Financial Summary Change Revenue 200.6m 215.0m (7%) Revenue (excluding costs recharged to customers) 174.9m 171.3m +2%

Transcription

1 13 September 2006 JOHNSON SERVICE GROUP PLC STATEMENT FOR THE HALF YEAR ENDED 30 JUNE 2006 Johnson Service Group PLC, the textile related services and facilities management group announces its interim results for the half year ended 30 June Results Summary The Rental division achieved good sales growth but higher operating costs affecting margins Corporatewear achieved significant new business wins though activity remains biased to second half Facilities Management trading well and benefiting from successful SGP acquisition Drycleaning responding to cost reductions and branch rationalisation 26.5m sale and leaseback of Drycleaning properties completed Potential disposal of Drycleaning division advancing through auction process Financial Summary 2006 Change Revenue 200.6m 215.0m (7%) Revenue (excluding costs recharged to customers) 174.9m 171.3m +2% Reported Operating Profit 19.0m 14.1m +35% Adjusted Operating Profit* 14.9m 15.0m (1%) Reported Profit Before Tax 14.3m 10.2m +40% Adjusted Profit Before Tax* 10.2m 11.1m (8%) Interim dividend 4.6p 4.4p +5% * (before intangibles amortisation and exceptional items) We are encouraged by the prospects for the Group in the second half of the year. The Rental division will benefit from the good sales performance achieved in the first half, which should help offset some of the operating cost increases. Corporatewear and Facilities Management are both expected to perform strongly given the level of planned activity in the second half. In Drycleaning, action has been taken to reduce costs and promote sales, in an improving though still unpredictable marketplace. Whilst the remainder of the year will be influenced by the timing of activity in the Corporatewear and Facilities Management divisions, as well as the possible sale of the Drycleaning division, the Board continues to look forward to the future with confidence. For further information, please contact: Johnson Service Group PLC Stuart Graham, CEO Jim Wilkinson, CFO Tel: on 13 September only; thereafter Simon Sherrard, Chairman Hudson Sandler Michael Sandler Sandrine Gallien Tel: Website: 1

2 CHAIRMAN S STATEMENT The first half results reflect satisfactory trading by our major businesses, though the timing of activity in both the Corporatewear and Facilities Management divisions has, as previously indicated, further increased the bias of our profitability towards the second half. We remain encouraged by the level of business wins in both of these newly created divisions and believe that it is a positive indicator for their future prospects. The Rental division has had an excellent first half in winning new customers, which will help offset increasing operating costs. As announced in July we are pursuing a formal auction process for the Drycleaning business which would continue the well-established process of focusing the Group on activities with more predictable business to business revenue streams and long-term growth potential. GROUP RESULTS Total Group revenue in the six months to 30 June 2006 fell by 7% to million (: million), while underlying revenue, excluding costs recharged to customers, rose by 2% to million (: million). Operating profit, excluding amortisation of intangibles and exceptional items, was 1% lower than in the first half last year at 14.9 million (: 15.0 million). Interest charges increased to 4.7 million (: 3.9 million), reflecting higher average borrowings as a result of the eight acquisitions we completed during. Adjusted pre-tax profit, excluding amortisation of intangibles and exceptional items, was 10.2 million (: 11.1 million), a reduction of 8%. Exceptional profit during the half year of 6.9 million (: 0.7 million) comprised a profit of 8.6 million arising on the 26.5 million sale and leaseback of 79 retail trading properties currently occupied by the Drycleaning division, partly offset by restructuring costs in the same division of 1.7 million. After this exceptional credit and amortisation of intangibles of 2.8 million (: 1.6 million), profit before tax was up 40% at 14.3 million (: 10.2 million). Adjusted fully diluted earnings per share were 12.1p (: 13.2p), a reduction of 8%, while earnings inclusive of exceptional items and amortisation were up 45% at 17.5p (: 12.1p). FINANCES Total debt at the end of the first half was million, slightly reduced from the year-end December total of million. This followed the receipt of net cash of 23.6 million from our property disposal shortly before the end of the period. This sale and leaseback transaction was 2

3 undertaken with the intention of simplifying the process of disposing of our Drycleaning division, as well as reducing Group indebtedness. The underlying increase in debt, before the property disposal, reflected our continued substantial programme of capital expenditure, notably on the rollout of our Enterprise Resource Planning system. This was successfully implemented at Stalbridge Linen Services in April and Johnson Workplace Management in July. The remaining implementations at Johnsons Apparelmaster and at Head Office are expected to be completed by the end of This continuing level of expenditure will result in a similar level of debt at December 2006, which is well within our existing headroom. As referred to in the annual report the balance sheet liability in respect of the defined benefit pension schemes is related to the longevity assumptions and movements in the discount rate. At the half year a favourable movement in market assumptions has reduced the recorded net deficit after tax for all of the pension schemes by 9.7 million. This is in addition to the reduction resulting from the additional cash contributions of 1.4 million made in the second quarter, which will continue at the rate of 5.5 million per annum at least until the next formal valuation. DIVIDEND The Board has decided to pay an increased interim dividend of 4.6p per share (: 4.4p). This is a rise of 5%, reflecting our confidence in the Group s prospects and in line with our commitment to a progressive dividend policy. The interim dividend will be paid on 20 October 2006 to those shareholders on the register at the close of business on 29 September DIVISIONAL TRADING RESULTS Rental Revenue increased by 7% to 65.6 million (: 61.2 million), while adjusted operating profit was 11% lower than in the first half last year at 6.6 million (: 7.4 million), primarily as the result of increased operating costs. Johnsons Apparelmaster, the market-leading workwear laundering and rental business, maintained the positive sales trend established last year. Organic revenues remained stable and total revenue increased by 2%. Rentokil Initial s withdrawal from the UK linen and workwear market has assisted an exceptional new business sales performance, with over 1,600 new customers gained during the second quarter, including a number of leading food processors. Successful initiatives to improve customer focus have also helped to improve client retention. The period immediately following Rentokil s exit from the market was the first time that new revenue gained has outpaced revenue lost for at least five years, although we are now expecting to return to recent trends. In order to help offset the ongoing increase in operating costs we are continuing to improve the efficiency of our 3

4 plants through further investments in both people and infrastructure, with major refurbishments under way at our Birmingham, Leeds and Basingstoke sites. Stalbridge Linen Services, focused on the premium hotel, catering and corporate hospitality markets, again achieved excellent organic sales growth, with total revenues increasing by 24%. New business sales exceeded our targets, and customer retention improved on the exceptional performance achieved last year. As anticipated, pressure on operating margins arose as a result of our investment in additional people and technologies to support this growth, with the new IT system going live successfully in April. We are also investing in additional capacity, with a new, state-of-theart plant at Hinckley in the East Midlands currently under construction and due to come on stream early next year. Johnson Hospitality Services, providing furniture and catering equipment to the contract catering market, last year underwent rationalisation and restructuring following its poor performance. Trading has continued to be difficult and we will undertake a further review of the business during the second half of the year. Corporatewear Revenue of 36.8 million (: 39.6 million) was 7% below that of the previous first half, while adjusted operating profit was 16% lower at 3.8 million (: 4.5 million). This reflects the timing of major contracts for corporate uniforms, which this year are skewed even more heavily towards the second half. Our Corporatewear Division is the UK s clear market leader in the supply of high quality clothing for people at work. Since the beginning of 2006 our brands have continued to increase their share of this strongly growing market, winning significant new business with leading retail and restaurant chains. We have also secured commitments to renew their contracts from three of our largest customers, assuring the future of the secure, long-term revenue streams that are one of the most attractive features of this sector. Our brands focused on the public services have performed particularly strongly, making this an increasingly important part of our total offer. Yaffy, focusing on high quality police outerwear, and Boyd Cooper, supplying nurses uniforms, have both made excellent progress. Although we performed well in our Industrial division, delayed rollouts with two major food retailers and a leading bank meant that our Retail and Financial divisions performed slowly, though they are well positioned to make strong progress in the second half. The full integration of all the acquisitions we made in 2004 and is progressing well, and we are already realising the principal expected benefits of leveraging our Group scale to achieve lower product costs and improved quality. We expect to achieve further improvements in our customer offer and profitability as we complete this integration process in the months ahead. 4

5 Drycleaning Revenue for the division, which includes retail drycleaning and Alex Reid, the specialist supplies business, increased by 1% to 49.3 million (: 48.7 million) and adjusted operating profit improved by 6% to 3.6 million (: 3.4 million). The result for benefited from 0.7 million of profit from routine property disposals, with no benefit arising in Excluding the effect of this the underlying adjusted operating profit increase was 33%. Weak consumer demand, particularly in the first quarter, was reflected in a 2.3% decline in like-forlike retail Drycleaning sales. Sales were also affected by our branch rationalisation programme, which reduced the number of Johnsons and Sketchley outlets from 587 at the beginning of the year to 568 by 30 June. However, the benefit of cost control measures meant that the underlying profitability of the retail drycleaning business rose by 34%, with the operating margin improving from 3.8% to 5.1%. Total divisional turnover and profit also reflected the acquisition last year of Firbimatic UK to strengthen our Alex Reid business. Action was taken during the first half both to reduce the cost base of the retail business and to stimulate customer demand through a series of successful operational and marketing initiatives, without compromising quality. A major management restructuring in April helped to deliver a tighter operational focus and more effective cost control. This was reflected in improved trading results in the second quarter, against the background of a gradually improving retail market. We continue to focus on developing new stores in convenient, high traffic locations. A further drivein site and two new supermarket concessions were opened during the half-year, and all are trading to expectation. At the same time we have embarked on an active programme to rationalise underperforming branches. This will be ongoing. The elimination of loss-making sites, and our other actions to promote sales and reduce costs, are all expected to contribute to improved profitability during the second half. Jeeves of Belgravia, our London luxury drycleaning brand, maintained the more positive trend established in and is now trading profitably and achieving strong like-for-like sales growth. Although our specialist drycleaning supplies business, Alex Reid, suffered in line with the drycleaning market as a whole, the integration of Firbimatic, which was acquired in August, led to a 20% increase in revenue and a 216% uplift in operating profit. Although our drycleaning business is the clear UK market leader its revenues are intrinsically more volatile than those of our other divisions which have long-term contracted revenue with corporate customers. Following an initial approach in March 2006, we have received a number of expressions of interest in the business, and therefore embarked on a formal auction process in July of this year. We believe that it will be in the best interests of our Shareholders to seek offers for this business but 5

6 we will only dispose of it if satisfactory value can be achieved. We are currently reviewing the initial offers received and a further announcement will be made in due course. Facilities Management Revenue excluding costs recharged to customers grew by 6% to 23.2 million (: 21.8 million) while total revenue fell by 25% to 48.9 million (: 65.5 million), the latter being affected by reduced recharges to customers on project work. Adjusted operating profit increased by 63% to 2.6 million (: 1.6 million). This included an initial contribution from SGP Property Services (SGP), acquired in October. SGP, specialising in the provision of property management services to the financial, leisure and retail sectors, has continued to meet all our expectations and to achieve excellent year-on-year growth of 25%. During the half year it extended its established relationships with Tesco and Arcadia and gained new business with Marks & Spencer, Phones4U and Superdrug, the last of these in association with Johnson Workplace Management (JWM). JWM, focused primarily on the commercial office market, recorded lower turnover and operating profit, mainly as the result of the timing of contracts and projects, which are expected to recover in the second half. During the first half we secured significant contract renewals and extensions with two major customers, and were awarded a health and safety contract with the Capgemini consulting and outsourcing group. We also successfully installed a new Enterprise Resource Planning System, providing a market-leading IT platform which will help to drive new business generation by providing JWM with valuable differentiation in its sector. Workplace Engineering, delivering hi-tech electrical, engineering and fit-out services, was similarly affected in the first half by the phasing of project work, which is expected to improve in the second half. It has recently secured a major head office refurbishment contract with BHS. IFRS The Group is required to report under International Financial Reporting Standards (IFRS) and all figures in this statement refer to reporting under IFRS. BOARD As we have previously announced, David Bryant is to retire from the Board on 2 October after 37 years with the Group. We would like to thank David for his contribution to the Group, particularly since his appointment as Managing Director of the Drycleaning division. Although retiring from the Board, David remains with the Group for the current auction process. 6

7 OUTLOOK We are encouraged by the prospects for the Group in the second half of the year. The Rental division will benefit from the good sales performance achieved in the first six months of the year, which should help offset some of the operating cost increases. Corporatewear and Facilities Management are both expected to perform strongly given the level of planned activity in the second half. In Drycleaning, action has been taken to reduce costs and promote sales, in an improving though still unpredictable marketplace. Whilst the remainder of the year will be influenced by the timing of activity in the Corporatewear and Facilities Management divisions, as well as the possible sale of the Drycleaning division, the Board continues to look forward to the future with confidence Simon Sherrard Chairman 7

8 Consolidated Income Statement 30th June th June Year ended 31st December Note 2 REVENUE Costs recharged to customers (25.7) (43.7) (68.4) Revenue excluding costs recharged to customers OPERATING PROFIT OPERATING PROFIT BEFORE INTANGIBLES AMORTISATION AND EXCEPTIONAL ITEMS Amortisation of intangible assets (2.8) (1.6) (3.9) Exceptional items - Restructuring and environmental costs (1.7) (1.6) (5.0) - Profit on disposal of property OPERATING PROFIT Finance costs (4.7) (3.9) (8.2) PROFIT BEFORE TAXATION Taxation (3.9) (3.0) (6.6) PROFIT FOR THE PERIOD EARNINGS PER SHARE * Basic 17.7p 12.4p 29.2p Diluted 17.5p 12.1p 28.6p 6 ORDINARY DIVIDENDS PAID AND PROPOSED Interim dividend proposed 4.6p - - Interim dividend - 4.4p 4.4p Final dividend p * Earnings per share before intangibles amortisation, restructuring costs and other exceptional items are shown in Note 5. 8

9 Consolidated Statement of Recognised Income and Expense 30th June th June Year ended 31st December Actuarial gain / (loss) on defined benefit pension plans 13.9 (5.0) (15.7) Taxation in respect of actuarial (gain) / loss (4.2) Net movement on reserves in respect of IAS 19 actuarial gains and losses 9.7 (3.5) (11.0) Cash flow hedges movement - (0.2) (0.1) NET INCOME / (EXPENSE) RECOGNISED DIRECTLY IN EQUITY 9.7 (3.7) (11.1) Profit for the period TOTAL RECOGNISED INCOME FOR THE PERIOD

10 Consolidated Balance Sheet As at 30th June 2006 As at 25th June As at 31st December Note ASSETS NON-CURRENT ASSETS Goodwill Intangible assets Property, plant and equipment Rental items Deferred tax assets CURRENT ASSETS Inventories Trade and other receivables Derivative financial assets Cash and cash equivalents LIABILITIES CURRENT LIABILITIES Trade and other payables Other creditors and accruals Current income tax liabilities Borrowings Derivative financial liabilities NET CURRENT ASSETS / (LIABILITIES) 13.2 (2.2) 9.9 NON-CURRENT LIABILITIES Borrowings Retirement benefit obligations Deferred tax liabilities Provisions and other non-current liabilities NET ASSETS EQUITY CAPITAL AND RESERVES ATTRIBUTABLE TO THE COMPANY S EQUITY HOLDERS 9 Called up share capital Share premium Other reserves Retained earnings TOTAL EQUITY

11 Consolidated Cash Flow Statement 30th June th June Year ended 31st December Note CASH FLOWS FROM OPERATING ACTIVITIES Profit before taxation Adjustments for: Finance costs Depreciation and amortisation Increase in net working capital (6.2) (7.8) (3.4) Profit on sale of property, plant and equipment (8.4) (2.9) (6.3) Additional pension contributions (1.4) - - Other non-cash movements (0.8) 0.2 (0.3) Cash generated from operations Interest paid / received (5.0) (3.3) (7.4) Taxation paid (2.2) (2.4) (6.2) Net cash flows generated from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of subsidiaries (net of cash acquired) (1.7) (34.1) (56.2) 8 Proceeds from sale of investments in other companies Purchase of property, plant and equipment (7.5) (4.5) (14.1) Proceeds from sale of property, plant and equipment Purchase of intangible assets (5.9) (2.7) (9.1) Purchase of textile rental items (13.0) (12.0) (24.8) Proceeds from sale of textile rental items Net cash used in investing activities (1.4) (47.1) (89.2) CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from borrowings Repayments of borrowings (45.0) (2.2) (116.2) Capital element of finance leases (0.5) (0.5) (1.1) Net proceeds from issue of share capital Dividends paid to company shareholders (8.8) (8.2) (10.8) Net cash generated from financing activities (12.0) Net (decrease) / increase in cash and cash equivalents (1.1) (8.4) 3.0 Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 6.4 (3.9)

12 Notes to the Consolidated Interim Financial Statements 1 BASIS OF PREPARATION These unaudited consolidated interim financial statements of Johnson Service Group PLC are for the six months ended 30th June They have been prepared in accordance with those International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations issued and endorsed, or issued and expected to be endorsed by the European Union (EU), as at the time of preparing these statements (September 2006). The IFRS s and IFRIC interpretations that will be applicable at 31st December 2006, including those that will be applicable on an optional basis, are not known with certainty at the time of preparing these interim financial statements. The Johnson Service Group PLC consolidated financial statements were prepared in accordance with UK Generally Accepted Accounting Principles (UK GAAP) until 31st December. Those UK GAAP accounts received an unqualified audit report and have been filed with the Registrar of Companies, and the auditors report did not contain a statement under Section 237 (2) or (3) of the Companies Act 1985 (as amended). UK GAAP differs in some areas from IFRS. In preparing the Johnson Service Group PLC 2006 consolidated interim financial statements, management has amended certain accounting, valuation and consolidation methods applied in the UK GAAP financial statements to comply with IFRS. The comparative figures were restated to reflect these adjustments. Johnson Service Group PLC has elected a date of transition to IFRS of 27th December The Group previously reported the impact of the adoption of IFRS on the 2004 comparative financial information in July. Supplementary IFRS information was provided in the Annual Report, together with summary reconciliations and descriptions of the effect of the transition from UK GAAP to IFRS on the Group s equity and its net income and cash flows. Further information is provided within this interim report: the key changes to the Group s accounting policies as a result of the adoption of IFRS are detailed in the section entitled Summary of the Revised Principal Accounting Policies, and reconciliations of total equity and reserves and income from UK GAAP to IFRS are provided in the section entitled Transition from UK GAAP to IFRS. The revised principal accounting policies are those which are expected to be formally adopted by the Group when it prepares its Annual Report for the year ending 31st December 2006, and have been consistently applied to all the periods presented. Under the transitional arrangements included within IFRS 1, First-time Adoption of International Financial Reporting Standards, which permit those companies adopting IFRS for the first time to take some exemptions from the full requirements of IFRS, the Group has made use of the following exemptions: Business combinations: business combinations prior to the transition date have not been restated to an IFRS basis. Fair value or revaluation as deemed cost of fixed assets: the net book value of property, plant and equipment under UK GAAP has been adopted as the deemed cost in the opening balance sheet at the transition date. Share-based payments: IFRS 2 has not been applied to share options and shares awarded which vested before 1st January. 2 SEGMENT ANALYSIS Business segments Segment information is presented in respect of the Group s business segments, which are based on the Group s management and internal reporting structure as at 30th June Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Inter-segment pricing is determined on an arm s length basis. Geographical segments Revenue originates wholly within the United Kingdom and as a result, no geographical segments are presented within these financial statements. There is no significant difference between revenue by origin and revenue by destination. The business segment results for the half year ended 30th June 2006, together with comparative figures, are as follows: 30th June th June Year ended 31st December Revenue Rental Corporatewear Drycleaning Facilities Management Revenue excluding costs recharged to customers Rental Corporatewear Drycleaning Facilities Management

13 Notes to the Consolidated Interim Financial Statements 2 SEGMENT ANALYSIS (continued) 30th June th June Year ended 31st December Operating profit Rental Corporatewear Drycleaning Facilities Management Unallocated (1.7) (1.9) (4.6) Operating profit before intangibles amortisation and exceptional items Rental Corporatewear Drycleaning Facilities Management Unallocated (1.7) (1.9) (4.5) All operations are continuing Since the last half year results, and in line with the segment analysis at December, the segment analysis shows the unallocated central overheads separately and includes the results of Alex Reid Limited within the Drycleaning segment. The operating profit, and the operating profit before intangibles amortisation and exceptional items from Drycleaning, includes nil (June : 0.7 million, December : 1.8 million) of profit from the disposal of properties formerly occupied by the Drycleaning business and other non-trading items. The 2006 exceptional items of 6.9 million have been included within the Drycleaning segment in the analysis of operating profit. 3 ADJUSTED PROFIT BEFORE TAXATION 30th June th June Year ended 31st December Profit before taxation Intangibles amortisation Restructuring and environmental costs Profit on disposal of property (8.6) (2.3) (4.4) Adjusted profit before taxation TAXATION 30th June th June Year ended 31st December Current tax expense UK corporation tax charge for the period Adjustment in relation to previous periods (0.2) - (0.1) Current tax charge for the period Deferred tax expense Origination and reversal of temporary differences (0.4) (0.1) 0.3 Adjustment in relation to previous periods (0.5) - - Deferred tax charge for the period (0.9) (0.1) 0.3 Total charge for taxation included in the income statement Taxation on the exceptional items (excluding intangibles amortisation) in the current period has increased the UK corporation tax charge by 2.2 million (June : 0.3 million reduction, December : 1.2 million reduction). Tax relief on intangibles amortisation has reduced UK corporation tax by 1.3 million (June : nil, December : 0.2 million). 13

14 Notes to the Consolidated Interim Financial Statements 5 EARNINGS PER SHARE 30th June th June Year ended 31st December Profit for the period attributable to Ordinary Shareholders Intangibles amortisation (net of taxation) Restructuring, environmental costs and profit on disposal of property (net of taxation) (4.7) (1.0) (0.6) Adjusted profit attributable to Ordinary Shareholders Weighted average number of Ordinary shares 58,802,635 58,144,347 58,208,126 Dilutive options 871,987 1,267,517 1,149,222 Fully diluted number of Ordinary shares 59,674,622 59,411,864 59,357,348 Basic earnings per share Basic earnings per share 17.7p 12.4p 29.2p Adjustment for intangibles amortisation 2.5p 2.7p 6.3p Adjustment for restructuring, environmental costs and profit on disposal of property (7.9p) (1.7p) (1.0p) Adjusted basic earnings per share 12.3p 13.4p 34.5p Diluted earnings per share Diluted earnings per share 17.5p 12.1p 28.6p Adjustment for intangibles amortisation 2.5p 2.8p 6.2p Adjustment for restructuring, environmental costs and profit on disposal of property (7.9p) (1.7p) (1.0p) Adjusted diluted earnings per share 12.1p 13.2p 33.8p Basic earnings per share is calculated using the weighted average number of shares in issue during the year, excluding those held by the ESOP, based on the profit for the period attributable to Ordinary Shareholders. Adjusted earnings per share figures are given to exclude the effects of intangibles amortisation, restructuring costs, environmental costs and profit on disposal of property, all net of taxation, and are considered to show the underlying results of the Group. For diluted earnings per share, the weighted average number of Ordinary shares in issue is adjusted to assume conversion of all dilutive potential Ordinary shares. The Company has dilutive potential Ordinary shares arising from share options granted to employees where the exercise price is less than the average market price of the Company s Ordinary shares during the year. 6 DIVIDENDS 30th June th June Year ended 31st December Ordinary dividends paid and proposed Interim dividend proposed 4.6p - - Interim dividend proposed and paid - 4.4p 4.4p Final dividend proposed and paid p On 15th May 2006 a dividend of 15.0p was paid on the Ordinary shares in respect of the final dividend, utilising 8.8 million of Shareholders funds. The Directors are proposing an interim dividend in respect of the year ended 31st December 2006 of 4.6p which will reduce Shareholders funds by 2.7 million. The dividend will be paid on 20th October 2006 to Shareholders on the register of members at the close of business on 29th September The Trustee of the ESOP has waived the entitlement to receive dividends on the Ordinary shares held by the Trust. In accordance with International Financial Reporting Standards, these financial statements do not reflect a liability in respect of the proposed dividend. 14

15 Notes to the Consolidated Interim Financial Statements 7 RETIREMENT BENEFIT OBLIGATIONS The Group has applied the requirements of IAS 19 Employee Benefits (revised December 2004) to its employee pension schemes and post-retirement healthcare benefits. The IFRS transitional adjustment to net assets of 25.6 million as at December 2003 comprised of a 34.5 million gross liability, an associated deferred tax asset of 10.4 million and the combined reversal of the previously recognised SSAP24 asset and a movement due to the variation in the method of valuing scheme assets as prescribed by IAS 19 of 1.5 million. As part of the Group s objective to reduce its overall pension liability, additional contributions of 1.4 million were paid to the Johnson Group Staff Pension Scheme during the period to 30th June Following discussions with the Group s appointed actuary it has been identified that an actuarial gain of 13.9 million should be recognised in the period to 30th June This is as a result of the scheme assets and liabilities performing differently to previous assumptions. The gross retirement benefit liability and associated deferred tax asset thereon, together with the net liability is shown below: 30th June th June Year ended 31st December Gross retirement benefit liability (35.5) (39.8) (50.4) Deferred tax asset thereon Net liability (24.9) (27.7) (35.3) 8 SALE OF INVESTMENTS During the period, the Group disposed of the trade and assets of Johnson Environmental Pest Control Limited. The financial performance of the discontinued operation during the period, together with the related cash flows thereon, are not separately presented in these interim financial statements as they are not material in the context of the Group. 30th June 2006 m Disposal proceeds 0.9 Total net assets disposed - Goodwill written off (0.9) Costs of disposal - Pre-tax profit / (loss) on disposal - Taxation (0.3) Profit / (loss) on disposal (0.3) 15

16 Notes to the Consolidated Interim Financial Statements 9 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY Share capital Share premium Other reserves Retained earnings Total equity m m Balance at 25th December Adoption of IAS (0.1) - (0.1) Balance at 26th December Total recognised income and expense for the period Dividends (8.2) (8.2) Issue of share capital Share options (value of employee services) Cash flow hedges movement - - (0.1) - (0.1) Balance at 25th June Balance at 26th June Total recognised income and expense for the period Dividends (2.6) (2.6) Issue of share capital Share options (value of employee services) Cash flow hedges movement Balance at 31st December Balance at 1st January Total recognised income and expense for the period Dividends (8.8) (8.8) Issue of share capital Share options (value of employee services) Balance at 30th June ANALYSIS OF NET DEBT Cash and cash equivalents Debt due within one year Debt due after more than one year Finance leases Total net debt m m Balance at 26th December (3.2) (69.9) (5.8) (74.4) Cash flow (8.4) 2.2 (36.0) 0.5 (41.7) Acquisitions (excluding cash and overdrafts) (0.1) (0.1) Other non-cash changes - (1.3) (0.1) (0.8) (2.2) Balance at 25th June (3.9) (2.3) (106.0) (6.2) (118.4) Balance at 26th June (3.9) (2.3) (106.0) (6.2) (118.4) Cash flow (28.2) 0.6 (14.9) Acquisitions (excluding cash and overdrafts) - - (4.9) (0.1) (5.0) Other non-cash changes Balance at 31st December 7.5 (1.0) (138.2) (5.5) (137.2) Balance at 1st January (1.0) (138.2) (5.5) (137.2) Cash flow (1.1) Other non-cash changes - - (0.1) - (0.1) Balance at 30th June (136.3) (5.0) (134.9) 11 PUBLISHED FINANCIAL STATEMENTS Copies of the interim report are to be sent to Shareholders and will be available to members of the public at the Company s registered office at Mildmay Road, Bootle, Merseyside L20 5EW. The report can also be accessed on the internet at 16

17 Summary of the Revised Principal Accounting Policies SUMMARY OF THE REVISED PRINCIPAL ACCOUNTING POLICIES AS A RESULT OF THE ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS Consolidation The financial statements consolidate the results of Johnson Service Group PLC (the Company) and its subsidiary undertakings. Entities over which the Group has the ability to exercise control are accounted for as subsidiaries. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The accounting periods of subsidiary undertakings are co-terminous with those of the Company. Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Subsidiaries accounting policies have been changed where necessary to ensure consistency with the policies adopted by the Group. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group s share of the identifiable tangible and intangible net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the Group s share of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Interests sold are consolidated up to the date of disposal, when control ceases. Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. Foreign currency translation The consolidated financial statements are presented in sterling, which is the Company s functional and presentational currency. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except where hedge accounting is applied as explained below. Accounting for derivative financial instruments and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as hedges of the variability of cash flows (cash flow hedge). The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of hedged items. Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss (for example, when the forecast transaction that is hedged takes place). However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Such derivatives are classified as at fair value through profit or loss, and changes in their fair value are recognised immediately in the income statement. Fair value estimation The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price; the appropriate quoted market price for financial liabilities is the current ask price. The nominal value less estimated credit adjustments of trade receivables is assumed to approximate to their fair values. The fair value of financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. 17

18 Summary of the Revised Principal Accounting Policies Intangible Assets (i) Goodwill For acquisitions since 28th December 2003, goodwill represents the excess of the cost of an acquisition over the fair value of the Group s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. For acquisitions prior to this date, goodwill is included at the amount recorded previously under UK GAAP. Goodwill on acquisitions of subsidiaries is included in non-current assets. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. (ii) Intangible assets Intangible assets comprise of brands and customer contracts and relationships, recognised at cost or fair value. They have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of the intangible assets over their estimated useful lives (4-20 years). (iii) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software, and are included on the balance sheet within intangible assets. Costs are amortised over their estimated useful lives (4-10 years). Costs associated with the general development and maintenance of computer software programs are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the costs of employees involved in software development and an appropriate portion of relevant overheads. Computer software development costs recognised as assets are amortised over their estimated useful lives (not exceeding 10 years). Deferred taxation Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and that are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Employee benefits (i) Pension obligations Group companies operate various pension schemes. The schemes are funded through payments to insurance companies or trusteeadministered funds, determined by periodic actuarial calculations. The Group has both defined benefit and defined contribution plans. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The defined benefit obligation is calculated periodically by an independent actuary. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. Current service costs are recognised in operating costs in the income statement. Interest cost on plan liabilities and the expected return on plan assets are recognised in finance costs. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to the consolidated statement of recognised income and expense. For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. (ii) Share-based compensation The Group operates a number of equity-settled, share-based compensation plans. The economic cost of awarding shares and share options to employees is recognised as an expense in the income statement equivalent to the fair value of the benefit awarded. The fair value is determined by reference to option pricing models, principally Binomial and Monte Carlo models. The charge is recognised in the income statement over the vesting period of the award. At each balance sheet date, the Group revises its estimate of the number of options that are expected to become exercisable. Any revision to the original estimate is reflected in the income statement with a corresponding adjustment to equity immediately to the extent it relates to past service and the remainder over the rest of the vesting period. Dividend distribution Under IAS 10 (Events after the Balance Sheet Date) dividends to holders of equity instruments declared after the balance sheet date are not recognised as a liability as at the balance sheet date. Dividend distribution to the Company s shareholders is recognised in the Group s financial statements in the period in which the dividends are declared to the Company s shareholders. Interim dividends are recognised when paid. 18

19 Transition from UK GAAP to IFRS TRANSITION FROM ACCOUNTING PRACTICES GENERALLY ACCEPTED IN THE UK TO INTERNATIONAL FINANCIAL REPORTING STANDARDS Johnson Service Group PLC previously reported the impact of the adoption of International Financial Reporting Standards (IFRS) on the 2004 comparative financial information in July. In its Annual Report, the Group reported its result for the year ended 31st December in accordance with UK GAAP, following the adoption during the year of FRS 17, Retirement Benefits and FRS 20, Sharebased Payment. As a result of adopting these two standards during, the 2004 UK GAAP comparative information was restated. The reconciliations below in respect of 2004 therefore show the revised effect of transition from the restated UK GAAP position to IFRS and consequently, the effects of transition differ in some areas to those previously reported in the July document. The Group has elected a date of transition to IFRS of 27th December Set out below, in accordance with the provisions of IFRS 1 First-time Adoption of International Financial Reporting Standards are the reconciliations of total equity and reserves and income from UK GAAP to IFRS. RECONCILIATION OF UK GAAP PROFIT AND LOSS ACCOUNT TO IFRS INCOME STATEMENT FOR THE 26 WEEKS ENDED 25 TH JUNE In accordance with UK GAAP Effect of As restated under IFRS 25 th June transition 25 th June to IFRS REVENUE Costs recharged to customers (43.7) - (43.7) Revenue excluding costs recharged to customers OPERATING PROFIT OPERATING PROFIT BEFORE INTANGIBLES AMORTISATION AND EXCEPTIONAL ITEMS Amortisation of goodwill (5.4) Amortisation of intangible assets (0.1) (1.5) (1.6) Exceptional items OPERATING PROFIT Finance costs (net) (3.9) - (3.9) PROFIT BEFORE TAXATION Taxation (3.0) - (3.0) PROFIT FOR THE PERIOD RECONCILIATION OF NET ASSETS IN ACCORDANCE WITH UK GAAP TO NET ASSETS AS RESTATED UNDER IFRS AS AT 25 TH JUNE m m NET ASSETS IN ACCORDANCE WITH UK GAAP 79.3 IFRS adjustments in respect of: Dividends 2.6 Share options - Pensions and healthcare benefits - Goodwill amortisation 12.5 Recognition of intangibles (2.1) Other (3.5) 9.5 REVISED NET ASSETS AS RESTATED UNDER IFRS

20 Transition from UK GAAP to IFRS RECONCILIATION OF UK GAAP BALANCE SHEET TO IFRS BALANCE SHEET AS AT 25 TH JUNE In accordance with UK GAAP As restated under IFRS Effect of 25 th June transition 25 th June to IFRS ASSETS NON-CURRENT ASSETS Goodwill (10.2) Intangible assets Property, plant and equipment 71.5 (4.1) 67.4 Rental items Deferred tax assets CURRENT ASSETS Inventories Trade and other receivables Cash and cash equivalents LIABILITIES CURRENT LIABILITIES Trade and other payables Other creditors and accruals 66.0 (2.5) 63.5 Current income tax liabilities Borrowings Derivative financial instruments (0.8) NET CURRENT LIABILITIES (3.0) 0.8 (2.2) NON-CURRENT LIABILITIES Borrowings Retirement benefit obligations Deferred tax liabilities Provisions and other non-current liabilities NET ASSETS EQUITY CAPITAL AND RESERVES ATTRIBUTABLE TO THE COMPANY S EQUITY HOLDERS Called up share capital Share premium account Revaluation reserve 8.0 (8.0) - Other reserves 2.1 (0.2) 1.9 Retained earnings TOTAL EQUITY