Johnson Service Regulatory News (JSG)

27 February 2018

AIM: JSG

Johnson Service Group PLC

('JSG' or 'the Group')

Preliminary Results for the Year Ended 31 December 2017

"Strong financial performance and established growth platform"

FINANCIAL HIGHLIGHTS: STRONG PERFORMANCE

§ Strong financial performance reflects organic revenue growth of 5.1%3 and successful delivery of earnings from acquisitions

§ Net debt to adjusted EBITDA ratio of 1.6x (2016: 1.8x) demonstrates the impact of the Group's strong cash flows

§ Board recommends a 11.8% increase in final dividend to 1.9 pence per share (2016: 1.7 pence) which together with the interim dividend, takes the total dividend for the year up 12.0% to 2.8 pence per share (2016: 2.5 pence)

OPERATIONAL HIGHLIGHTS: DELIVERING ON STRATEGIC AIMS

§ Highly focused textile services business with increasing UK geographical coverage:

- Disposal of Drycleaning division in January 2017

- PLS in Edinburgh, acquired in July 2017, to extend coverage of our high volume linen services to Scotland and Northern England

- StarCounty in Wrexham, acquired in December 2017, to increase the geographical coverage of our Stalbridge brand across the North West and West Midlands

§ Continuing capital investment to increase production capacity and efficiency:

- Accelerated investment in 2017 to support the demand from strong organic sales generated during the year

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

2 Net debt at 31 December 2016 included £0.8 million of cash within "assets classified as held for sale".

3 Excluding revenue from acquisitions completed in 2017, the full year benefit of acquisitions completed in 2016 and the one-off benefit of some £2.6 million of revenue for work processed in 2017 on behalf of a privately owned laundry whose plant was out of commission.

Chris Sander, Chief Executive Officer of Johnson Service Group PLC, the UK's leading textile services provider, commented:

"During the year Johnson Service Group continued to meet its strategic objectives by transforming the Group into a highly focused Textile Services business. In doing so, we have delivered another strong financial performance underpinned by significant organic growth together with growth from acquisitions which continue to extend the geographical coverage of our businesses. The operational strategy of continuing to invest capital in modern, highly efficient equipment has helped mitigate cost pressures and supported margin growth. With strong new business sales, the benefit of recent acquisitions and a continued focus on delivering service excellence, we remain confident in the year ahead."

SELL-SIDE ANALYSTS MEETING

The Company will present to sell-side analysts at 09:30 today at Investec, 2 Gresham Street, London EC2V 7QP. A copy of the presentation will be available on the Company's website (www.jsg.com) following the meeting.

ENQUIRIES

Note

Throughout this statement 'adjusted operating profit' refers to 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 tax. 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'.

The Drycleaning results in the Income Statement for 2016 have been classified as Discontinued Operations and the corresponding assets and liabilities have been classified as held for sale in the Balance Sheet as at 31 December 2016.

 OPERATIONAL AND FINANCIAL REVIEW

Financial Results

Total continuing revenue for the year to 31 December 2017 increased by 13.3% to £290.9 million (2016: £256.7 million), reflecting the Group's continuing strong organic growth performance of 5.1% and contributions from the acquisitions of Professional Linen Services ('PLS') in July 2017 and StarCounty ('Star') in December 2017, as well as the full year benefit of acquisitions completed in 2016. Adjusted operating profit increased by 14.9% to £43.3 million (2016: £37.7 million).

The total finance cost was £3.6 million (2016: £3.9 million) reflecting lower average debt levels and a reduced notional interest charge of £0.4 million (2016: £0.6 million) on the Group's net pension liabilities.

Adjusted profit before taxation increased by 17.5% to £39.7 million (2016: £33.8 million).

Net exceptional items from continuing operations were £0.5 million (2016: £1.0 million) and were in respect of acquisition and subsequent integration activity. The statutory profit before taxation, after amortisation of intangible assets (excluding software amortisation) of £8.0 million (2016: £6.9 million), increased by 20.5% to £31.2 million (2016: £25.9 million).

Continuing adjusted diluted earnings per share increased by 14.5% to 8.7 pence (2016: 7.6 pence). Diluted earnings per share from continuing operations after amortisation of intangible assets (excluding software amortisation) and exceptional items increased by 16.9% to 6.9 pence (2016: 5.9 pence).

Dividend

The Board is pleased to recommend an increased final dividend of 1.9 pence per share (2016: 1.7 pence), which reflects the Group's strong performance and confidence in the future prospects of the business. Together with the interim dividend, this takes the total dividend for the year to 2.8 pence per share (2016: 2.5 pence), an increase of 12.0% year-on-year.

The proposed final dividend, if approved by Shareholders, will be paid on 11 May 2018 to Shareholders on the register at close of business on 13 April 2018. The ex-dividend date is 12 April 2018.

Post-Employment Benefits

The recorded net deficit after taxation for all post-employment benefit obligations reduced to £9.8 million at 31 December 2017 from £14.8 million at 31 December 2016. The reduction reflects the benefit of strong asset returns and deficit recovery contributions offset in part by the net impact of a slight reduction in the discount rate and small increase in the assumed inflation rate.

Asset allocation remains under constant review with the Trustee. Changes have been made to more appropriately match assets against the remaining scheme liabilities and to reduce interest rate and inflation risks to a more acceptable level when market dynamics change.

The current agreement with the Trustee of the defined benefit pension scheme required deficit recovery payments of £1.9 million in the year to December 2017. In addition to this agreed schedule of contributions a further payment of £1.5 million was made to the pension scheme in April 2017.

The triennial actuarial valuation of the defined benefit scheme as at 30 September 2016 was finalised during the year. Calculated under the more prudent technical provisions of the scheme, the actuarial deficit has increased to £39.3 million. However given the additional contribution of £1.5 million referred to above, the Trustee has agreed that ongoing deficit funding contributions will remain at the current level of £1.9 million per annum.

Cash Flow and Banking

Total net debt at the year-end stood at £91.3 million (31 December 2016: £98.2 million). The Group's strong trading performance and cash generation helped to offset the impact of both the acquisitions we made in the year and our significant investment in capital expenditure across the business. Interest cover, based on adjusted operating profit and excluding notional interest, is 13.5 times (2016: 11.4 times).

The Group remains well funded. A revolving credit facility of £120.0 million was agreed in April 2016 and runs to April 2020 and is considerably in excess of the current anticipated level of borrowings.

Interest payable on bank borrowings is based upon LIBOR plus a margin which is linked to gearing levels. The applicable margin during 2017 was, on average, 1.73% (2016: 1.67%) and will remain at a similar level for at least the first quarter of 2018. We have mitigated our exposure to increases in LIBOR rates through the use of interest rate hedging. Two hedging arrangements, each for £15.0 million of borrowings, are in place whereby LIBOR is replaced by a fixed rate of 1.4725% for the period January 2016 to January 2019, and 1.665% for the period January 2016 to January 2020. Two further hedging arrangements, each for £10.0 million, were entered into at the end of June 2016 whereby LIBOR is replaced by a fixed rate of 0.49% to June 2018 and 0.5525% to June 2019.

OPERATIONAL HIGHLIGHTS

Introduction

The Group reported another year of substantial growth with both divisions delivering higher levels of new business wins and maintaining consistently high levels of customer retention. In line with our strategic objective of continuing to build a nationwide business, the acquisition of PLS, a high volume linen plant based in Edinburgh, provides geographical extension of our services in Scotland and the North East of England, whilst the acquisition of StarCounty, based in Wrexham, provides an excellent platform for the extension and consolidation of the Stalbridge trading area in the North West of England.

Following the sale of the Drycleaning division in January 2017, the Group is now entirely focused on textile service activities, covering Workwear rental and linen services to the Hotel, Restaurant and Catering ("HORECA") sectors. Going forward, we will report on these two Divisions.

The planned capital investment programme was accelerated during the year in many of our existing locations to ensure that we both improved efficiencies and created additional capacity to meet the demands from the strong organic sales generated throughout the year.

Our Businesses

Our Group now comprises of Textile Service businesses that trade through a number of very well recognised and respected brands, servicing the UK's Workwear and HORECA sectors. Following the successful integration of numerous acquisitions over the last five years we now have several regional brands servicing similar markets. We have therefore taken the decision to implement a review to consolidate branding in order to maximise and extend national brand recognition. We currently anticipate that this will take up to three years to fully implement and the associated modest cost will not have a material impact on the reported earnings of the Group over that period.

In conjunction with this review, work has also commenced on upgrading and consolidating our operational IT platforms for both workwear and high volume linen to ensure that we continue to provide market leading solutions for our business and our customers. Design, build and implementation of the system is expected to be a two year programme utilising our own in house team of experts.

Workwear Division

The Group's workwear business provides workwear rental and laundry services, trading under the 'Apparelmaster' brand, to a very large cross section of industry and commerce, including many large blue chip corporates.

Apparelmaster enjoyed another very strong and successful year with revenue increasing by 4.0% to £122.4 million (2016: £117.7 million).  Organic growth was aided by record new sales wins, which were well ahead of management targets. This reflected the on-going investment in our sales and marketing department. Almost 15% of the total value of new sales were to those customers who had previously not had a rental service. Sales to existing customers also increased and this, combined with high levels of customer retention at 95.4% (2016: 94.6%), delivered year on year growth against a backdrop of an ever changing competitive environment.

The strong new sales combined with production efficiencies and careful cost control, increased adjusted operating profit by 6.0% to £21.1 million (2016: £19.9 million) resulting in an improved margin of 17.2% (2016: 16.9%).

Our business ethos, which is focused on nationwide coverage, strong local service and continued investment in our facilities, has helped us to increase customer confidence. Customer satisfaction scores, both for our new and longer term customers, have improved. During the year, evidence of this confidence was borne through a number of large national contracts being successfully renewed.

Apparelmaster continues to work closely with its supply chain and, recognising market trends, has introduced new food trade and leisurewear ranges. We review our garment range on an ongoing basis to ensure that we meet the ever changing needs of customers by keeping abreast of the latest fashion trends.

In line with our operational strategy, Apparelmaster has continued to invest in plant and machinery and commercial fleets, with the emphasis on best in class equipment to drive production efficiencies and optimise energy consumption. In particular, the plants at Brighton, Basingstoke and Letchworth have been upgraded to increase capacity and efficiency in relation to food industry garment processing, where growth has been particularly strong. Further refurbishments to the Hinckley cleanroom are due to be completed in early 2018. In total, capital expenditure amounted to £4.5 million (2016: £5.4 million), with a further £17.9 million (2016: £16.5 million) on new rental stock.

Computer tablet software enhancements have been provided to our sales and service staff, which integrate the sales and service processes and make the face to face customer experience more productive with faster and more efficient responses to their business needs. Further enhancements have been developed and were launched in January 2018.

The Johnsons Academy, which provides targeted, in-house training and development for employees, allows opportunities for further staff development and improves the skill base of the business. We are pleased with the success of the Academy and the numbers of staff who are moving through the business to fill vacant management positions.

HORECA Division

The Group provides premium linen services to the hotel, restaurant, hospitality and corporate events market through 'Stalbridge' and 'London Linen' as well as high volume hotel linen services through 'Afonwen', 'Bourne' and 'PLS'.

The total revenue for the HORECA division was up 21.2% to £168.5 million (2016: £139.0 million). This £29.5 million increase includes contributions from additional months of trading from acquisitions completed in both 2016 and 2017. In addition, it reflects the one-off benefit of some £2.6 million of revenue for work processed between February and October 2017 on behalf of a privately owned laundry whose plant was out of commission. New business sales throughout the year were strong, contributing organic growth of 6.0%.

Adjusted operating profit increased by £5.0 million to £26.8 million (2016: £21.8 million) with an operating margin of 15.9% (2016: 15.7%). The margin in 2017, excluding the benefit from the work processed for the privately owned laundry referred to above, was 15.2%, still ahead of our expectations.

The HORECA division has continued to invest in upgrading its plants with the aim of increasing both capacity and throughput. During the year total expenditure on plant and equipment amounted to £12.0 million (2016: £9.2 million) with a further £25.2 million (2016: £18.0 million) invested in new rental stock.

Throughout 2017 Stalbridge has built on their previous successful performance with accelerated revenue and margin growth, led by impressive new sales wins, which were significantly ahead of management targets. Stalbridge's flexible and responsive approach is very well received by their clients.

Given that Stalbridge's operating model has no long term customer contracts, a real focus is placed on customer satisfaction and building a reputation for providing very high service levels. The 2017 customer satisfaction score, provided by The Leadership Factor, an independent customer experience consultancy, was the highest yet recorded, and reflected actions taken by the management to improve service and quality levels even further.

Significant capital investments have been made to support the growth. During the year new washing and finishing equipment was installed in Grantham, additional soiled storage and towel drying in Sturminster Newton, new ironing equipment in Glasgow and increased clean work and packing space in Shaftesbury.

Further significant investment is planned in early 2018, both in existing factory locations and in Southall, where Stalbridge has recently taken on the management of Caterers Linen Supply. This business was originally acquired as part of the London Linen Group and had some common customers with Stalbridge. An additional factory unit is being developed adjacent to the existing Southall factory to accommodate future business growth and a further investment of £3.3 million in processing equipment will be completed by summer 2018.

At the half year we commented on the need for additional processing capacity near to the North West of England and we are pleased to have completed the acquisition of StarCounty in Wrexham in December. The plant is being integrated into the Stalbridge business and will provide processing capacity for servicing our customers in this area of the UK.

Once the Southall and Wrexham sites are fully operational they will allow some further consolidation of distribution and service costs.

Revenue at London Linen has also seen strong organic growth, driven by strong new sales combined with a number of existing multi location customers continuing to open additional new sites. A number of contract extensions were secured on key customers, typically for a further two or three years.

Operationally, the main focus of London Linen in the year was the completion of the £4.5 million capital investment programme. The investment included a total reorganisation of the incoming soiled goods sorting system with a new mezzanine floor containing highly automated conveyor systems, new ergonomically efficient sorting tables and an automated bag-loading system which transports soiled linen directly to two new continuous batch washers. The capital investment programme was completed during the first half of the year, on schedule and on budget. It has helped to reduce operating costs as well as increasing production capacity and improving the quality of linen. The benefits of this investment have been particularly evident in the run up to the busy Christmas period. These efficiencies, along with the increased sales, have helped to offset increasing employment costs, driven by the higher NLW and the apprenticeship levy, together with general upward inflationary pressures, in particular relating to linen purchases.

The business continues to explore ways that further capital expenditure can continue to improve capacity, productivity and consistency, including the use of electronic inspection systems and improvements to our ironing capability.

The programme to fully co-ordinate the sales and service functions of the London Linen and London Workwear brands is almost complete. We believe this initiative will enhance customer service and streamline product offerings to customers.

The high volume linen brands of Afonwen, Bourne and PLS have performed very well throughout 2017. There has been continued focus on improving the efficiencies within the transport network by reallocating customers to their closest operating production facility, which reduces costs and ultimately improves customer service. The £3.0 million investment at the Chester laundry was completed on time and on budget, resulting in significant improvements to output and efficiency levels and to the quality of the finished products.

The high volume linen brands are increasingly working together with a new national accounts management structure and sales strategy, to further exploit opportunities with national hotel customers and other prospects. During the year, and despite the competitive pressure on pricing, the business continued to successfully re-tender and agree commercial terms with an important number of key accounts in its core market of the budget and corporate 4 star hotel market place. In addition the business experienced strong customer loyalty at a time of increased uncertainty amongst some of our competitors.

In July we also completed the strategically important acquisition of PLS in Edinburgh, providing us with capacity and coverage in the Scottish market as well as strengthening the customer base in North East England. We are already seeing the benefit of this with additional business being secured, from both existing customers opening new hotels in the region as well as from new customers, by virtue of us now being able to cover the Scottish market place. We are looking to invest in upgrading production capability over the year ahead, as well as strengthening our sales team to enable greater coverage of the Scottish hotel market.

Customer retention has remained high throughout the year, as has overall customer satisfaction, and new systems and procedures are being introduced to benchmark performance and identify areas for further enhancement.

Over the year ahead, we are seeking to further integrate the Afonwen and Bourne operations with the appointment of a newly created role of Operations Director, to help focus the business on continued integration, operational efficiencies and continuous improvement across all sites.

Employees

Our teams across the business have continued to work with skill, enthusiasm and dedication and have helped to ensure that our customers receive market-leading service standards.

The Board would like to thank them for their significant contribution to the continuing success of the Group.

Board Changes

As announced on 5 December 2017, Peter Egan, currently Managing Director of our workwear business, will join the Board on 1 April 2018 as Chief Operating Officer ahead of assuming the role of CEO. Chris Sander, the current CEO, has agreed to remain on the Board until the end of 2018 to ensure a smooth and effective transition to Peter within that period.

Outlook

During the year Johnson Service Group has continued to meet its strategic objectives by transforming the Group into a highly focused Textile Services business. In doing so, we have delivered another strong financial performance underpinned by significant organic growth together with growth from acquisitions, which continue to extend the geographical coverage of our businesses. The operational strategy of continuing to invest capital in modern, highly efficient equipment has helped mitigate cost pressures and supported margin growth.

The Group's performance since the year end has been in line with management expectations and with strong new business sales, existing strong cash flows and an established strategy, we remain confident in the year ahead.

By order of the Board,

Chris Sander Yvonne Monaghan

Chief Executive Officer Chief Financial Officer

27 February 2018 27 February 2018

CONSOlidated Income Statement

* Including £1.7 million credit (2016: £1.5 million credit) relating to amortisation of intangible assets (excluding software amortisation) and £0.1 million credit (2016: £0.2 million credit) relating to exceptional items.

Consolidated Statement of COMPREHENSIVE Income

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

The Group has an Employee Benefit Trust (EBT) to administer share plans and to acquire shares, using funds contributed by the Group, to meet commitments to employee share schemes. At 31 December 2017, the EBT held 16,256 shares (2016: 20,739).

Consolidated Balance Sheet

The notes on pages 12 to 24 form an integral part of these condensed consolidated financial statements. The condensed consolidated financial statements on pages 8 to 24 were approved by the Board of Directors on 27 February 2018 and signed on its behalf by:

Yvonne Monaghan

Chief Financial Officer

 Consolidated Statement OF Cash Flows

NOTES TO THE PRELIMINARY ANNOUNCEMENT

1 BASIS OF PREPARATION & FORWARD LOOKING STATEMENTS

Basis of Preparation

The financial information contained within this Preliminary Announcement has been prepared on a going concern basis in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS), IFRS Interpretations Committee (IFRS IC) interpretations and the Companies Act 2006 applicable to companies reporting under IFRS.

The financial information has been prepared using accounting policies consistent with those set out in the 2017 Annual Report.

The financial information set out within this Preliminary Announcement does not constitute the Company's statutory accounts for the years ended 31 December 2017 or 31 December 2016 within the meaning of Section 434 of the Companies Act 2006, but is derived from those accounts.

Statutory accounts for 2016 have been delivered to the Registrar of Companies, and those for 2017 will be delivered as soon as practicable but not later than 30 April 2018. The auditor has reported on those accounts; the reports were unqualified and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

Forward Looking Statements

Certain statements in these condensed consolidated 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 Group'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 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.

2 SEGMENT ANALYSIS

Segment information is presented based on the Group's management and internal reporting structure as at 31 December 2017.

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.

Prior to its disposal on 4 January 2017, the Drycleaning business comprised a single reporting segment with all other operating businesses being reported within the 'Textile Rental' reporting segment. In addition, the Group also provided analysis for two further reporting segments: 'Discontinued Operations' and 'All Other Segments'. As a result of the Drycleaning disposal, the Board considered whether it remained appropriate to continue reporting under the remaining segments.

The Board 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 (e.g. 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.

After careful consideration, the Board deemed it appropriate to introduce two new reporting segments (in addition to 'Discontinued Operations' and 'All Other Segments'), being:

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

2) Hotel, Restaurants and Catering ('HORECA'): comprising of our Stalbridge, London Linen, Afonwen and Bourne businesses, each of which are a separate operating segment.

The Board's rationale for aggregating the Stalbridge, London Linen, Afonwen and Bourne 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 exactly the same method across each operating segment.

The 2017 segmental analysis has, therefore, been prepared as described above and, in accordance with IFRS 8, the 2016 segmental analysis has been adjusted to reflect the position had these changes been in place throughout the year ended 31 December 2016.

NOTES TO THE PRELIMINARY ANNOUNCEMENT (continued)

2 SEGMENT ANALYSIS continued

The Board assesses the performance of the reporting segments based on a measure of operating profit, both including and excluding the effects of non-recurring items from the reporting segments, such as restructuring costs and impairments when the impairment is the result of an isolated, non-recurring or non-operating event.

Interest income and expenditure are not included in the result for each reporting segment that is reviewed by the Board. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis, for example rental income received by Johnson Group Properties PLC is credited back, where appropriate, to the paying company for the purpose of segmental reporting. Other than as described above, there have been no changes in measurement methods used compared to the prior year.

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

Exceptional items have been included within the appropriate reporting segment as shown on pages 14 to 15.

NOTES TO THE PRELIMINARY ANNOUNCEMENT (continued)

2 SEGMENT ANALYSIS continued

The results, assets and liabilities of all segments arise in the Group's country of domicile, being the United Kingdom.NOTES TO THE PRELIMINARY ANNOUNCEMENT (continued)

2 SEGMENT ANALYSIS continued

The results, assets and liabilities of all segments arise in the Group's country of domicile, being the United Kingdom.NOTES TO THE PRELIMINARY ANNOUNCEMENT (continued)

3 EXCEPTIONAL ITEMS

Current year exceptional items

Costs in relation to business acquisition activity

During the year, professional fes of £0.3 million were paid relating to the acquisitions of Clayfull Limited, which trades as PLS, and StarCounty Textile Services Limited. In addition, costs of £0.2 million were incurred as part of the integration of recent acquisitions. Further information relating to the acquisitions is provided in note 13.

Prior year exceptional items

Costs in relation to business acquisition activity

During the prior year, professional fees of £0.6 million and Stamp Duty of £0.3 million were paid relating to the acquisitions of Zip Textiles (Services) Limited, Chester Laundry Limited and Portgrade Limited, the parent company of Afonwen Laundry Limited. In addition, costs of £0.3 million were incurred as part of the integration of recent acquisitions.

Pension costs

During the prior year, professional fees of £0.3 million were incurred in respect of liability management exercises in relation to the defined benefit pension scheme.

Profit on disposal of freehold property

A former Workwear site in Leeds that was closed in 2015 was disposed of during the prior year for net proceeds of £0.5 million. The carrying value was previously written down to £nil in 2014.

4 TOTAL FINANCE COST

5 ADJUSTED PROFIT BEFORE AND AFTER TAXATION

NOTES TO THE PRELIMINARY ANNOUNCEMENT (continued)

6 TAXATION CHARGE

The tax charge for the year is lower (2016: lower) than the effective rate of Corporation Tax in the UK of 19.25% (2016: 20.00%).

The differences are explained below:

Taxation in relation to amortisation of intangible assets (excluding software amortisation) has reduced the charge for taxation on continuing operations by £1.7 million (2016: £1.5 million reduction). Taxation in relation to exceptional items in the current year has reduced the charge for taxation on continuing operations by £0.1 million (2016: £0.2 million reduction).

The taxation charge is based on the effective rate of UK Corporation Tax for the year of 19.25% (2016: 20.00%).

Deferred income taxes at the balance sheet date have been measured at the tax rate expected to be applicable at the date the deferred income tax assets and liabilities are realised. Management has performed an assessment, for all material deferred income tax assets and liabilities, to determine the period over which the deferred income tax assets and liabilities are forecast to be realised, which has resulted in an average deferred income tax rate of 18.0% being used to measure all deferred tax balances as at 31 December 2017 (2016: 18.5%). The impact of the change in tax rates to 18.0% has been a £0.3 million credit in the Income Statement and a £0.1 million charge recognised within other comprehensive income.

During the year, a £0.7 million charge relating to deferred taxation (2016: £0.5 million credit) has been recognised in other comprehensive income.

During the year, a £0.2 million credit relating to current taxation (2016: £0.2 million credit) and a credit of £nil relating to deferred taxation (2016: £nil) have been recognised directly in Shareholders' equity.

NOTES TO THE PRELIMINARY ANNOUNCEMENT (continued)

7 EARNINGS PER SHARE

Basic earnings per share is calculated using the weighted average number of Ordinary shares in issue during the year, excluding those held by the Employee Benefit Trust, based on the profit for the year 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 Group 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, are satisfied.

Potentially dilutive Ordinary shares are considered 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 years ended 31 December 2017 and 31 December 2016, 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.

NOTES TO THE PRELIMINARY ANNOUNCEMENT (continued)

8 DIVIDENDS

The Directors propose the payment of a final dividend in respect of the year ended 31 December 2017 of 1.9 pence per share. This will utilise Shareholders' funds of £7.0 million and will be paid, subject to Shareholder approval, on 11 May 2018 to Shareholders on the register of members on 13 April 2018. The trustee of the EBT has waived the entitlement to receive dividends on the Ordinary shares held by the trust. In accordance with IAS 10, there is no payable recognised at 31 December 2017 in respect of this proposed dividend.

9 CAPITAL EXPENDITURE AND COMMITMENTS

Capital Expenditure

During the year the Group purchased property, plant and equipment and intangible assets for a cost of £15.3 million (2016: £15.6 million), excluding property, plant and equipment and intangible assets acquired through business combinations. In addition, textile rental items with a cost of £43.7 million were acquired in the year (2016: £35.4 million), excluding textile rental items acquired through business combinations. Offsetting this, property, plant and equipment with a net book value of £0.1 million was disposed (2016: £0.6 million). In addition, amounts received in respect of textile rental special charges were £2.1 million (2016: £2.7 million).

Capital Commitments

Orders placed for future capital expenditure contracted but not provided for in the financial statements are shown below:

10 POST-EMPLOYMENT BENEFIT OBLIGATIONS

The Group has applied the requirements of IAS 19, 'Employee Benefits' (revised June 2011) to its employee pension schemes and post-retirement healthcare benefits. The Group operates a defined benefit pension scheme, the Johnson Group Defined Benefit Scheme ('JGDBS'). The JGDBS was closed to future accrual on 31 December 2014.

As part of the Group's objective to reduce its overall pension deficit, deficit recovery payments of £1.9 million (2016: £1.9 million) were paid to the JGDBS. In addition, a further, one-off, deficit recovery payment of £1.5 million was made in April 2017.

A net re-measurement and experience gain of £3.2 million has been recognised in the year to 31 December 2017. This is principally as a result of asset returns over the period being £9.8 million higher than previously assumed together with an experience gain on liabilities of £1.0 million being offset, to a lesser extent, by an increase in liabilities due to changes in financial and demographic assumptions of £7.6 million.

The gross 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:

NOTES TO THE PRELIMINARY ANNOUNCEMENT (continued)

11 SHARE CAPITAL

Issue of Ordinary shares of 10p each

An analysis of the new shares issued in each year is shown below:

Note 1: During the year the Group placed nil (2016: 33,061,540) Ordinary shares with institutional investors raising net proceeds of £nil (2016: £28.7 million) of which £nil (2016: £3.3 million) was credited to share capital. The placing in the prior year was undertaken using a cash box structure. As a result, the Company was able to take relief under section 612 of the Companies Act 2006 from crediting share premium and instead transfer the net proceeds in excess of the nominal value to retained earnings.

Note 2: 1,025,000 (2016: Nil) Ordinary shares were allotted to the EBT at nominal value to be used in relation to employee share option exercises. The total nominal value received was £102,500 (2016: £nil). At the time of allotment, the EBT already held 20,753 (2016: 20,753) Ordinary shares of 10 pence each which, together with the 1,025,000 (2016: nil) newly allotted Ordinary shares of 10 pence each, were part used to satisfy the exercise of 1,029,043 (2016: nil) LTIP options.

Note 3: 366,356 (2016: 1,476,456) SAYE Scheme options were exercised with a total nominal value of £36,636 (2016: £147,645).

The total proceeds received on allotment in respect of all of the above transactions were £0.3 million (2016: £29.3 million) and were credited as follows:

12 BORROWINGS

As at 31 December 2017, borrowings were secured and drawn down under a committed facility dated 21 February 2014, as amended and restated on 24 April 2015 and as further amended and restated on 22 April 2016, comprising a £120.0 million rolling credit facility (including an overdraft) which runs to 24 April 2020.

Individual tranches are drawn down, in sterling, for periods of up to six months at LIBOR rates of interest prevailing at the time of drawdown, plus the applicable margin. The margin varies between 1.25% and 2.25%.

As at 31 December 2017, £50.0 million of borrowings were subject to hedging arrangements which had the effect of replacing LIBOR with fixed rates as follows:

§ for £15.0 million of borrowings, LIBOR is replaced with 1.4725% from 8 January 2016 to 8 January 2019;

§ for £15.0 million of borrowings, LIBOR is replaced with 1.665% from 8 January 2016 to 8 January 2020;

§ for £10.0 million of borrowings, LIBOR is replaced with 0.49% from 30 June 2016 to 30 June 2018; and

§ for £10.0 million of borrowings, LIBOR is replaced with 0.5525% from 30 June 2016 to 30 June 2019.

Borrowings are stated net of unamortised issue costs of £0.4 million (31 December 2016: £0.7 million).

NOTES TO THE PRELIMINARY ANNOUNCEMENT (continued)

13 BUSINESS COMBINATIONS AND DISCONTINUED OPERATIONS

BUSINESS COMBINATIONS

On 28 July 2017 the Group acquired 100% of the share capital of Clayfull Limited, which trades as PLS ('PLS'), for a net consideration of £7.5 million (being a gross consideration of £6.6 million adjusted for normalised working capital, cash and debt like items together with £1.3 million in respect of the acquisition of a freehold building used by PLS) plus associated fees. Included within net consideration is £0.3 million of contingent consideration. Since acquisition, PLS has generated a profit of £0.2 million on revenue of £2.7 million. Had the business been acquired at the start of the period it is estimated that a profit of £0.2 million would have been generated on revenue of £6.2 million.

On 11 December 2017 the Group acquired 100% of the share capital of StarCounty Textile Services Limited ('Star') for a net consideration of £2.0 million (being a gross consideration of £3.9 million adjusted for debt like items) plus associated fees. Included within net consideration is £0.2 million of contingent consideration. Since acquisition, Star has generated a profit of £nil on revenue of £0.3 million. Had the business been acquired at the start of the period it is estimated that a profit of £nil would have been generated on revenue of £4.5 million.

The provisional fair value of assets and liabilities acquired are as follows:

Goodwill represents the deferred income tax arising on the recognition of the customer contracts plus the expected benefits to the wider Group arising from the acquisition. None of the acquired goodwill is expected to be deductible for tax purposes.

PLS and Star have been included within the HORECA reporting segment, PLS within the Afonwen CGU and Star within the Stalbridge CGU.

In 2016, the Group acquired the entire share capital of Zip Textiles (Services) Limited ('Zip'), Chester Laundry Limited ('Chester') and Portgrade Limited, together with its trading subsidiary Afonwen Laundry Limited ('Afonwen'). Full details are provided in the 2016 Annual Report.

Cash flows from business acquisition activity

The cash flows in relation to business acquisition activity are summarised below:

The £0.5 million adjustment in 2017 relates to contingent consideration of £0.3 million and £0.2 million for PLS and Star respectively which may become payable in future periods dependent upon the outcome of certain, currently unknown, events. The £0.8 million adjustment in 2016 relates to deferred consideration paid in the prior year in relation to Ashbon, which was acquired in 2015. Further deferred consideration of £0.3 million relating to that acquisition remains payable.

Costs in relation to business acquisition activity in the current year include the payment of £0.2 million of costs that were recognised in 2015 and costs in relation to business acquisition activity in the prior year include the payment of £0.1 million of costs that were recognised in 2015.

NOTES TO THE PRELIMINARY ANNOUNCEMENT (continued)

13 BUSINESS COMBINATIONS AND DISCONTINUED OPERATIONS (continued)

DISPOSALS AND DISCONTINUED OPERATIONS

On 4 January 2017 the Group disposed of its Drycleaning operation for a consideration of £8.3 million on debt free, cash free basis and subject to adjustments for normalised working capital. The initial proceeds for the disposal, net of transaction costs of £0.5 million, were £6.8 million, with a further £1.0 million of contingent consideration which was received on 29 December 2017. Disposal costs of £0.5 million were expensed in the year of which payments of £0.4 million were made. The remaining £0.1 million is expected to be paid in 2018.

The Drycleaning business is included in the December 2016 Balance Sheet as "assets classified as held for sale" and "liabilities directly associated with assets held for sale". The anticipated loss on disposal of £2.0 million was reflected as an impairment of goodwill as at 31 December 2016 and included within Discontinued Operations.

Assets and related liabilities classified as held for sale are as follows: