9 million (June 2018: £4.2 million), increased by 8.6% to £15.2 million (June 2018: £14.0 million).

Adjusted diluted earnings per share increased by 10.0% to 4.4 pence (June 2018: 4.0 pence). Diluted earnings per share, after amortisation of intangible assets (excluding software amortisation), increased by 6.5% to 3.3 pence (June 2018: 3.1 pence).

Dividend

Reflecting the Group's strong performance and prospects, the Board is pleased to increase the interim dividend by 15.0% to 1.15 pence (June 2018: 1.00 pence). This is in line with our progressive dividend policy, whilst also maintaining satisfactory dividend cover.

The interim dividend will be paid on 1 November 2019 to those Shareholders on the register of members at the close of business on 4 October 2019. The ex-dividend date is 3 October 2019.

Finances

Total net debt (excluding the impact of IFRS 16) at 30 June 2019 was £92.6 million (December 2018: £98.4 million), slightly better than management expectations, and reflected the strong trading performance in the first half offset by significant planned investment in both plant and equipment and new rental stock which was required to support organic growth. The Group's net debt to adjusted EBITDA leverage ratio (excluding the impact of IFRS 16) was 1.47:1 at the end of June 2019 (June 2018: 1.57:1).

After including the impact of IFRS 16, net debt at June 2019 was £130.5 million.

Subsequent to the balance sheet date we have extended the tenure of our £135.0 million revolving credit facility by 12 months, such that it now runs to August 2023.

Interest costs on our floating rate borrowings continue to benefit from the current low levels of LIBOR. Interest payable on bank borrowings is based upon LIBOR plus a margin which is linked to leverage levels, and was, in the first half, 1.75%. The lower leverage ratio at June 2019 reduces the margin to 1.5% from July until at least the next quarterly covenant test. We have mitigated our exposure to future increases in LIBOR rates through the use of interest rate hedging. Current hedging arrangements, each over a £15.0 million tranche of borrowings, replace LIBOR with 1.665% for the full year 2019, 1.07% for the period to January 2021 and 1.144% to January 2022.

Post-Employment Benefits

The recorded net deficit after tax for all post-employment benefit obligations, calculated in accordance with IAS 19, has increased to £10.6 million at June 2019 from £3.8 million at December 2018. The increase is due, in part, to the reduction in the discount rate assumed on liabilities partially offset by a higher return on scheme assets. 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 current agreement with the Trustee of the defined benefit pension scheme requires deficit recovery payments of £1.9 million in the year to December 2019, of which £0.9 million was contributed during the first half. The payments are expected to continue at this level until the results of the next triennial actuarial valuation, as at 30 September 2019, are finalised, which is likely to be in the second half of 2020.

OPERATIONAL REVIEW

Our Businesses

The Group has again had a successful six months, delivering continued strong organic growth and increased profit. We continue to invest in many of our laundry facilities to improve productivity and capacity and, given current and anticipated strong demand, there is further scope to continue this plan. Our geographic coverage gives us the opportunity to acquire groups of contracts as an efficient way of utilising available capacity in a cost effective manner.

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 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 'Bourne', 'Afonwen' and 'PLS' provide high volume hotel linen services.

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

All of our brands experienced significant new business wins which, combined with high levels of customer retention, resulted in a strong first half performance, generating revenues of £167.1 million (June 2018: £152.2 million), an increase of 9.8%. This increase includes six months of trading from the acquisition of South West Laundry, completed in August 2018, and additional revenue from a small number of hospitality contracts acquired in January 2019. Our strong underlying organic growth of 7.5% included the benefit of price increases and some significant contract wins across all businesses during the last 12 months.

Adjusted operating profit from our Textile Rental businesses increased by £2.8 million to £25.0 million (June 2018: £22.2 million), representing an increase of 12.6%, with the operating margin improving slightly to 15.0% (June 2018: 14.6%), including the benefit of £0.6 million from the impact of IFRS 16.

Workwear Division 

Johnsons Workwear provides workwear rental and laundry services to over 36,000 customers in the UK, from small local businesses to the largest companies covering food related and other industrial sectors.

Trading for the first six months of 2019 was strong with organic revenue growth of 6.8% to £67.5 million (June 2018: £63.2 million). This growth was driven by strong sales to both new and existing customers, particularly in the second half of 2018. The business has a strong cultural ethos for delivery of excellent customer service which has ensured customer retention levels have been maintained at 95%. Our continuing investment in sales and marketing through our in-house call centre supported the sales to new customers and 19% of all new business won came from new to rental customers.

To further support the sales and service personnel additional improvements have been made to the tablet based dynamic catalogue, increasing its functionality and improving the product range in line with our customers' requirements. The business continues to focus on stocked products which have improved garment delivery times for both new and existing customers. The business was also pleased to renew agreements with a number of large national accounts.

With the benefit of strong revenue growth and a continued focus on efficiency, Workwear's adjusted operating profit increased by 12.0% to £12.1 million (June 2018: £10.8 million) and the margin improved to 17.9% (June 2018: 17.1%). This includes a modest benefit of £0.3 million from the implementation of IFRS 16.

Operationally the business continued to invest in plant and machinery. This included the installation of highly efficient garment folding machines in the high care food units at Gateshead and Birmingham, increasing their folding capacity. Several new industrial washing machines have also been installed across the estate. In Manchester a refurbishment of the industrial unit to improve its efficiency is nearing completion, resulting in the removal of drycleaning processing which is being replaced by washer extractors. Work on expanding the industrial garment processing capacity at Basingstoke is underway with additional plans being considered for expanding food garment processing capacity next year as part of our normal ongoing level of capital investment.

In line with the development of the new Group wide national brand, Johnsons Workwear rebranding has commenced starting with a number of vehicles being rebranded with the new livery. The rollout of the brand will continue over the coming years in order to reinforce the strong reputation of the Johnson Service Group.

The internal training Academy is continuing to provide development and support to employees at all levels within the business and an updated portfolio of blended learning is benefitting all personnel. The specific focus on health and safety and product knowledge training has resulted in enhancing knowledge and empowerment within the business. Various apprenticeships are being undertaken which will help to provide internal succession in some of our more technical and skilled areas.

HORECA Division

The total revenue for the HORECA division increased by 11.9% to £99.6 million (June 2018: £89.0 million). After adjusting for the acquisition of South West Laundry, which was completed in August 2018, and also excluding the revenue from a small number of contracts acquired in January 2019, underlying revenue increased by 8.0%.

HORECA's adjusted operating profit increased to £12.9 million (June 2018: £11.4 million), an increase of 13.2%. This includes a modest benefit of £0.3 million from the implementation of IFRS 16. The operating margin was largely unchanged at 13.0% (June 2018: 12.8%).

Johnsons Hotel Linen, our high volume linen business (comprising Afonwen, Bourne and PLS brands) has continued with the successful integration of the acquisitions purchased in the last few years. The seamless consolidation of the finance function to our Preston Brook offices at the beginning of the year gave us the benefit of consolidating from three different financial systems into a single integrated reporting line using the new Microsoft Dynamics finance package.

Operationally, the business continues to benefit from our reputation for excellent customer service, strong service delivery and national scale. Johnsons Hotel Linen is continuing to win a wide range of customers across the core of its business, being the corporate 4 star and budget hotel sectors as well as independent hotels across the UK. Despite operating at close to capacity, service levels continue to improve year on year with a strong emphasis on seeking to deliver complete orders on time to our customers.

Construction of the new Leeds production facility continues to be on time and on budget. The site in Gildersome, Leeds is now largely complete with the developer expected to hand over the site by the end of this month. This timescale will allow us to work with our appointed contractors on the installation of all equipment in time for opening in the second quarter of 2020. Rapid progress has already been made with the installation of all core utilities ahead of plan. We have worked with the appointed contractors for many years and all have extensive experience in building and commissioning new laundry installations. As such, we are pleased to reconfirm that the overall project remains on plan, to schedule and in line with the previously announced capital expenditure cost in the region of £10.0 million.

Sales activity within the business has increased to take advantage of current market opportunities as well as to identify further sales opportunities for the autumn of 2019 into the spring of 2020 across the whole of the UK. We anticipate that we will transfer work from a number of our existing sites to the new Leeds site over a six month commissioning period, ramping up volume to enable the Leeds production facility to reach approximately 50% capacity once all the expected transfers have been completed. This will in turn create new capacity, along with logistical benefits, in our existing plants to allow service to new customers in those areas.

Despite a somewhat uncertain economic outlook and some customers experiencing a slight softening in hotel occupancy demand, overall, Johnsons Hotel Linen has continued to trade slightly ahead of our expectations reflecting the importance of our quality local service delivery and the everyday need for our products and services.

We have experienced strong organic sales growth through the signing of new hotels together with a number of bolt-on hotels being added to current customer contracts. Tight cost control has been maintained and efficiency improvements have been realised as a result of continued capital investment in the first half of the year.

Growth at Stalbridge continues with strong new sales in 2019 building on the full year effect of record new sales in 2018. Stalbridge continues to successfully market its high value, flexible and responsive service which attracts both new market entrants and established hospitality operators where service, quality and reliability are the primary drivers.

South West Laundry, which was acquired in 2018 with capacity for growth, has enabled us to relocate the processing and servicing of some Devon and Cornwall based customers from our Dorset plants at Milborne Port and Sturminster Newton to South West, thereby streamlining distribution and service.

Similarly, the Stalbridge plant in Southall, following the £3.3 million refurbishment and extension completed at the end of 2018, is now fully operational and has allowed us to move some London based catering customers from our Dorset plant in Shaftesbury.

We have extended the Stalbridge operations in both Grantham and Wrexham with additional space and investment in washing processes to deal with the continuing growth of the business in the North of the country. We have also replaced four ironer lines across the estate in the first half of 2019. This new equipment provides greater capacity, better quality and is more energy efficient than the machinery it replaces.

At London Linen we have commenced a project to extend the dispatch area and improve workflows to allow for the increased linen volumes being experienced. The business continues to focus on delivering excellent quality and service to the customer base in order to ensure the high levels of customer satisfaction are maintained.

London Linen and Stalbridge have begun the process of combining sales and marketing resource to better engage with, and attract, potential new customers. This stronger sales and marketing focus on the independent restaurant market in London is designed to negate any potential reduction in the casual dining market.

We have acquired a number of customer contracts from two small laundries to add to the strong organic growth being achieved. In January we acquired annualised revenue of £1.2 million to be processed in our newly extended Grantham site and in July we have acquired an additional £2.5 million of annualised revenue to be processed at our sites in Southall.

TECHNICAL INNOVATION

The project for updating and improving our IT systems is ongoing. Replacement of all of the finance systems which are in scope will be completed by the end of October 2019. We are also intending to supplement the Microsoft Dynamics platform with a leading industry standard laundry operating system which should reduce the overall time frame for implementation. Our overall budgeted cost remains broadly unchanged.

EMPLOYEES

The Group now employs over 5,700 people who have all contributed to the performance of the business. Our people are fundamental to us being able to deliver our market-leading customer service standards. We thank them for their significant contribution to another tremendous first half performance.

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 has undertaken a review of potential actions that it would take in the event that mitigation was required.

OUTLOOK

The Group's performance in the two months since the period end, which are two of the busiest months particularly for our Hotel Linen plants, has been slightly ahead of our expectations.

The capital investment made to increase our processing capacity has allowed us to meet high customer demand and provide a quality service more efficiently. This investment in our sites will be maintained and will help us to further increase revenue going forward.

We are looking forward to the completion of the new Leeds plant in Spring 2020 and we see opportunities for filling the additional processing capacity that will be created across the Hotel Linen plants in the medium term. As with all major development capital investments there will be some up-front costs which may have a small impact on the HORECA margin in 2020, until throughput of the Leeds plant reaches its optimum level.

In view of the encouraging performance over the summer months we now anticipate that the results for the current full year will be slightly ahead of current expectations.

Responsibility Statement

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

The Directors confirm that to the best of their knowledge:

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

§ this interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

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

The Directors of Johnson Service Group PLC are listed in the Johnson Service Group PLC Annual Report for 2018. 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

3 September 2019 3 September 2019

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 30 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 2019, the EBT held 12,468 shares (June 2018: 16,256; December 2018: 16,256).

Consolidated Balance Sheet

The notes on pages 15 to 30 form an integral part of these condensed consolidated interim financial statements. The condensed consolidated interim financial statements on pages 11 to 30 were approved by the Board of Directors on 3 September 2019 and signed on its behalf by:

Yvonne Monaghan

Chief Financial Officer

Consolidated Statement of Cash Flows

The notes on pages 15 to 30 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 3 September 2019.

1 BASIS OF PREPARATION

These condensed consolidated interim financial statements of the Group are for the half year ended 30 June 2019. 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 2018 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 2018 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 2018 included herein is derived from the condensed consolidated interim financial statements for that period.

Going Concern

The Group currently meets its day-to-day working capital requirements through committed bank facilities which, as at 30 June 2019, ran to August 2022 but which now, following the extension of that facility on 17 July 2019, will run to August 2023. Current economic conditions continue to create uncertainty, particularly over the level of demand for the Group's services. The Group's latest forecasts and projections, taking account of reasonably possible changes in trading performance, show that there is not a substantial doubt that the Group should be able to operate within the level of its current facilities for a period of at least 12 months from the date of these condensed consolidated interim financial statements.

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

2 SEGMENT ANALYSIS

Segment information is presented in respect of the Group's operating segments, which are based on the Group's management and internal reporting structure as at 30 June 2019. These segments are the same as those included within the 2018 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 trading reporting segments, being Workwear and Hotel, Restaurants and Catering ("HORECA"). Discontinued operations are reported separately.

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, for example, prior to adoption of IFRS 16 in the 2018 comparative information, rental income received by Johnson Group Properties PLC is credited back, where appropriate, to the paying company for the purpose of segmental reporting. In 2019, 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, derivative financial assets and cash and cash equivalents, all of which are managed on a central basis. Segment liabilities include non-bank borrowings but exclude 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 2019, together with comparative figures, are as follows:

2 SEGMENT ANALYSIS (continued)

2 SEGMENT ANALYSIS (continued)

3 FINANCE COST

4 TAXATION

Taxation in relation to amortisation of intangible assets (excluding software amortisation) has reduced the charge for taxation on continuing operations in the half year to 30 June 2019 by £0.9 million (June 2018: £0.8 million reduction in the charge; December 2018: £1.7 million reduction in the charge). There is no taxation in relation to exceptional items in any of the periods reported.

During the half year to 30 June 2019, a £1.5 million credit relating to deferred taxation (June 2018: £1.0 million charge; December 2018: £1.0 million charge) has been recognised in other comprehensive income.

During the half year to 30 June 2019, there has been a £0.3 million credit relating to current taxation (June 2018: £nil; December 2018: £nil) and a £0.1 million charge relating to deferred taxation (June 2018: £nil; December 2018: £0.1 million credit) recognised directly in Shareholders' equity.

Reconciliation of effective tax rate

Taxation on non-exceptional items for the half year to 30 June 2019 is calculated based on the estimated average annual effective tax rate (excluding prior year items) of 18.9% (June 2018: 19.5%; December 2018: 20.0%). This compares to the weighted average tax rate expected to be enacted or substantively enacted at the balance sheet date of 19.00% (June 2018: 19.00%; December 2018: 19.00%). 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 17.5% being used to measure all deferred tax balances as at 30 June 2019 (June 2018: 18.0%; December 2018: 17.5%).

5 ADJUSTED PROFIT BEFORE AND AFTER TAXATION

6 DIVIDENDS

On 10 May 2019 a final dividend of 2.10 pence per share in respect of 2018 was paid to Shareholders, utilising £7.7 million of Shareholders' funds.

The Directors are proposing an interim dividend in respect of the year ended 31 December 2019 of 1.15 pence which will reduce Shareholders' funds by £4.3 million. The dividend will be paid on 1 November 2019 to Shareholders on the register of members at the close of business on 4 October 2019. The trustee of the EBT has waived the entitlement to receive dividends on the Ordinary shares held by the trust.

In accordance with IAS 10 there is no payable recognised at 30 June 2019 in respect of this proposed dividend.

7 EARNINGS PER SHARE

* Includes outstanding share options granted to employees.

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

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

For diluted earnings per share, the weighted average number of Ordinary shares in issue is adjusted to assume conversion of all potentially dilutive Ordinary shares. The Company has potentially dilutive Ordinary shares arising from share options granted to employees. Options are dilutive under the SAYE scheme, where the exercise price together with the future IFRS2 charge of the option is less than the average market price of the Company's Ordinary shares during the year. Options under the LTIP schemes, as defined by IFRS 2, are contingently issuable shares and are therefore only included within the calculation of diluted EPS if the performance conditions, as set out in the Board Report on Remuneration in the 2018 Annual report and Accounts, are satisfied.

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

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

8 POST-EMPLOYMENT BENEFIT OBLIGATIONS

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

In the half year to 30 June 2019 deficit recovery payments of £0.9 million were paid by the Group to the defined benefit scheme (June 2018: £0.9 million; December 2018: £1.9 million).

Following discussions with the Group's appointed actuary a re-measurement loss of £9.1 million has been recognised in the half year to 30 June 2019. This is principally as a result of asset returns over the period for the scheme having been higher than the assumed interest credit at the year end, resulting in an actuarial gain of £6.8 million, offset, to a greater extent, by the decrease in the assumed discount rate from 2.9% per annum to 2.35% per annum resulting in an actuarial loss of £15.9 million.

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

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

9 INTANGIBLE ASSETS

Capitalised software

Other intangible assets