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 2017 were approved by the Board of directors on 6 November 2017 and delivered to the Registrar of Companies. The comparative figures for the financial year ended 31 July 2017 are an extract of the Company's statutory accounts for that year. 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 2018 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 2017, which have been prepared in accordance with IFRSs as adopted by the European Union.

As referred to in note 8 of the financial statements for the year ended 31 July 2017, the Directors have taken the decision to reclassify to cost of sales, certain costs that had previously been reported as part of both distribution costs and administrative expenses. The impact on the six months ended 31 January 2017 is the reclassification of £1,038,000 from distribution costs and the reclassification of £500,000 from administrative expenses. The result has been an increase in cost of sales of £1,538,000, with no impact upon previously reported equity.

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, 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. 

3. Accounting policies

The accounting policies applied are consistent with those of the annual financial statements for the year ended 31 July 2017.

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

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 19-23 of the Group's Annual Report for the year ended 31 July 2017, which is available on the group's website, www.upgs.com.

The result of the referendum in favour of the UK leaving the European Union resulted in a weakening of sterling, creating imported cost price inflation and, in turn, retail price inflation, leading to a dampening of consumer demand. We are closely following developments in this area and will adapt our strategy as the impact of the UK exit from the European Union becomes clearer.

The Group has an exposure to US Dollars for the purchase of goods and this is partially hedged by virtue of invoicing a proportion of its turnover in US Dollars. In addition, the Group invoices a proportion of its turnover in Euros and Canadian Dollars and where necessary, the Group uses forward currency contracts to further mitigate its foreign currency exposure.

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 2017, 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

Geographical split by location:

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, it is anticipated that the operating profits for the second half of the year ending 31 July 2018 will be lower than those for the six months ended 31 January 2018.

9. Exceptional items and share based payment charges

Shareholder bonus costs consisted of bonus payments based on certain Group EBITDA performance targets. These costs ceased to accrue after the year ended 31 July 2017.

Initial public offering costs related entirely to the Group's IPO in March 2017 and therefore are not considered to relate to the Group's underlying performance. The costs incurred comprised principally legal and advisory fees and listing costs.

The share based payment expense relates to the non-cash charge arising on a share option management incentive plan adopted immediately prior to the IPO. The options have been valued using the Monte Carlo option pricing model and are granted with a three-year vesting period and can be exercised up to seven years following the vesting date.

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 exceptional items and 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. 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 exceptional items and 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.

12. Taxation

The interim period tax charge is accrued based on the estimated average annual effective income tax rate of 20.8% (six months ended 31 January 2017: 20.9%; year ended 31 July 2017: 24.9%).

The tax charge for the year ended 31 July 2017 was higher due to a higher level of expenses not deductible for tax purposes included within the exceptional items and share based payment charges arising in the second half of the year ended 31 July 2017.

The effective income tax rates on the underlying profit before taxation was 20.3% (six months ended 31 January 2017: 20.6%; year ended 31 July 2017: 21.1%).

The Chancellor announced in his Budget on 16 March 2016 that the main rate of corporation tax will be reduced to 17% from 1 April 2020 and the future current tax charges will reduce accordingly.

13. 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, and uses the number of shares as if they had always been subdivided from £1 shares to 0.25 p shares.

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 arises in the 6 months ended 31 January 2018 as the hurdle for the MIP Option Scheme (explained further in note 25 of the financial statements for the year ended 31 July 2017) was not achieved based upon the interim measurement of the criteria as at 31 January 2018.

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 exceptional items and share based payment charges set out in note 9 above and the tax effects as set out in note 12 above.

14. Dividends

The adjusted number of shares reflects the subdivision of ordinary share capital from 205,424 £1 shares into 82,169,600 0.25 p shares on 28 February 2017.

The final dividend declared in respect of the year ended 31 July 2017 was paid in the 6 months ended 31 January 2018.

An interim dividend of 0.83 p per share was approved by the Board on 27 April 2018 and will be paid on 27 July 2018 to shareholders on record as at 6 July 2018.

15. Property, plant and equipment

Additions to property, plant and equipment during the 6 months to 31 January 2017 and the year ended 31 July 2017 substantially included expenditure relating to the refurbishment of Heron Mill, the Group's new warehousing facility. Such expenditure in the 6 months to 31 January 2018 has reduced and the refurbishment is now substantially complete.

16. 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.

17. 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 and US Dollars. 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.

18. Borrowings

The Group is funded by external bank facilities provided by HSBC. The facilities run to July 2020 providing the ongoing funding of the Group and comprise a revolving credit facility of £6.2 m, an import loan facility of £6.5 m and an invoice discounting facility of £17 m.

19. 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) Financial assets /(liabilities)

The Group held the following financial assets/ (liabilities), classified as fair value through profit and loss:

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 2018, the outstanding contracts all mature within 12 months of the period end (31 January 2017: 7 months; 31 July 2017: 12 months). At 31 January 2018, the Group was committed to buy US$15,750,000, to sell €8,950,000 and to sell CA$90,000, paying and receiving respectively a fixed sterling amount (31 January 2017: to buy US$4,000,000, to sell €1,700,000 and to sell CA$225,000; 31 July 2017: to buy US$11,650,000, to sell US$3,500,000 to sell €7,050,000 and to sell CA$nil). The forward currency contracts are measured at fair value using the relevant exchange rates for GBP:USD, GBP:EUR and GBP:CAD. The fair value of the contracts at 31 January 2018 is a liability of £589,000 (31 January 2017: £309,000 asset; 31 July 2017: £200,000 liability).

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.

Derivative financial instruments - Interest rate swaps

The Group has entered into an interest rate swap to hedge the exposure to interest rate movements on the Group's revolving credit facility. The swap is based on a principal amount of £2,000,000 until 31 July 2018 and exchanges the exposure to a LIBOR interest rate to a fixed rate of 0.39%. The fair value of the swap at 31 January 2018 is an asset of £2,000, (31 January 2017: £nil, 31 July 2017: £nil).

In addition, the Group has entered into an interest rate swap to hedge the Group's exposure to interest rate movements on the Group's invoice discounting facility. The swap is based on a principal amount of £1,000,000 until 31 December 2019 and exchanges the exposure to Base Rate interest charges to a fixed rate of 0.31%. The fair value of the swap at 31 January 2018 is an asset of £10,000 (31 January 2017: £6,000 asset, 31 July 2017: £4,000 asset).

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

Derivative financial instruments - Interest rate caps

Along with the interest rate swaps referred to above, the Group has entered into interest rate cap agreements to protect the exposure to interest rate movements on the Group's banking facilities. The interest rate caps are measured at fair value, being the market value of the cap at the balance sheet date.

The Group has entered into an agreement to cap LIBOR interest rates at 1% until 31 December 2019 on a principal amount of £4,000,000. The fair value of the interest rate cap at 31 January 2018 was an asset of £8,000 (31 January 2017: £20,000 asset, 31 July 2017: £6,000 asset).

In addition, at 31 January 2018, the Group has entered into further agreements to cap LIBOR interest rates at 2% on a principal amount of £4,702,000, reducing to £2,842,000 by 31 December 2019. The fair value of the interest rate caps at 31 January 2018 was an asset of £9,000, (31 January 2017: £20,000 asset, 31 July 2017: £7,000 asset).

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

20. Events occurring after the reporting period

Interim dividend

As disclosed in note 14, an interim dividend of 0.83 p per share will be paid on 27 July 2018.

21. Related party transactions

Statement of Directors' Responsibilities

The Directors' confirm that these consolidated condensed interim financial statements have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting, as adopted by the European Union. The interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

• an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

• material related party transactions in the first six months and any material changes in the related party transactions described in the last annual report.

The Directors of UP Global Sourcing Holdings plc are listed on pages 32 to 35 of the Group's Annual Report for the year ended 31 July 2017, which is available on the group's website, www.upgs.com.

For and on behalf of the board of directors