Company Announcements

1 September 2022                                                                                                        

AIM:  JSG

Johnson Service Group PLC

('JSG' or 'the Group')

Interim Results for the Six Months ended 30 June 2022

and Intention to Launch a Share Buyback Programme

"Continuing recovery in HORECAConfidence for longer term growth."

FINANCIAL PERFORMANCE: SIGNIFICANT RECOVERY ACHIEVED

-     Total revenue of £176.2 million (June 2021: £99.6 million).

-     Organic revenue up 73.0% compared to H1 2021 and broadly in line with H1 2019.

-     Adjusted EBITDA¹ of £42.8 million (June 2021: £16.9 million); margin of 24.3% (June 2021: 17.0%).

-     Adjusted operating profit¹ of £12.8 million (June 2021: loss of £9.5 million³).

-     Operating profit of £6.7 million (June 2021: loss of £12.3 million³).

-     Adjusted profit before taxation² of £11.2 million (June 2021: loss of £11.1 million³).

-     Profit before taxation of £5.1 million (June 2021: loss of £13.9 million³).

-     Adjusted diluted EPS of 2.3 pence (June 2021: 1.9 pence loss).

-     Diluted EPS of 1.1 pence (June 2021: loss of 2.5 pence).

-     Reinstatement of progressive dividend policy with interim dividend of 0.8 pence per share.

FINANCING

-     Net debt, including IFRS 16 liabilities, at June 2022 of £57.7 million (December 2021: £60.1 million).

-     New £85 million bank facility to August 2025.

-     Intention to launch a share buyback programme of up to £27.5 million.

OPERATIONAL HIGHLIGHTS

-      Strong commercial momentum in HORECA with volumes continuing to recover as hospitality returns to more normal and predictable levels; Q2 volumes at 91% of 2019 level.

-      Successfully continued to secure and implement price increases across our customer base to mitigate the impact of inflationary pressures on our cost base.

-      Impact of energy price increases being proactively managed.

-      Increasing sales activity and strengthening pipeline of new business enquiries.

-      Continued capital investment across the estate to increase efficiencies and underpin capacity.

-      Progress made on our sustainability agenda.

Notes

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

2    "Adjusted profit / (loss) before taxation" refers to adjusted operating profit / (loss) less total finance costs.

3    June 2021 numbers have been restated in respect of IFRIC guidance issued in 2021 regarding accounting for cloud-based computer arrangements under IAS38 (see note 23).

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

"During the six-month period we have achieved a significant improvement in the Group's financial performance and are focusing on capital investment across the estate to improve energy and production efficiencies and underpin capacity, alongside implementing mitigating actions to seek to address current and future inflationary pressures.

Our organic growth is underpinned by increased sales activity and a strengthening pipeline of new business enquiries, whilst our strong balance sheet and cash generation means that we remain well placed to pursue earnings accretive acquisitions.

Reflecting our strong performance and resumption of more normal levels of cash generation, we have today announced the recommencement of our progressive dividend policy and our intention to launch a share buyback programme of up to £27.5 million.

Trading momentum since June 2022 has remained encouraging, with volumes in HORECA for the six weeks to the middle of August increasing to 92% of normal.  Nevertheless, and despite implementing material price increases across our customer base, we do expect some margin pressure in the short term, particularly in respect of energy costs.  However, based on our assumption that volumes follow the normal seasonal pattern over the coming months and are not impacted by a reduction in discretionary spending, or a further material deterioration in the energy markets, as a result of ongoing economic factors, we expect the full year outturn to be in line with current market expectations."

SELL-SIDE ANALYST MEETING

A presentation for sell-side analysts will be held today at 09:30, details of which will be distributed by Camarco.  A copy of the presentation will be available on the Company's website (www.jsg.com) following the meeting.

ENQUIRIES

Note: Throughout this statement 'adjusted operating profit/(loss)' refers to continuing operating profit/(loss) before goodwill impairment, amortisation of intangible assets (excluding software amortisation) and exceptional items.  'Adjusted profit/(loss) before taxation' refers to adjusted operating profit/(loss) less total finance cost.  'Adjusted EBITDA' refers to adjusted operating profit/(loss) plus the depreciation charge for property, plant and equipment, textile rental items and right of use assets plus software amortisation.  'Adjusted EPS' refers to earnings per share calculated based on adjusted profit/(loss) after taxation.  Underlying adjusted EPS refers to adjusted EPS calculated to exclude the impact of the 'super-deduction' capital allowances introduced by HMRC for a limited period.  The Board considers that 'adjusted operating profit/(loss)', 'adjusted profit/(loss) before taxation, 'adjusted EBITDA', 'adjusted EPS' and 'underlying adjusted EPS', all of which exclude the effects of non-recurring items or non-operating events, provide useful information for Shareholders on underlying trends and performance. 

OPERATIONAL AND FINANCIAL REVIEW

We are pleased with the overall performance of the Group in what has been another challenging period.  Workwear, which remained resilient throughout the pandemic, recorded revenue growth of 2.3% in the first half alongside strong customer retention, which remained at 95%.  As the first half progressed, Workwear saw a small contraction within a number of accounts in terms of products on rental and the market remains competitive.  Positively though, we are continuing to see a recovery in HORECA as hospitality returns to more normal and predictable levels.  Organic growth was strong in the first half of the year, as the Group benefited from like for like volume recovery, net new business and improved pricing, and our underlying EBITDA margin increased significantly year on year.

Inflationary pressures have impacted the Group in the first half but we have continued to secure and implement price increases across our customer base to mitigate the impact.  Importantly, we have also continued to focus on improved energy and production efficiencies and the delivery of our quality customer service.

Our existing scale, expertise and operational excellence means that we are well placed to capitalise on opportunities as our commercial markets continue to recover.

FINANCIAL REVIEW

Financial Results

Our results for the first half of 2022 reflect the slow start to the year in HORECA and the subsequent recovery in volume.  Half year revenue was £176.2 million, up from £99.6 million in 2021.  Adjusted EBITDA was £42.8 million (June 2021: £16.9 million) giving a margin of 24.3% (June 2021: 17.0%).  In the prior period, for the six months to 30 June 2021, the Group benefited from Coronavirus Job Retention Scheme (CJRS) claims of £9.9 million.

Total finance costs remained at £1.6 million (June 2021: £1.6 million). 

The exceptional charge of £0.5 million (June 2021: credit of £2.6 million) relates to site clearance costs at the Exeter site which was destroyed by fire in January 2020.  We anticipate further costs in the second half of the year as well as an exceptional credit of £1.5 million having now reached a financial settlement with the insurer in relation to the fire.

The adjusted profit before taxation was £11.2 million (June 2021: loss of £11.1 million).

Statutory profit before taxation, after amortisation of intangible assets (excluding software amortisation) of £4.2 million (June 2021: £5.4 million), goodwill impairment of £1.4 million (June 2021: £nil) and an exceptional charge of £0.5 million (June 2021: exceptional credit of £2.6 million) was £5.1 million (June 2021: loss of £13.9 million).

The tax rate on the adjusted profit before taxation, excluding exceptional items, the amortisation of software (excluding software amortisation) and goodwill impairment, was 9.7% (June 2021: 23.1%).  The rate is significantly below the headline corporation tax rate for the full year of 19% due to the impact of the capital allowances super-deduction which offers 130% first-year relief on qualifying main rate plant and machinery investments until 31 March 2023.  The impact of this super-deduction in the first half of 2022 is estimated to be a £2.6 million credit to corporation tax.

Adjusted diluted earnings per share was 2.3 pence (June 2021: adjusted diluted loss per share 1.9 pence).  Excluding the impact of the capital allowances super-deduction, the adjusted diluted earnings per share was 1.7 pence.

Dividend

Reflecting the recovery during recent months and the confidence that trading levels have returned to, and will remain at, more normal levels, the Board has reinstated its dividend payments.  An interim dividend of 0.8 pence per share will be paid on 4 November 2022 to those Shareholders on the register of members on 7 October 2022.  The ex-dividend date is 6 October 2022.  The dividend represents a return to our progressive dividend policy and it is the Board's current intention to reduce dividend cover from our historical level of cover of 3 times to 2.5 times by financial year 2024.

Finances

Free cash flow in the first half of the year, after capital lease payments, was £30.0 million compared to £5.7 million in the first half of 2021, reflecting the improved trading performance.

Total net debt (excluding IFRS 16) at 30 June 2022 was £21.9 million, a similar level to the December 2021 position of £22.3 million and reflecting significant investment in new rental stock, which is now at more normal levels.  After including the impact of IFRS 16, net debt at June 2022 was £57.7 million (December 2021: £60.1 million).

A new £85.0 million bank facility was entered into on 8 August 2022 for an initial three-year term.  The initial margin is 1.45% over SONIA.  The terms of the facility provide an option to extend the term for up to a further two years and an option to increase the facility by up to a further £50.0 million, both with bank consent.  It is our intention to add ambitious sustainability performance targets to this facility in the near future in order to make it a Sustainability Linked Loan facility.

Covenants remain unchanged and comprise a leverage covenant (total debt to EBITDA) of less than three times and interest cover of not less than four times.  At 30 June 2022 the leverage ratio was 0.6 times.

Capital Structure and Share Buyback Programme

Our Capital Allocation policy remains unchanged.  The Group's objective is to employ a disciplined approach to investment, returns and capital efficiency to deliver sustainable compounding growth whilst also maintaining a strong balance sheet.  We continue to see exciting opportunities to deploy capital organically and have a good M&A pipeline.  Even after taking into consideration ongoing capital expenditure at current levels to fund organic growth, payment of dividends and acquisitions within the M&A pipeline, the Group has significant headroom under its committed facilities and target leverage of 1-1.5x.

As a result, the Board announces that, later this month, it intends to launch a share buyback programme of the Company's ordinary shares for up to a maximum aggregate consideration of £27.5 million during the period up until the Company's 2023 Annual General Meeting in early May 2023.  A further announcement will be made in due course.

Defined Benefit Pension Scheme ('the Scheme')

The recorded net surplus after tax for the Scheme, calculated in accordance with IAS 19, was £5.9 million at June 2022 compared to a net deficit of £0.9 million at December 2021.  The improvement in the position is due, in part, to a higher discount rate assumed on liabilities and lower assumed inflation.  We continue to have a significant portion of scheme assets invested so as to hedge against movements in liabilities, thereby reducing overall scheme volatility.

The next triennial valuation of the defined benefit pension scheme will be undertaken as at 30 September 2022 and we will continue with the existing deficit recovery payments of £1.9 million per annum until the result of the review is finalised.

BUSINESS REVIEW

Our Businesses

The Group comprises of Textile Rental businesses which trade through a number of very well recognised brands, servicing the UK's Workwear and Hotel, Restaurant and Catering ('HORECA') market sectors.  The 'Johnsons Workwear' brand predominantly provides workwear rental, protective wear and laundry services to corporates across all industry sectors.  Within HORECA, 'Stalbridge' and 'London Linen' provide premium linen services to the restaurant, hospitality and corporate events market and Johnsons Hotel Linen, our high volume linen business primarily serves the corporate four star and budget hotel market.  Also within HORECA, our recently acquired Northern Ireland business, Lilliput, predominantly services hotels and restaurants as well as a number of healthcare customers.

The year began with the continuing impact of COVID-19 which particularly impacted HORECA volumes.  As business activity began to recover to more normal levels we, like many other UK businesses, have experienced cost inflation and volatility.  We have agreed price increases across the customer base which will help to offset cost inflation and we will continue to keep pricing under review.

Energy

Energy costs (comprising gas, electricity and diesel) have been highly volatile over the period and remain so.  Costs for the first half of 2022 were significantly higher than the equivalent period in 2019 and represented 9.3% of revenue in the six months to 30 June 2022 (June 2019: 6.5%).

In respect of the third quarter this year, over 80% of our anticipated electricity usage and some 90% of our anticipated gas usage is fixed at prices significantly below current day ahead rates.  In quarter four, those proportions increase to 100% and 95%, respectively.  Looking ahead, 100% of our electricity requirement is fixed for the first quarter next year with up to 40% thereafter up to and including September 2024.  Similarly, we have fixed pricing in place for some 67% of our anticipated gas requirement through to September 2023.  In addition, we have hedged 67% of our anticipated diesel requirement for 2022 at rates significantly below current pricing.  We will continue to closely monitor markets and consider fixing further prices as opportunities allow.

Workwear Division

Total revenue for the Workwear division was £66.0 million (June 2021: £64.5 million), an increase of 2.3%, and includes the benefit of a small number of customer contracts acquired in February 2022.  Organic growth was 1.7%.  Adjusted EBITDA was £22.2 million (June 2021: £23.0 million) giving a margin of 33.6% (June 2021: 35.7%).  Adjusted operating profit was £10.0 million (June 2021: £11.3 million) with the June 2021 results including the benefit of a CJRS grant of £0.6 million.

The margin has been impacted by the lag in implementing price increases with customers compared to increases in the cost base.  Further pricing discussions are ongoing.

The division has continued to focus on maintaining the quality of service that we provide to our customers.  This was reflected in the first quarter's customer satisfaction results of 85%, maintaining our position of providing a first-class service.  Once again our logistic teams, in particular, received excellent feedback.  The service teams have proactively engaged with our customers and continue to successfully renew significant volumes of contracts.  Additional service sales to existing customers remain positive and has helped offset the impact of the increasing pressure from our customer base to reduce their workwear costs.  Whilst customer retention has remained at 95%, we have seen a small contraction within accounts in terms of products on rental.

The sales teams are continuing to gain momentum with increased activity and pipelines.  The recent launch of our new, more sustainable and recyclable garment, the 'Flex-Collection', is another exciting prospect.  This is being supported by a specific marketing campaign highlighting the innovative qualities of the garment.

In response to rising costs, and in particular energy, the operational teams remain focused upon the continuous improvement of our processes and delivering further enhancements to our operational efficiencies.  Following the successful implementation of the fully automated sortation systems in three of our sites, we are reviewing its installation into additional locations.

We continue to make progress with the implementation of our new laundry management system.  The installation phase will be completed by the third quarter.  The new system will allow us to implement new operating functionalities and procedures that will further enhance the quality of service to our customers, some of which are already in the trial phase.

HORECA Division

Notwithstanding the negative impact of the Omicron variant at the start of the year, total revenue for the HORECA division increased significantly to £110.2 million (June 2021: £35.1 million).  Adjusted EBITDA was £23.3 million (June 2021: £3.5 million loss).  Adjusted operating profit was £5.5 million (June 2021: £18.2 million loss) and, in June 2021, was after claiming a CJRS grant of £9.3 million.

HORECA volumes were 83% of normal in the first quarter, improving to 91% in the second quarter.  We are continuing to see a pipeline of new business and some additional sites have been installed during July and August 2022, adding over 6,700 new bedroom and 75 restaurant locations.  At least a further 5,000 bedrooms are anticipated to be installed before the end of the year.

Competition for new employees continues to be a challenge.  Previously, during periods of lower demand, our workforce would flex in both employee headcount and shifts operated in order to control costs.  Recruiting and retaining staff has been a key focus, with many engagement initiatives introduced, as well as guaranteed hours during low demand months and various learning and development opportunities made available.  Hourly rates, differentials and bonus incentives, to underpin consistency of headcounts and performance, have been reviewed and changed where necessary.  A significant amount of work has been undertaken to ensure the correct personnel resource is in place to meet customer peak demand and this will remain a continual process.

The Hotel, Restaurant and Catering business, which includes Johnsons Stalbridge and London Linen, has experienced a strong recovery in the first half of 2022 and a healthy conversion and pipeline of new business enquiries.  We have sought and achieved commercially improved terms with many customers and increased initial pricing to new accounts to keep pace with the significant cost inflation being experienced across the industry.

Within Hotel Linen, the beginning of 2022 resulted in lower than expected volumes due to the impact of restrictions relating to the Omicron Covid variant.  Service levels during the first six months have been consistently high but customer volumes remained lower than those of 2019.  These lower volumes are, in the main, due to the operational changes within our customer base on frequency of changing linen and the amount of linen provided in each room, impacting our stock turn ratio.  The link between a hotel's occupancy rates and the volumes to be processed in our laundries is now less of a reliable measure, impacting our forward planning, production efficiency and ultimately costs.

Constructive commercial discussions have taken place with customers relating to significant increases in our business costs.  We have implemented price increases across the customer base to offset the cost impact and also, in many instances, introduced minimum charges.  Our National Accounts team have achieved success in retaining key customers and continue to build strong business relationships.  We continue to benefit from ongoing sales and referrals for new business, especially from new build hotels where the strength of our longstanding reputation for service and quality continue to help us win additional new business from current and new customers.

The previously announced appointments of a Project Manager, National Transport Manager and a Learning and Development Manager have already made a good impact in supporting our people, service and operations.

Our field service teams have been busy rolling out our new 'Linen Room' customer portal.  The Linen Room has been well received by our customers, automating the linen order process and providing useful business intelligence.  Our new Customer Service Visit app provides us with real time customer feedback as well as providing us with information on opportunities to further develop and improve our service offering.

The £4.2m investment in our Bourne site was successfully completed on time and has improved working processes and underpins capacity.  The team at Bourne have maximised the opportunities provided by the investment and plans for further investment in 2022 are underway.  Our newly acquired Northern Ireland site has also received investment in increased washing, drying and towel folding capacity, providing a new unit and improved working practices.

The Carbon Trust backed water recycling system, which was successfully installed and trialled in our Shaftesbury site, has been shown to deliver a significant amount of recycled water and reduced energy and chemical usage.  Further equipment will be installed in our Cornwall site by the end of 2022 with plans to continue the roll out to other sites early next year.

We have started to replace plastic packaging wrap on many of our products with paper banding and we will be seeking to reduce plastic packaging further by the end of the year.  In July, we received delivery of our first electric commercial vehicles for our engineering teams and are at present trialing larger vehicles for potential use in our distribution network.

EMPLOYEES

Our employees remain the foundation of our business and are the key to us being able to provide excellent customer service.  The Board would like to thank them for their support, hard work and significant contribution to the business over the last six months.

SUSTAINABILITY

We believe that embedding a best in class sustainability programme throughout our operations will help position us as a leader in responding to the challenges faced by the textile services industry and prove to be a differentiator for our customers.  We aspire to create a culture where sustainability is embedded into our daily working life, continually developing and evolving to reflect the responsibility we have as a Group.

Following the launch of The Johnsons Way, our revised approach to sustainability, in February, we continue to make excellent progress with our sustainability programme.  We have developed the strategy around the four pillars of Our Family, Our World, Our Integrity and Our Communities and have implemented a robust governance and reporting framework to support the delivery of the programme.

A selection of some of the ongoing projects and initiatives we have undertaken include:

§ We have recently published our inaugural Sustainability Report - an overview of the progress we have made on the Johnsons Way.  The report is available on our website at www.jsg.com.

§ We have submitted our first CDP disclosure during the 2022 cycle (for our 2021 reporting year).  The results will be published in our 2022 Annual Report and Accounts.

§ Successful conclusion of the wastewater recycling pilot at our Shaftesbury site with significant water recovery being demonstrated.  Following the results achieved with the pilot we are installing additional equipment at our Cornwall site later this year with plans to continue the roll out to other sites thereafter.

§ Working in partnership with our suppliers and customers, we have made improvements on how we collate and manage our waste streams which has identified opportunities to reduce our waste to landfill.  We are also actively engaged with a group of customers to reduce their requirements for single use plastic packaging, with the introduction of recyclable alternatives.

§ Further to the electric vehicle trials completed last year, our employees have taken delivery of a number of electric and hybrid vehicles.  Depending on continued availability and delivery schedules, we anticipate achieving 25% of our company car fleet being electric or hybrid by the end of the year.

BOARD CHANGES

As previously announced, Nicola Keach was appointed to the Board on 1 June 2022 as an independent Non-Executive Director.

OUTLOOK

The Board remains confident that margins will continue to recover towards pre-pandemic levels and is excited about the growth opportunities available to the Group.  This is reflected, in part, by the reinstatement of the dividend.

Customer behaviour remains difficult to predict and, whilst there are inflationary pressures, which are expected to increase and continue at a heightened level, we have a resilient business model to help mitigate these challenges.  We also have some protection through the fixing of a proportion of our energy costs, although the Board is cognisant that the energy market remains highly volatile.  We continue to secure and implement price increases across our customer base which, along with expected additional volume which will better utilise our labour resource and improve processing efficiency, will help offset cost inflation.

Our existing scale, expertise and operational excellence means that we are well placed to capitalise on opportunities as markets continue to recover.  We will continue to identify opportunities for us to invest to strengthen our position in the market and enhance our competitive advantage as well as continuing to focus on delivering outstanding customer service and investing in both our employees and our laundry facilities.

Trading momentum since June 2022 has remained encouraging with volumes in HORECA for the six weeks to the middle of August increasing to 92% of normal.  Nevertheless, and despite implementing material price increases across our customer base, we do expect some margin pressure in the short term, particularly in respect of energy costs.  However, based on our assumption that volumes follow the normal seasonal pattern over the coming months and are not impacted by a reduction in discretionary spending, or a further material deterioration in the energy markets, as a result of ongoing economic factors, we expect the full year outturn to be in line with current market expectations.

RESPONSIBILITY STATEMENT

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

The Directors confirm that to the best of their knowledge:

§ the condensed consolidated interim financial statements have been prepared in accordance with IAS 34, 'Interim Financial Reporting' as adopted by the United Kingdom;

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

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

The Directors of Johnson Service Group PLC are listed in the Johnson Service Group PLC Annual Report for 2021 and, other than for the appointment of Nicola Keach on 1 June 2022, remain unchanged.  Details of the Directors are available on the Johnson Service Group PLC website: www.jsg.com

By order of the Board

Peter Egan                                            Yvonne Monaghan

Chief Executive Officer                          Chief Financial Officer

1 September 2022                                  1 September 2022

Forward Looking Statements

Certain statements in these condensed consolidated interim financial statements constitute forward-looking statements.  Any statement in this document that is not a statement of historical fact including, without limitation, those regarding the Company's future expectations, operations, financial performance, financial condition and business is a forward-looking statement.  Such forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially.  These risks and uncertainties include, among other factors, changing economic, financial, business or other market conditions.  These and other factors could adversely affect the outcome and financial effects of the plans and events described in these condensed consolidated interim financial statements.  As a result, you are cautioned not to place reliance on such forward-looking statements.  Nothing in this document should be construed as a profit forecast.