Johnson Service Group PLC (JSG) Earnings Call Transcript & Summary

Good morning all, and thank you for joining us this morning. I will first take us through the operational highlights and then hand over to Yvonne, who will take us through the financials. And following that, I'll take a little bit more of a deeper dive into the operational and strategic elements, and then we'll move to Q&A. So we're very pleased to report a strong financial and operational performance for H1 2024. It underpins the resilience of our business model. Including the strength of our relationship with our customers and suppliers, and of course, the excellent work and contribution of our wonderful employees. Turning to Slide 4, operational highlights. Our organic revenue is up 5.7% compared to H1 2023. Yes, we have seen an increase in sales activity and a strengthening pipeline in both HORECA and Workwear, which is pleasing. Energy costs, which Yvonne will cover in more detail in a moment, continue to reduce, although we're mostly fixed for the remainder of 2024, which I'm sure most of you already know. Pleasingly, our margin continues to improve and is on track for our previously stated target of at least 14% by 2026. We have been working hard on our new Crawley site and we expect to start processing on that side in Q4 of this year. Our depot for Hotel Linen and Enfield, is helping us expand our services further into the London and the South. And I'll touch upon that a little bit later. And of course, we are delighted to announce the acquisition of Empire Lending Services situated in Tottenham, which will complement our Regency business into the luxury 4 and 5-star hotels. We expect to exit 2024 with a strong progression towards previous levels of adjusted operating margin and expect the full year outturn before the additional benefits of Empire to be in line with the expectation. Now we move to Slide 6 and over to Yvonne for the financial highlights.

Thank you, Peter, and good morning, everyone. On Slide 6 is a brief summary on our results. As you can see, revenue has continued to increase, reflecting increased volumes in HoReCa, the benefit of the acquisitions in 2023 and stable revenue in Workwear, organic growth, 5.7%. Adjusted EBITDA increased to GBP 69.2 million, giving a margin of 28.3% compared to 26.8% in the first half of '23. Adjusted operating profit increased to 25.2% -- GBP 25.2 million, sorry, and an increase of 32.6%. Adjusted PBT of GBP 21.5 million, EPS increased to GBP 3.9p from 2.9p last year, and we've included an increased interim dividend of 1.3p and have confirmed our current intention of moving to a cover of 2.5x for the full year 2024. On the next slide, we just tried to remind you of the growth that we've had over recent years, split between those delivered by organic growth, which has been strong and the acquisition benefit over the recent years. Turning to costs, which is close to everyone's heart, I know. So energy costs still have been less volatile and although energy unit prices have gradually fallen over the period, we still remain higher than they were historically. Costs for the first half reduced to 9.4% of revenue compared to 10.3% in the first half of '23, but remain significantly higher than we had in 2019, which were down in 6.5%. We currently anticipate a reduction to 9% of revenue for the full year. We're continuing to monitor forward pricing for energy, and we are largely fixed for the remainder of 2024. We are approximately 60% fixed for [ gas and electric ] in '25 and 25% to 30% fixed to 2026. Overall, the current expected cost for 2025 and '26 remain to be detailed back in May when we gave a full picture of our energy costs over the next few years. Labor costs were 44.7% of revenue, and they are remain on major costs. We have expect that to remain at a consistent level for the remainder of this year. As Peter has already said, the remainder of the opinion, the overall group operating margin will reach at least 14% by 2026. We turn now to a summary of cash flow on Slide 9. You'll see the major items contributing to cash flow. Net debt at the end of the period was GBP 117 million and excluding leases GBP 74 million. Gearing at 0.8x is still well within our comfortable range. The net debt reflects the significant investment we've made in plant to machinery, totaling about GBP 29 million. And an outflow of working capital of GBP 7 million in the first half, and that there reflects the increase in HoReCa revenue. So a significant note that our debt today remain relatively flat at 45 days. As I expected, rental stock depreciation increased to GBP 29 million, from GBP 25 million in 2023, reflecting the larger business but noting that it's a consistent percentage of revenue to about 12%. The GBP 29.8 million spent on PPE includes GBP 8.7 million on Crawley as we largely completed the build in the first half, over GBP 6 million on new vehicles across the estates, and GBP 3.2 million on the investments at board. Second half spend on PPE will be lower with a full year estimate of around GBP 50 million. Cash spend -- the first half was just over GBP 1 million, and there'll be a further outflow in the second half, making about GBP 2.5 million to GBP 3 million for the total for the year. Since the period end, as Peter just mentioned, we've made the acquisition of Empire, and we did acquire some contracts in HoReCa, which are noted in the statement. So there's been a total outflow of about GBP 27 million on those acquisitions. But notwithstanding that, the strong cash flow in the second half of the year will mean that debt at the end of the year is only slightly higher the GBP 74 million of bank debt at June. After reflecting those acquisitions, gearing on a pro forma basis at June would have only been 0.9x. So again, still well within our target range. On Slide 10, there's a quick summary for the financial information. Interest costs increased to GBP 3.7 million due to higher borrowings over the period. But the margin on the facility remains at 1.45%. And that's the both strong year for both sterling and euro borrowings. Underlying tax rate is 24.7%, being the blended rate of the U.K. tax rate of 25% and the average tax rate of 12.5%, offset by some nondeductible expenses. There is a small net accounting surplus on the DB scheme of GBP 2.6 million, and that's largely due to a higher discount rate assumed in calculating the liabilities. As a reminder, we're no longer paying deficit contributions, and that will remain until the next valuation due in September 2025. Return on capital employed improved to 14.8% on a rolling 12-month basis.

Thank you, Yvonne. Now moving to Slide 12. I'll take us through some of the investments. We start off on Slide 12 with the acquisition of Empire Linen Services, as I said earlier, we're very pleased to announce the acquisition of Empire based in Tottenham. I was actually there yesterday on the production floor, walking the management and employees to the Johnson Service Group. We have previously stated our aim was to develop 4 and 5 star element of our offering, and this complements our Regency business which as a reminder, we acquired in the early part of 2023, which also provides the service to the luxury hotels. We acquired it for as Yvonne said a consideration of GBP 20.6 million on a debt-free cash-free basis. Multiple circa 4x EBITDA, which I'm sure we can go through a little bit more in the Q&A a little bit later. And we expect it to be immediately earnings enhancing. It operates from a 26,000 square foot facility with approximately 170 employees. We've known the two owners for a number of years, and I've been in dialogue with them for a number of years, and they are staying on to help us with the transition of the business. The current General Manager of the site is also staying on permanently which we're very pleased with, and he worked closely with the management of Regency. As a reminder, the processing plant and equipment for this type of operation is exactly the same as you would find in any of our flat worker [indiscernible] or any other longer providers for that matter. The differentiator is the Linen specification, which in essence, [ thread count ] is higher and the ground of towel is heavier, servicing the 4- and 5-star elements. Regency and Empire, which share best practice and continue to service the luxury hotels. And generally, as you know, in our business model, we like our clients to know in my words, who they are. So whether they're focused on hotels in the 4- or 5-star, midrange independents, restaurants and catering, R&D's Workwear. The plants is Germany well invested and will not require any immediate CapEx investment. Moving on to Slide 13, our Crawley opening. Our new site for hotel, restaurant and catering, we're expected to start processing later in Q4. There has been a slight delay in relation to utilities, but that's been a little frustrating, but absolutely outside of our control. However, we're still on track for a Q4 opening. The new plants, as you know, been able to design from scratch is always going to be more efficient. We designed the push and pull of production. And of course, although it's going to drive more efficiencies, it's not going to be a step change from our current estate given the fact that we are well invested across the piece. We have designed the plant through a prism of sustainability, be it robotic folders, [ towel-in ] our water and heat recovery to and general improvement to ergonomics. As a reminder, when the plant is up to capacity for Phase 1, we'll process in the region of 600,000 pieces per week. And we have the option later on the Phase 2 investment, which can add another 300,000 pieces. Costs incurred in H1 are in the region of GBP 1 million and expected to be some GBP 3.5 million full year '24. We haven't become imagine being actively marketing the site generating new sales, as you would expect, and we're actually using the site at the moment, hubbing work from our Dorton site are using it as a [indiscernible] hub location from our [ Dorton site ] into London and the wider geographics. Just gives us further scope to grow either into London and South. The plant falls, as I said onto the hotel, restaurant and catering business, as I said earlier, which provides service to the independent and niche hotels. On to Slide 14, investments. Total CapEx spends GBP 29.8 million H1 '24, a big chunk of that is no surprise is Crawley, GBP 8.7 million, and commercial vehicles also make up quite a chunk of that CapEx. But as we've always consistently stated, we will continue to invest in our facilities to drive efficiencies and normally as a consequence of that to create capacity. We have increased our capacity at our Bourne client -- our Bourne client in East Midland, investing just over GBP 3 million and as a reminder, that site is in essence, two plants operating back to back. And this has allowed us [ trope ] that work through to the new Enfield's depot and service hotels further down into London and into the South. Following our acquisition of Regency last year, in Cosham, we did invest GBP 1.4 million in that business adding to its capacity. And that's that we have done over the last number of years, we have added more automation. We're available to the workwear plants, particularly in the -- in the large food processing plants, improvement efficiency and because of automation, in some instances, increase in its capacity. Next to Slide 16, sustainability. And we've made great strides in our sustainability journey. We are working with a lot of customers and prospects promoting our excellent sustainability credentials. We recently published our third sustainability report, and we implemented new internal assurance processes with plans to -- sorry, to obtain independent assurance. We continue to enhance our employee engagement service, which is incredibly important as part of our family pillar. And along with exploring new technologies and processes such as end-of-life textiles, I'm very pleased to say that 95% of our Workwear end-of-life is now recycled. We have circa 8% of our fleet currently running on HVO, hydrolases vegetable oil, but there's a trade-off here commercially versus carbon reduction. And we have a small ERG number of electric vehicles running, particularly out of our London Linen Plant, servicing the London area. We have, as you know, have set out our targets for 2030 in the Johnson's way, and we were progressing towards those targets year-on-year. Now moving to Slide 18, and back to Yvonne.

So on Slide 18, a summary of HORECA results. Revenue increased by 20% to GBP 172.9 million, reflecting a combination of the 2023 acquisitions and higher pricing and volume. Within that, organic growth was 8.5%, split roughly 1/3 volume, 2/3 price. The EBITDA margin improved to 27.8% and operating margin to 10.6%, and we would expect a further improvement for the full year. Production efficiencies continued and energy costs as a percentage of revenue continued to reduce and were 10.5% in '24 compared to 11.9% of revenue in 2023. And looking back to 2019, we're only 7.1% back then. Crawley revenue costs, I think, as Peter said, we're about GBP 1 million in the first half. And the total impact on the full year estimated at about GBP 3.5 million. And Crawley, as we keep saying, as those are a few times now, is expected to start processing in Q4.

Thank you Yvonne on to Slide 19, operational performance of HORECA. As Yvonne said, growth in HORECA was 8.5% organic growth. Our sales pipeline remains strong, good independent and group sales. I felt a good time to touch on the acquisitions of Regency in the South and Celtic Linen in Ireland. They continue to perform as expected and are integrating wild post acquisition. And on that integration point, we always look for best practices. It's just not necessarily the Johnson's way. We look for best practices with the business that we are acquiring and share those best practices going forward. As Yvonne touched upon earlier, we've also acquired a customer portfolio of GBP 34.5 million from a family business that had one stage had their own processing plant in Manchester, but no longer they have their customers, subcontractors to a number of laundry providers. Their predominantly chefs were and restaurant-type customers, and we're transferring those as we speak over to our hotel restaurant and catering business across the U.K. Germany, consideration there was GBP 6.6 million or GBP 1.47 in the pound. I've already touched on the new depot in Enfield, which have opened and running well from Bourne. Volumes overall through the summer, volumes have been good, but in line with where we expected, albeit, I guess, the weather has an impact. Had it been a better summer weather-wise, then I think we would have seen stronger hospitality across the industry in the U.K. and Ireland, not just with ourselves. Come back to Yvonne for Slide 20.

Now Slide 20 is a summary of the Workwear results. Workwear is still a tough market. Revenue and EBITDA was in line with 2023 with an EBITDA margin of 34.4%. Adjusted operating profit of GBP 10.2 million and a margin of 14.3%. And Rental stock depreciation was about GBP 1 million higher than in the same period last year, reflecting both new customer installations and renewal of garments in existing customers. Workwear revenue has stabilized with new sales continuing to gain momentum as we move into the second half.

On to Slide 21, the operational performance of Workwear as the Yvonne set trading have been reasonably stable in H1. And yes, we are seeing some positive momentum in sales. Similar to previous results, our NTR or new to rental, but sales prospects not having work were already are not using the commercial laundry are about 25% of new sales sold. Our customer retention continues to improve. '23 -- full year '23 of 91% to 92.4% in H1, and we'd expect that number to continue to improve for full year '24. Our latest customer survey carried out by external company. It's very pleasing around that 86.2%, up from circa 83% in 2023. As previous stated, we are carrying out investments in one of our largest Workwear processing plants in Manchester to improve its efficiencies. And the fact that it's a very big food plant will help us drive a little bit more capacity, more efficiencies from that plant. Overall, Workwear remains in the macro environment, a little challenging. However, we're generally pleased with the results. Moving on to Slide 23, outlook. This pipeline, as I already said, continues to strengthen, and that's leading to the strong financial and operational performance. We continue to invest in our estate, which helps us drive efficiencies and deliver that all important on time and in full service. We are very pleased with the Empire of -- with the acquisition, sorry, of Empire Linen services, and it complements our Regency in providing a service to the 4- or 5-star hotels in London and the South in general. Our strong balance sheet has always give us the flexibility for organic investments and firepower for M&A. And we aim to exit 2024, continuing our progression to at least 14% margin by 2026 as Yvonne already stated. Adjusted operating profit for the year before the benefit of impart is expected to be in line with expectation. And our London-based investor event to update the market of future growth and financial plans, we aim to hold in H1 2025. Moving then to Slide 25, really Slide 25 is a visual display of how JSG has repositioned itself from 2012 to current day. So drop in dry cleaning and facilities that we had back in the day, and we are now fully focused on our core, which is textile rental, obvious workwear and hotel and restaurant and catering has swap sides with regards to HORECA has actually had bigger revenue-wise and workwear over that period. On Slide 26, an essential service provider. A couple of key points here. We are an essential provider. Our hotels can service the room and sell a room without our Linen and [indiscernible], on time and in full. And our food plants and Workwear account operate without our garments. The quality of our service is paramount as our investments and our training, but it's not just our investment in plant and machinery, it's our training of our excellent people that work for us as well. And that, combined with our proximity to customers enable us to respond and to deliver that all important on time and in full service. The sustainability piece as we're going from strength to strength. Not just with our customers and with our suppliers but also with our people. It's actually helping us hire people given our environmental and sustainability credentials. Substitutions in the marketplace, quite limited, you have substitutions, I guess, in front-of-house restaurants, but generally not for Hotel Linen or for workwear. It's not cost effective and there is a tightness in the market, which is not unhelpful. And then moving to Slide 27. We have a consistent and proven strategy. Our organic growth, market-leading service underpinned by quality and reliability. Our operating margin, I guess when we look at size of utility costs and driving efficiencies and capacities, we continue to see our margin recover. Capital allocation, as I touched on earlier, we have a strong balance sheet. We have scoped to invest in organic capacity and target further M&A. And finally, we have very strong sustainability cost, which is ex not just for our customers, suppliers, investors, but also it important for our people. So thank you very much, and let's move to questions.

[Operator Instructions] So our first set of questions come from Tom Callan at Investec. First one is on Crawley. Can you provide a bit more color as to the staffing and labor market you're seeing in and around that location, specifically in terms of access to talent and any cost pressures you have experienced in both finding and retaining these people ahead of the Q4 opening?

Thank you, Tom. I guess the good news is, no, we're not seeing any pressures with regarding hiring of staff. Obviously, we haven't our plan fully operational, as I mentioned earlier. Usually Crawley is placed in a -- from a transportation point of view, a very good place. with good road, rail and bus networks. We have hired a small number of production staff there and not out to sync with what we'd expect to pay in the market, they're actually working currently in our Southall plant being trained from moving over to our plant in Crawley. We have transferred people working from there as well as we have engineers and we have a general manager also hired. So cost pressures are not out of line with what we expect to see in the market overall and staff availability is pleasingly good.

Next on -- from Tom on Empire. Can you comment more on lease on the leasehold Tottenham side that comes with the deal specifically in the context of the scarcity of site locations in and around London and the Southeast. How important was the site-specific location when considering Empire as an acquisition target.

Yes, it is important. And clearly, when we look at acquisitions throughout the U.K. and Ireland, we look at not just our geographic area, but the customer, their service the type of plants that is operational, what type of machineries is there, management and so on. But given the fact that the London hospitality, particularly for our 5 star markets, an element is growing. The luxury element of hotels are opening is strong. Not necessarily hit by discretionary spend given the type of profile of hotel and can be less seasonal as well. So to be situated in London to be able to service with the Regency and the Empire, the London area and Southwest to service those hotel customers if pleasing strategically, it fits very well.

And finally, from Tom, on healthcare. In terms of the M&A pipeline, are there any further health care opportunities that are well progressed within that? And therefore, could we expect to see further deal flow in that area in medium term?

Thanks, Tom, very pointed question. Healthcare in Ireland is good. We're pleased with Celtic Linen performance overall, not just in healthcare but in Orica. And I guess we'd look to grow health care further in Ireland particularly organically. In the U.K., I'm sure, as you know, we do not have a position at the moment in healthcare. It's not something that we'd ever rule out. It's part of the textile rental industry and as such as part of our core of what we would offer. So we don't have immediate plans, but it's not something that we shy away from in the future.

Our next set of questions come from James Baird at Deutsche Numis. Firstly, can you talk through the margin dynamics in Empire, are the high preacquisition margin sustainable, and if so, why? And secondly, can you talk through competitive dynamics in HORECA market currently where you're winning new business? What are key reasons?

Okay. Yvonne, do you want to take the first part of that question?

Yes. So Empire margin is quite strong. We've given the management account numbers for the June '24 details. Just to remind people, this is a private company, so they don't always pay themselves in the normal way, and they may take dividends, et cetera. So there is a bit of that, and we will have to put some infrastructure into the business to replace the two guys when they eventually move on. But I think it is a higher margin business that will remain. So it is a really good acquisition, and that reflects the quality of the living and the end customers it's servicing.

And I just ask that the quality of Linen and the quality of their services is excellent. And the service it provides the hotels. Second part of that question, the market, the HORECA market overall within customers, and that comes down to our service, it comes down to our ability to deliver an excellent service to our -- both our customers and our prospects, and we've got a good reputation for doing that. And that reputation comes from back to what I said earlier, investing not just in our plant machinery, but in our people right around the U.K., and we pride ourselves on that service. There's not time winning service winning customers on price, you've got to win it on what they believe is value proceeds within the offering. So from our perspective, it's pleasing that we can attract further prospects to the States on the back of our excellent service.

Next question from Dan Cowen at HSBC. Can you talk please about automation and Workwear? You've said you're fully automated production at Manchester. What does that mean for profitability in Rocky, can this be done at all sides?

Well, thank you, Dan, and thank you for the question. I'll take the first part, and then I'll hand over to Yvonne for the Rocky parts. Automation, I guess, over the last number of years. Automation has always been available to an extent for workwear. If you think about Workwear in our plants and workwear, they're generally producing 100,000 to 150,000 pieces garments per week. I think of those going around on each individual, hanger and around the rail system. But it hasn't been cost effective to put those type of automations in over the last number of -- well, certainly up to 10 years, maybe even 6, 7 years ago. And the improvements in those automated systems that combined with, I guess, the level of employee wage rates going up, then the return on investment becomes more commercially palatable. For us, it's looking at our plans, particularly our high-volume food plants. And if we look at the spine of the country and we go from Exeter to Oakley, to Manchester to Perth. That's the spine of the country with our large food operating plants, hence why that automation helps us drive the same volume with less hours or actually drive more volume with the same number of the heads but generate capacity as a consequence, return on investment Yvonne.

Yes. I mean it's a hard one to do because we're spending GBP 4 million. We have to replace some of the machinery and some of that cost is for upgrading the sortation system. So on a payback, it's probably about a 6-year payback. But some of it we had to spend anyway. So the additional spend is to get more productivity and throughput through, and that's where the saving comes.

Thank you. And this question comes from James Fletcher, Berenberg. On Empire. Could you -- please, could you give some color to the improved trading FY '23 to FY '24? Do you feel it is a sustainable level of growth or reflective of an exceptional year? And two, could you highlight if there are any expected cost synergies to the deal?

Questions is on Empire. is it? Sorry.

Yes.