Trading Update & Management Actions

RNS Number : 4992F

Johnson Service Group PLC

17 November 2020

 

17 November 2020

AIM: JSG

Johnson Service Group PLC

("JSG" or "the Group")

Trading Update & Management Actions

JSG, a leading UK textile services provider, today releases an update on trading and management actions being taken within the business.

The past three months' performance has been a mixed picture across the Group reflecting current market conditions, with the Workwear business currently seeing volumes having returned to pre-Covid levels, whilst the focus within the Hotel, Restaurant and Catering ("HORECA") business has been to manage the cost base and ensure we are ready once volumes in the UK's hotel, restaurant and catering markets resume in the coming months.

Trading Update

Since the interim results announcement on 2 September 2020, the Group has continued to see disruption, particularly within its HORECA business, with increasing uncertainty in recent weeks on the back of the various lockdowns and associated reduced activity within the hospitality sector.

Encouragingly, in our Workwear division, which serves both industrial and food processing customers, volumes have continued to increase with the 6% year on year reduction reported in August improving to a 2% reduction at the end of September and being slightly ahead of pre-COVID levels by the end of October.  The latest lockdown in England is currently expected to have a limited impact on the division.

95% of customers who had advised that they were closed during the national lockdown earlier in the year had returned at varying levels of activity by the end of October, up from 91% at the end of August.  Testament to the high service levels of JSG, the annualised year to date customer retention levels within Workwear increased to 94.0% at the end of October, compared to 93.8% in July 2020, and customer satisfaction levels remained at circa 86% in the third quarter.

HORECA volumes, particularly in the regions, held up well during September with volumes at 55% of normal, up from 45% in August.  However, volumes reduced in October, particularly in the high-volume hotel linen plants, back to 45% of our normal levels due to the various local lockdown measures being implemented across the UK.  The outlook for the remainder of the current year remains dependent on the level and impact of regional restrictions on the hospitality industry in December, particularly following the planned ending of the lockdown in England on 2 December 2020.

Management Actions Underway

Workwear

Whilst Workwear volumes overall have recovered to the levels seen in February, there is an expectation that the lower level of new sales signed during the national lockdown, the increased uncertainty for many of our industrial customers and the potential for further lockdowns, on either a regional or national basis, will restrict the division's ability to achieve organic revenue growth in the short term.

We have therefore been reviewing our resource levels along with our overall cost base in order to improve efficiency whilst continuing to deliver our high level of customer service.

As a result of the increased spare capacity we have created at nearby Workwear sites, we have announced the closure of our Newmarket site, which is one of our smaller Workwear sites and our only mixed economy facility.  Work is currently in the process of being transferred to neighbouring sites.

At the end of December 2019, the division had 2,300 employees.  Following the changes discussed above, along with the normal churn of employees, we anticipate starting 2021 with 2,100 employees operating from 16 processing sites across the UK.

HORECA

The HORECA division is continuing to experience uncertainty.  Whilst the news last week of a possible vaccine is encouraging, volumes currently remain unpredictable and the timing of any sustained recovery in our market remains unknown.  Although mindful of the current reduced volumes, we are continuing to manage the business prudently and are in ongoing discussions with many of our customers so that we are in the best position possible to scale up our operations when markets return.

All of our existing sites were open until 7 November, albeit operating on reduced hours.  As a result of the current lockdown in England, we now have three sites mothballed with a limited number of deliveries to those customers who have remained open.  Two of our larger sites, in Reading and Bourne, each comprise two independent processing units on one site.  We had already hibernated the smaller unit on each of these sites and this is likely to continue to be the case over the winter months.  We have also taken the decision to delay the commissioning of our new Leeds site until volumes return to more normal levels.  

Once the current lockdown has ended, we will operate our estate in line with the volumes experienced.  Over the coming months, traditionally our quietest time of the year, we are ensuring that we operate as efficiently as possible with the majority of plants operating very flexibly in order to manage costs in line with sales demand, whilst maintaining strong service levels, as we plan for the recovery.

Throughout the year we have utilised the Coronavirus Job Retention Scheme, which has been extended to March 2021, and will continue to do so as and where appropriate.  At the end of 2019, the division comprised 3,800 employees.  In line with the reduction in volumes this number has reduced significantly, through both redundancies and natural churn, such that we anticipate ending the year with some 2,450 employees.  Some 1,600 of our employees are currently on furlough with the majority of the remaining workforce being flexi-furloughed and working reduced hours in line with the current reduced volumes.

Balance Sheet and Capital Allocation

The Group has a committed bank facility of £175 million and benefits from a strong balance sheet with net cash as at 31 October 2020, excluding IFRS 16 lease liabilities, of £1.7 million, compared to a net debt position of £0.2 million as at 30 June 2020.  We are continuing to preserve cash where possible and anticipate that there may be opportunities for us to invest to strengthen our position in the market.

We have previously managed our net debt (excluding IFRS 16) levels at a ratio of less than 2 times adjusted EBITDA (EBIT plus PPE depreciation and software amortisation) compared to a bank covenant threshold of less than 3 times.  This ratio as at 31 December 2019 was 1.3 times.  From March 2022, we intend measuring against an amended bank definition of adjusted EBITDA which will be defined as EBIT plus depreciation of PPE, rental stock and right of use assets and software amortisation, compared to net debt including IFRS 16 liabilities.  The covenant threshold is expected to remain at less than 3 times.  Using this new measure, the ratio would have been 1.1 times as at 31 December 2019.

The Group's medium to long term intention is to return the capital structure such that we operate between 1 and 2 times on this new basis, other than for short term specific exceptions.  Under this framework, our capital allocation policy remains unchanged and will take into account the following criteria as part of a periodic review of capital structure:

1)  maintaining a strong balance sheet;

2)  continuing capital investment to increase processing capacity and efficiency;

3)  appropriate value accretive acquisitions;

4)  operating a progressive dividend policy; and

5)  distributing any surplus cash to Shareholders.

Outlook

While the next few months are difficult to predict, particularly for our HORECA business, we have taken steps to reduce the cost base of the Group, whilst retaining as many of our employees as practical utilising the extended Coronavirus Job Retention Scheme.  This will allow us to maintain our ability to service our customers during both periods of lower volume and during the ultimate recovery.

We acknowledge that the possible rollout of a vaccine is encouraging, however, the precise timing of that together with the speed of a sustained recovery in our markets remains unknown.  The Group remains confident of our leading market positions, our experienced management team and proven operational structure which gives us the ability to take advantage of any opportunities as they arise.

As stated at the time of the interims, we remain confident that the adjusted EBITDA margin for the full year will be similar to that achieved in the first half.

The cost of the restructuring, including the closure of Newmarket, will amount to some £6.0 million and will be charged as an exceptional item, offset by the net impact of the Exeter fire and Treforest flood.

Peter Egan, Chief Executive Officer of JSG, commented:

"The past three months' performance has been a mixed picture across the Group reflecting current market conditions, with the Workwear business currently seeing volumes having returned to pre-Covid levels, whilst the focus within the HORECA business has been to manage the cost base and ensure we are ready once volumes in the UK's hotel, restaurant and catering markets resume in the coming months.

"I have nothing but admiration for the way in which our employees have risen to the many challenges posed by Covid-19.  I thank them for the commitment, hard work and resilience they have demonstrated which has enabled our businesses to continue to operate and to service our customers effectively.

"We have taken the right steps to manage our cost base and maintain a firm foundation for JSG, with the strength of balance sheet and flexibility of resources and operations to provide for future strong returns when the recovery emerges."

ENQUIRIES:

Johnson Service Group PLC
Peter Egan, CEO Yvonne Monaghan, CFO Tel: [phone]
Investec Investment Banking (NOMAD)	Camarco (Financial PR)
David Flin Carlton Nelson Tel: [phone]	Ginny Pulbrook Ben Woodford Oliver Head Tel: [phone]

About Johnson Service Group PLC

www.jsg.com

 

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