Up Global Regulatory News (UPGS)

Notes to the Interim Results

1. General Information

UP Global Sourcing Holdings plc ('the Company') and its subsidiaries (together 'the Group') is a supplier of branded, value for money household products to global markets.

The Company is a public limited company, which is listed on the London Stock Exchange and incorporated and domiciled in the UK. The address of its registered office is UP Global Sourcing Holdings plc, Manor Mill, Victoria Street, Chadderton, Oldham OL9 0DD.

This consolidated condensed interim financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 July 2019 were approved by the Board of Directors on 4 November 2019 and delivered to the Registrar of Companies. The comparative figures for the financial year ended 31 July 2019 are an extract of the Company's statutory accounts for that year, as restated for the adoption of IFRS 16. The report of the auditor on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 (2) or (3) of the Companies Act 2006.

This consolidated condensed interim financial information is unaudited but has been reviewed by the Company's Auditor.

2. Basis of Preparation

This consolidated condensed interim financial information for the six months ended 31 January 2020 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority (previously the Financial Services Authority) and with IAS 34, 'Interim Financial Reporting' as adopted by the European Union. The consolidated condensed interim financial information should be read in conjunction with the audited financial statements for the year ended 31 July 2019, which have been prepared in accordance with IFRSs as adopted by the European Union.

Going Concern Basis

The Group meets its day-to-day working capital requirements through its bank facilities. After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group's forecasts and projections, taking account of reasonable sensitivities, including specific consideration of the potential risks associated with the COVID-19 outbreak, show that the Group should be able to operate within available facilities. The Group therefore continues to adopt the going concern basis in preparing its consolidated condensed interim financial statements. See the Chairman and Chief Executive's statement for further comments in relation to COVID-19.

3. Accounting Policies

The accounting policies applied are consistent with those of the annual financial statements for the year ended 31 July 2019, except for the following:

Adoption of IFRS 16

The Group has adopted IFRS 16 'Leases' effective for the accounting period commencing 1 August 2019. IFRS 16 has been applied fully retrospectively and comparatives for the prior periods have been restated. Further details of the impact of adoption of IFRS 16 is described in Note 24.

Leases

The Group assesses whether a contract is, or contains a lease at inception of the contract. A lease conveys the right to direct the use and obtain substantially all of the economic benefits of an identified asset for a period of time in exchange for consideration.

The Group as a lessee:

A right-of-use asset and corresponding lease liability are recognised at commencement of the lease. The lease liability is measured at the present value of the lease payments, discounted at the rate implicit in the lease, or if that cannot be readily determined, at the lessee's incremental borrowing rate specific to the term, country, currency and start date of each lease. Lease payments include: fixed payments; variable lease payments dependent on an index or rate, initially measured using the index or rate at commencement; the exercise price under a purchase option if the Group is reasonably certain to exercise; penalties for early termination if the lease term reflects the Group exercising a break option; and payments in an optional renewal period if the Group is reasonably certain to exercise an extension option or not exercise a break option.

The lease liability is subsequently measured at amortised cost using the effective interest rate method. It is remeasured, with a corresponding adjustment to the right-of-use asset, when there is a change in future lease payments resulting from a rent review, change in an index or rate such as inflation, or change in the Group's assessment of whether it is reasonably certain to exercise a purchase or extension option or not exercise a break option.

The right-of-use asset is initially measured at cost, comprising: the initial lease liability; any lease payments already made less any lease incentives received; initial direct costs; and any dilapidation or restoration costs. The right-of-use asset is subsequently depreciated on a straight-line basis over the shorter of the lease term or the useful life of the underlying asset. At each reporting date, the Group reviews the carrying amounts of its right-of-use assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any).

When the Group renegotiates the contractual terms of a lease with the lessor, the accounting depends on the nature of the modification. If the renegotiation results in one or more additional assets being leased for an amount commensurate with the standalone price for the additional rights-of-use obtained, the modification is accounted for as a separate lease in accordance with the above policy. In all other cases where the renegotiation increases the scope of the lease (whether that is an extension to the lease term, or one or more additional assets being leased), the lease liability is remeasured using the discount rate applicable on the modification date, with the right-of use asset being adjusted by the same amount. If the renegotiation results in a decrease in the scope of the lease, both the carrying amount of the lease liability and right-of-use asset are reduced by the same proportion to reflect the partial or full termination of the lease with any difference recognised in profit or loss. The lease liability is then further adjusted to ensure its carrying amount reflects the amount of the renegotiated payments over the renegotiated term, with the modified lease payments discounted at the rate applicable on the modification date. The right-of-use asset is adjusted by the same amount.

Leases of low value assets and short-term leases of 12 months or less are expensed to the income statement, as are variable payments dependent on performance or usage, 'out of contract' payments and non-lease service components.

Critical Accounting Judgements

Leases

Management exercises judgement in determining the likelihood of exercising break or extension options in determining the lease term. Break and extension options are included to provide operational flexibility should the economic outlook for an asset be different to expectations, and hence at commencement of the lease, break or extension options are not typically considered reasonably certain to be exercised, unless there is a valid business reason otherwise.

The discount rate used to calculate the lease liability is the incremental borrowing rate which is determined at the lease commencement date with consideration to the term, country and currency of the lease. The incremental borrowing rate is determined based on the entities' existing borrowing rates. Management have performed a sensitivity analysis on the rate used and note that decreasing or increasing the rate by 1 %, will not have a material impact on the financial statements.

COVID-19

Management have considered the Coronavirus pandemic to be a non-adjusting post balance sheet event, since as at the period end and based upon the information known at that time, management were of the opinion that it was not expected to have a significant impact on the trading results.

4. Operating Segments

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is responsible for allocating resources and assessing performance of operating segments.

The Directors consider that there are no identifiable business segments that are subject to risks and returns different to the core business. The information reported to the Directors, for the purposes of resource allocation and assessment of performance, is based wholly on the overall activities of the Group. The Group has therefore determined that it has only one reportable segment under IFRS 8.

The results and assets for this segment can be determined by reference to the statement of comprehensive income and statement of financial position.

5. Principal Risks and Uncertainties

With the exception of the new risk and uncertainties posed by the COVID-19 outbreak discussed below, the Directors consider that the principal risks and uncertainties, which could have a material impact on the Group's performance in the remaining 6 months of the financial year, remain substantially the same as those stated on pages 22-27 of the Group's Annual Report for the year ended 31 July 2019, which is available on the Group's website, www.upgs.com.

COVID-19

The Coronavirus pandemic represents an unprecedented worldwide crisis. In the short-term, the pandemic is expected to have an impact on demand and decline in turnover as retailers respond to the shutdown of their stores. It is not yet clear how long the pandemic will last and what the medium-to-long-term effect will be on consumer behaviour. The Group is carrying out a range of financial and operational measures to protect the business and its employees, as discussed in more detail in the Chairman and Chief Executive's statement.  

6. Financial Instruments

The Group's activities expose it to a variety of financial risks: market risk (including foreign exchange risk, cash flow and fair value interest rate risk and price risk), credit risk and liquidity risk.

The condensed interim financial statements should be read in conjunction with the Group's Annual Report for the year ended 31 July 2019, as they do not include all financial risk management information and disclosures contained within the Annual Report. There have been no changes in the risk management policies since the year-end.

7. Revenue

The Group has disaggregated revenue into various categories in the following tables which are intended to depict the nature of the Group's revenue.

Geographical split by location:

Analysis of Revenue by Brand:

Analysis of Revenue by Major Products:

Analysis of Revenue by Strategic Pillar:

^ During the year ended 31 July 2019, management altered the strategic pillars that are presented to the Board of Directors to better reflect the attributes of the Group. The comparatives for the six months ended 31 January 2019 have been restated.

Included within revenue are sales to customers who individually account for over 10 % of the Group's total sales and in total this amounted to approximately £18,413,000 being 2 customers (six months ended 31 January 2019: £22,084,000 being 2 customers; year ended 31 July 2019: £42,882,000 being 2 customers).

8. Seasonality of Operations

Overall the Group's product range is not significantly seasonal, however, retail demand is higher in the Christmas trading period. As a result of this and the anticipated impact of the COVID-19 outbreak discussed in note 5 above, it is anticipated that the operating profits for the second half of the year ending 31 July 2020 will be lower than those for the six months ended 31 January 2020.

9. Share-based Payment Charges

The share-based payment expense relates to the non-cash charge arising on the Management Incentive Plan ('MIP'), the Save as You Earn ('SAYE') and the Performance Share Plan ('PSP').

The above items have been shown separately in the Income Statement to better reflect the performance of the underlying business.

10. Operating Profit

EBITDA represents profit from operations before depreciation and amortisation. Underlying EBITDA represents EBITDA, as defined above, adjusted for the share-based payment charges set out in note 9 above. The Directors use EBITDA and underlying EBITDA as key performance indicators of the Group's business.

The following table sets forth a reconciliation of EBITDA and Underlying EBITDA to profits from operations for the periods indicated.

11. Finance Costs

12. Profit Before Taxation

The Directors also monitor the Group's performance with respect to profit before taxation and underlying profit before taxation. Underlying profit before taxation represents profit before taxation adjusted for the share-based payment charges set out in note 9 above.

The following table sets forth a reconciliation of profit before taxation and underlying profit before taxation for the periods indicated.

13. Taxation

The interim period tax charge is accrued based on the estimated average annual effective income tax rate of 22.0 % (six months ended 31 January 2019: 20.5 %; year ended 31 July 2019: 21.2 %).

The effective income tax rates on the underlying profit before taxation was 21.4 % (six months ended 31 January 2019: 20.2 %; year ended 31 July 2019: 20.5 %).

Following the Budget on 11 March 2020, legislation will be introduced in the Finance Bill 2020 to amend the main rate for Corporation Tax to 19 % from 1 April 2020. Prior to this, the rate was set to reduce from 19 % to 17 % on 1 April 2020.

14. Earnings per Share

Basic earnings per share is calculated by dividing the net income for the period attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period.

Diluted earnings per share amounts are calculated by dividing the profit attributable to owners of the parent by the weighted average number of ordinary shares in issue during the financial year, adjusted for the effects of potentially dilutive options. The dilutive effect is calculated on the full exercise of all potentially dilutive ordinary share options granted by the Group, including performance-based options which the Group considers to have been earned.

The calculations of earnings per share are based on the following:

No dilution arose in the 6 months ended 31 January 2019 as the hurdle for the MIP Option Scheme was not achieved based upon the interim measurement of the criteria as at 31 January 2019.

The underlying earnings per share referred to below is based on the underlying profit for the period, which reflects the profit for the period after adding back the share-based payment charges set out in note 9 and the tax effects as set out in note 13, divided by the weighted average number of shares in issue for the period.

15. Dividends

The final dividend declared in respect of the year ended 31 July 2019 was paid in the 6 months ended 31 January 2020.

As a result of the COVID-19 pandemic, the Board has not declared an interim dividend in order to conserve cash and maintain the financial strength of the business during this challenging period.

16. Property, Plant and Equipment

Further information on right of use assets included in the above, as a result of adopting IFRS 16, are set out in note 24.

17. Trade and Other Receivables

The Directors believe that the carrying value of trade and other receivables represent their fair value. Trade and other receivables are denominated in Sterling, US Dollars, Euros and Canadian Dollars. In determining the recoverability of trade receivables, the Group considers any change in the credit quality of the receivable from the date credit was granted up to the reporting date.

18. Trade and Other Payables

Trade payables principally consist of amounts outstanding for trade payables and ongoing costs. They are non-interest bearing and are normally settled on 30 to 60 days terms.

The Directors consider that the carrying value of trade and other payables approximates their fair value. Trade and other payables are denominated in both Sterling, US Dollars and Euros. UP Global Sourcing Holdings plc has financial risk management policies in place to ensure that all payables are paid within the credit timeframe and no interest has been charged by any suppliers as a result of late payment of invoices during the period.

19. Borrowings

The Group is funded by external bank facilities provided by HSBC comprising a revolving credit facility of £8.2 m and an invoice discounting facility of £23.5 m both running to 2024, along with an import loan facility of £8.7 m which is subject to annual review.

20. Lease Liabilities

The following tables show the discounted lease liabilities included in the Group balance sheet and a maturity analysis of the contractual undiscounted lease payments:

Maturity analysis - contractual undiscounted lease payments

Right-of-use assets

The right-of-use assets above are disclosed as a non-current asset and are included within property, plant and equipment as shown in note 16.

21. Financial Instruments

a) Principal financial instruments

The principal financial instruments used by the Group, from which financial instrument risk arises are as follows:

b) Financial assets

The Group held the following financial assets at amortised cost:

c) Financial liabilities

The Group held the following financial liabilities, classified as other financial liabilities at amortised cost:

d) Derivative financial instruments

The Group held the following derivative financial instruments, classified as fair value through profit and loss on initial recognition:

The following is a reconciliation of the financial instruments to the statement of financial position:

Derivative financial instruments - Forward contracts

The Group mitigates the exchange rate risk for certain foreign currency trade debtors and creditors by entering into forward currency contracts. At 31 January 2020, the outstanding contracts all mature within 12 months of the period end (31 January 2019: 12 months; 31 July 2019: 12 months). At 31 January 2020, the Group was committed to buy US$30,350,000, to sell €19,050,000, buy CNY 7,094,000 and to sell CA$50,000, paying and receiving respectively a fixed sterling amount (31 January 2019: to buy US$33,000,000, to sell €15,250,000, to buy CNY Nil and to sell CA$175,000; 31 July 2019: to buy US$35,500,000, to sell €16,050,000, to buy CNY 7,960,000 and to sell CA$155,000). The forward currency contracts are measured at fair value using the relevant exchange rates for GBP:USD, GBP:EUR, GBP:CNY and GBP:CAD. The fair value of the contracts at 31 January 2020 is a liability of £173,000 (31 January 2019: £318,000 asset; 31 July 2019: £1,240,000 asset).

Forward currency contracts are valued using level 2 inputs. The valuations are calculated using the period end exchange rates for the relevant currencies which are observable quoted values at the period end dates. Valuations are determined using the hypothetical derivative method which values the contracts based on the changes in the future cash flows based on the change in value of the underlying derivative.

All of the forward contracts to buy US Dollars and some of those to sell Euros meet the conditions for hedge accounting, as set out in the accounting policies of the financial statements for the year ended 31 July 2019.

Derivative financial instruments - Interest rate swaps and interest rate caps

The Group has entered into interest rate swaps and interest rate caps to protect the exposure to interest rate movements on the various elements of the Group's banking facility. As at 31 January 2020, protection was in place over an aggregate principal of £13,957,000 (31 January 2019: £17,659,000, 31 July 2019: £11,970,000).

None of the interest rate swaps meet the conditions for hedge accounting, as set out in the accounting policies contained in the financial statements for the year ended 31 July 2019.

Interest rate swaps and caps are valued using level 2 inputs. The valuations are based on the notional value of the swaps and caps, the current available market borrowing rate and the swapped or capped interest rate respectively. The valuations are based on the current valuation of the present saving or cost of the future cash flow differences, based on the difference between the swapped and capped interest rates contracts and the expected interest rate as per the lending agreement.

22. Events Occurring After the Reporting Period

COVID-19

Since the conclusion of the six months ended 31 January 2020, the Coronavirus crisis has spread beyond China and is now being felt worldwide. The rapidly evolving pandemic and corresponding measures being taken by governments to control the virus are impacting both the Group and wider global economy. Since the lockdown, the Group has seen a reduction in demand for its products and a decline in turnover as retailers respond to the closure of their stores by cancelling or deferring orders. The Group has also seen a delay in the placing of new orders.

In response to lockdown measures, the Group's UK and European offices are currently closed, however employees are working remotely with no resulting disruption to the day-to-day running of the business. No permanent headcount reductions have been made, however a number of employees have been placed on furlough leave. The Group's online business remains open, with a strictly monitored and comprehensive range of safety measures in order to protect those employees involved in the processing and distributing of orders. The Group's Guangzhou office has reopened and supply chain operations in China have now normalised, with over 90 % of its factories back up to full production.

The Group has implemented a range of measures to protect the business during this challenging time, including:

- making use of the UK government's VAT deferral, Job Retention Scheme and Time to Pay initiatives;

- receiving credit approval for a £4.0 m increase in its RCF facility, amortising over the period to 31 January 2021, in addition to an extension of the funding period of its import loan facility from 120 days to 180 days and an increase in the percentage of receivables advanced via the invoice discounting facility, both already agreed and implemented;

- temporarily halting all non-essential capital expenditure projects;

- suspending the interim dividend;

- deferring or delaying purchase orders placed with the Group's manufacturers where necessary.

The Directors continue to monitor developments with a potential impact of the Coronavirus in the short and medium term.

Purchase of own shares

On 18 February 2020 the UPGS EBT acquired 500,000 shares in the Company for a total cost of £342,143, including the associated acquisition costs. On 28 February 2020 the UPGS EBT acquired a further 250,000 shares in the Company for a total cost of £161,762. Following these transactions, the UPGS EBT holds 4,058,307 shares, representing 4.94 % of the Company's issued share capital with voting rights.

23. Related Party Transactions

24. Significant Accounting Changes: IFRS 16, Leases

This note explains the impact of the adoption of IFRS 16 'Leases' on the Group's financial position and financial performance.

IFRS 16 is effective for the accounting period commencing 1 August 2019. The Group adopted the standard using the fully retrospective method, with comparatives restated from a transition date of 1 August 2018.

IFRS 16 requires lessees to recognise right-of-use assets and lease liabilities on balance sheet for all leases, except short-term and low value asset leases. At commencement of the lease, the lease liability equals the present value of future lease payments, discounted at the incremental borrowing rate at the start of the lease, and the right-of-use asset equals the lease liability, adjusted for payments already made, lease incentives, initial direct costs and any provision for dilapidation costs.

For pre-IFRS 16 operating leases, the rental charge is replaced by depreciation of the right-of-use asset and interest on the lease liability.

Under IFRS 16, the lease liability is remeasured upon the occurrence of certain events, such as a change in lease term or a change in future lease payments resulting from a change in an index or rate (for example, inflation-linked payments or market rate rent reviews). A corresponding adjustment is made to the right-of-use asset.

The Group applied the practical expedient not to reassess whether a contract is, or contains, a lease on transition. The Group has elected to recognise payments for short-term leases and leases of low value assets on a straight-line basis as an expense in the income statement.

The most significant IFRS 16 judgements and estimates include the determination of lease term when there are extension or termination options, the selection of an appropriate discount rate to calculate the lease liability and the impairment of right-of-use assets. See Note 3 for further information.

The Group's lease portfolio consists of its principal properties (Manor Mill, Heron Mill, Guangzhou and Cologne) along with certain other plant and equipment.

IFRS 16 has an impact on reported assets, liabilities and the Income Statement of the Group, as well as the classification of cash flows relating to lease contracts. The standard impacts a number of key measures including operating profit, EBITDA and Earnings per Share.

Income Statement restatement

The table below sets out the impact of IFRS 16 on the comparative period income statements for the 6 months ended 31 January 2019 and the year ended 31 July 2019. Administrative expenses reduce and finance costs increase as straight-line operating lease rental expense is replaced by depreciation of the right-of-use asset and interest on the lease liability. This results in higher operating profit and higher EBITDA. As the interest expense is front-end loaded and decreases as the lease liability decreases, profit before tax is lower in the early stages of a lease and higher in the later stages when compared to a straight-line rental expense.

Statement of Financial Position restatement

The tables below set out the impact of IFRS 16 on the comparative period Statements of Financial Position as at 31 January 2019 and 31 July 2019. Property, plant and equipment and lease liabilities both increase as right-of-use assets are brought on balance sheet. As leases are brought on balance sheet, gains or losses on hedging instruments used to mitigate the exchange risk for certain foreign currency property leases no longer meet the conditions for hedge accounting, resulting in an adjustment to the hedging reserve.

Cash Flow Statement restatement

The table below sets out the impact of IFRS 16 on the comparative period cash flow statements for the 6 months ended 31 January 2019 and the year ended 31 July 2019. IFRS 16 has no impact on total cash flow for the period or cash and cash equivalents at the end of the period. Cash generated from operations increase as operating lease rental expenses are no longer recognised as operating cash outflows. Cash outflows are instead split between interest paid and repayments of obligations under leases, which both increase.