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

Good morning, everyone, here in person and online. Thank you very much for joining us. Yvonne and I will now take you through the operational and financial highlights following our -- and following our presentation, we're happy to take whatever questions you may have. So starting with some of the operational highlights. Organic revenue in HORECA increased 5.6% with a stable revenue in Workwear, both of which we will discuss in a lot more detail as we work our way through the presentation. HORECA volumes continue to improve with new hotel openings and new hotel room add-ons. And I'm very pleased to say our brand-new HORECA processing site in Crawley is now processing and in production, and we're in the process of moving work from our Dorset sites into Crawley. Workwear retention, pleasingly continues to improve. It's at 93%, up from 91% last year and working its way back to historic averages. We did implement price increases and other actions over the course of 2024 and to help offset cost inflation, we will continue into 2025. We're also very pleased with the integration of Empire, offering 4- and 5-star service to the luxury hotels, and that complements Regency, which also offers that service, and I'll talk more in detail about those 2 acquisitions in a moment. We continue, as always, on our sustainability journey. We have published our third sustainability report. We continue to set targets, aiming for our 2030 targets, and we have set our carbon water and plastic reduction targets for 2025 following the success of 2024. And finally, we're on track for our target of at least 14% on adjusted operating profit by 2026. So that's Slide 4, operational highlights. If I hand over to Yvonne to take us through some of the financial highlights.

Good morning, everybody. We turn on Page 6 of the presentation and just a brief summary. So revenue, as Peter said, continued to increase, reflecting both volume in HORECA and price increases across the group and together with the benefit of acquisitions. Organic growth overall was 3.8% for the 2 divisions combined. Adjusted EBITDA increased to GBP 152 million, giving an improved margin of 29.7% compared to GBP 28.3 million in the first half. And last year, for the full year was GBP 28.3 million again. Adjusted operating profit rose to GBP 62.3 million. And after an interest cost of GBP 7.5 million, adjusted PBT, GBP 54.8 million. Operating margin was increased to 12.1%. Adjusted EPS, pleasing at 10.1p, an increase of 29.5%. And the final dividend declared this morning of 2.7p, making full year 4p per share, which fulfills our commitment to reduce dividend cover to 2.5x. The next slide is just a reminder of where we've come from over the last 5 years with improved margin following obviously the COVID impact, returning to dividend growth, as we've said. And then our slide on cost pressures, cost management. And the focus everybody asked me about is energy costs and labor. So hitting those 2 costs. Energy costs remain elevated, although slightly lower than in recent years. And as a percentage of revenue in '24 reduced to 8.8%. As a reminder, last year was 10%. Back in '19, it was 6.2%. So still elevated but on the way back. We've continued to fix gas and electricity prices such that at the end of February, we have 73% of our anticipated core gas and electricity usage fixed for the first half of '25, slightly lower in the second half, around 60%. And we will continue to move into the market as we see opportunities. Energy costs have been a bit volatile. You probably noticed over the last few weeks. So we're just keeping our eye on that. We've got 77% of our anticipated diesel usage fixed for 2025. And then we do have some fixes into '26 and beyond, but at lower levels, and that's our stated policy. The nearer we are to a date, the more fixed we would be. In terms of '25, I think energy costs should continue to reduce as a percentage of revenue, and I would hope we would be around 8% or slightly lower for '25 as a whole. Labor costs, I suppose the other -- or the biggest cost we have for the year were 44.6%. And we note that further improvements in this cost as a percentage of revenue are challenged by the increases coming on minimum wage and of course, the national insurance increase, which is due in April. Our estimate is that the national insurance will cost us about GBP 6 million in the full year. So for this year, 9 months of that, so GBP 4.5 million in this '25. But overall, cost management, production efficiencies and price increases have resulted in the improved margin for '24 and still, as Peter said earlier, on target for 14% in 2026. Next slide is on cash on Page 9. So net debt, excluding IFRS 16, so that's leases, was GBP 68.6 million, just slightly higher than 12 months ago, December '23, and that's despite significant investment in CapEx and the acquisitions that we've made during '24. Working capital remained at normal levels, debtor days at fairly constant 44 days. As we expected, rental stock depreciation increased GBP 60 million for the year compared to GBP 53 million last year, and that's just a factor of a larger group. PPE spend, GBP 44.6 million, and I'd expect that to be a similar level in '25. Some spend was delayed from '24 into '25 just through timing. Tax payments, again, still quite low. So GBP 2.7 million in '24. I think we will spend or pay more in tax in '25, probably around GBP 7 million is our current estimate for '25 and then increasing thereafter. And that's a factor of the capital allowance system in the U.K. and also tax losses that we were still carrying forward from the COVID years. Acquisition spend, GBP 28 million. So that's on Empire and the contracts that we mentioned we bought in July '24, so about GBP 28 million in total cash out there. So we expect debt to increase as we move through the first half and probably peaking around GBP 90 million or so midyear, and that's excluding the impact of the share buyback that we've announced this morning. So that would be on top of that. And then debt falls during the second half. If you look at our cash generation profile, it's always stronger in the second half that goes with the trading in HORECA. And just picking up some other things on finances. So interest cost, as we said, GBP 7.5 million. Notional pension interest was nil in '24 because we had -- we were roughly even at the end of last year. And in fact, we should get a credit in '25 on notional interest, just a couple of hundred thousand probably because the pension scheme is in surplus. Bank facility, GBP 120 million. We've got potential accordion of another GBP 15 million should we need it in terms of acquisition, if anything comes to fruition during '25. Leverage was still 0.7x, so well below 1. And we still maintain our target of somewhere between 1 and 1.5 would be where we would be comfortable on gearing. Taxation, effective tax rate was 23.2% so lower than the standard 25%. We have some prior year adjustments or credits on that. And obviously, the Irish tax rate is 12.5%. So there's a blended rate there as well. Pension scheme, as I mentioned, in surplus, so GBP 2.9 million net of tax surplus, which is positive to see and no deficit recovery payments being made at present. And lastly, our return on capital increased again to 15.5%, up from 13.9% last year.

So moving to Slide 12, more detail on Crawley. As a reminder, Crawley is a GBP 16 million CapEx investment now complete. As I said earlier, we started processing work on that site and moving work from our Dorset sites up into Crawley. It's about 30 miles from London. So it helps us service the London area and the Southwest. And as a reminder, when the plant is up to capacity, it's capable of producing 600,000 pieces per week. We've also designed it in a way that we've allowed for a Phase 2 development in time that we can easily install more machinery to bring that capacity up even further by another 300,000. So with a Phase 2 development in the future, we can bring that total capacity for that plant up to 900,000 pieces. Being able to design a plant from the ground up is unusual. So it allows us to ensure that the plant will be one of the most efficient and sustainable plants within the U.K. It's not going to be a step change because we invest heavily with regards to pieces per operator, our production efficiency is not going to be a step change to what we currently have within the estate because of that reason. We invest heavily within our estate over the number of years, which you'd expect it to be improved and one of our highest efficiently -- most efficient plants. So we've also been heavily marketing clearly for some time off the back of that opening coming online, and we're pleased with the pipeline of new sales coming into the plant. As I said, it gives us further scope to penetrate further into London and particularly into the Southwest. Moving to Slide 13, acquisition of Empire Linen Services. Again, as a reminder, we acquired Empire. The transaction completed on the 2nd of September 2024 for a GBP 20.6 million consideration debt-free, cash-free basis. It provides Linen Services to the luxury Linen Hotels in the South and in the London area. And as a reminder, I guess, again, the equipment in this plant is exactly the same as the equipment you would see in any other of our HORECA sites and in fact, any flatwork laundry. The difference is the specification of Linen. It's a higher specification of Linen because it's servicing the 4- and 5-star element. We are very pleased with this integration. It's the management of Regency, our managing Regency and Empire. We have RFID technology in Empire that we're looking to actually move into our Regency plant as well. It's a 26,000-square foot facility, about 170 employees in the Tottenham area. And clearly, as you know, generally, our business model is the plants understand what they are and the plants of Regency and Empire are servicing the luxury hotels. So we will not be moving any volume Linen in their restaurant and catering, they will purely be focused on the luxury hotel area. Also, well invested in that plant, so there's no need for any immediate CapEx. Moving to Slide 14, speaking of CapEx and investment, GBP 44.6 million, as Yvonne said, last year on capital expenditure. We consistently do this, as you know. We consistently invest back into our estate. And I guess I'll pick out a few here. We've increased our capacity in our Bourne plant in the East Midlands, investing just over GBP 3 million. That site, in essence, is our biggest plant. In essence, it's 2 plants back to back. So when we're operating that site, we've actually taken on a depot just outside of London to help us further penetrate London and the South with regards to Hotel Linen. So that investment has complete, and we're very pleased with the outcome. Following the acquisition of Regency last year in Corsham, we also invested just over GBP 1.3 million, GBP 1.4 million into Corsham to increase its capacity, and that's completed as well. In Workwear, we invested GBP 4 million in our Workwear plant in Manchester. Manchester plant is a high-volume food plant, engineering and volume food plant. And as you know, over the last number of years, we've been investing more and more in Workwear and automation, particularly in sort systems. As this automation becomes available and of course, with the cost of labor, the return on investment and on CapEx are significantly improved. We've also carried out several installations across the estate, notably in Celtic Linen in Ireland. We've just started at the back end of last year, a major refurb of our Naas Road site, which is a HORECA site, just 6, 7 miles outside of Dublin. And we've also started refurbishment of our Wexford site, which is a HORECA and health care site. And both of those are progressing well, on time and on budget, I'm pleased to say. And then finally, there's a major chunk of CapEx, just over GBP 7 million with regards to commercial vehicles. Moving to Slide 16, sustainability. We continue on the journey. We're making great strides in sustainability. As I said earlier, we recently published our third sustainability report. We have set our targets on carbon, water and waste reduction. We're meeting those targets, and we've also got an overall target to 2030. We have 8% of our fleet running on HVO at the moment. But of course, there's a trade-off versus commercially sensible of how much of your fleet you want on HVO versus the carbon reduction. And we have a small number of electric vehicles running out of our London Linen plant. We recently implemented new internal assurances process with the plants to obtain independent assurance on our numbers produced. So our sustainability journey continues at pace. And of course, we are also marketing heavily off the back of our sustainability journey, particularly for our larger customers. But that said, large and small customers all now have sustainability in one way or another within their tender profiles as we go for renewals and new business. So very pleased with our sustainability journey. Continuing on with the operational performance, I hand back to Yvonne just for the overall financials on HORECA on Slide 18.

On Page 18, yes. So in terms of HORECA, revenue for the division increased by 15% to GBP 371 million, reflecting acquisitions in '23 and '24 and volume and price increases. Organic growth was 5.6%, benefiting from strong customer retention. Approximately 2/3 of that increase was attributed to pricing and the remainder 1/3 to volume. EBITDA margin improved to 29.8% and operating margin to 13.3%, both higher than the first half of the year. Production efficiencies continued and energy costs as a percentage of revenue continued to reduce and were 9.8% for the HORECA division compared to 11.4% in 2023. Back in '19, that percentage was 7.1%. So for the '25, we're focusing on building throughput through Crawley. And now that our plant is processing and introducing further efficiencies as we look at all the operational processes in the plants, and that should improve margin again in 2025.

And then moving to operational highlights on HORECA, some I've touched on already. On Slide 19. As Yvonne said, organic growth was 5.6%. Our sales pipeline is strong, both for good independent and group sales. We also acquired a customer portfolio of about GBP 4.5 million annualized from a family business that was exiting the market last year, and that has been installed into a number of our HORECA sites. I've touched on the depot earlier. We opened a depot just north of London for Hotel Linen Bourne site. Volumes throughout the summer of last year were good, were strong. Had the summer been a little bit better, weather-wise, they would have been stronger. I mean it was quite miserable weather, both in the U.K. and Ireland. So had the summer been a little bit better, numbers would have been stronger. But yet, we were still pleased with the volumes that we saw coming through our plants. All new investments with regards to CapEx always look through a prism of sustainability. We know they can wash. We know we can drive. What we're looking for is what we can save on energy, water and so forth. We did a little bit of analysis on the HORECA addressable market in GB, and we estimate that to be about GBP 1.3 billion and also looked at the market, health care and addressable market in Ireland at about just GBP 0.4 billion. Overall, pleased with the HORECA performance. And so far this year, although it's very, very early, also in line this year.

If we turn to Workwear on Page 20. Revenue was in line with 2023 with an improvement in EBITDA to GBP 49.4 million and a margin of 34.7%. Operating profit fell slightly to GBP 20.3 million with the first half margin of 14.3% maintained. Rental stock depreciation was GBP 2 million higher than in 2023, reflecting existing customer renewals and new installations. Customer retention, though improved to 93%. Energy cost as a percentage of revenue reduced to 6.3% compared to 6.9% in 2023. We started '25 with some positive momentum, although we acknowledge that some of this new business that we're signing will take some time to impact on into revenue in '25.

And then moving to Slide 21, again, Workwear operational performance. 25% of all new sales sold in the period came from new-to-rental. As a reminder, we have our own internal tele call center. We buy in data. We make appointments. This is for prospects that either have Workwear but not a Workwear provider or simply do not have Workwear at all. So 25% of new sales sold. As Yvonne said and I mentioned earlier, we're pleased with the retention improvement levels to 93% and that directly correlates with our satisfaction at 86% for existing customers and 88.7% for new customers that we take on board. So those numbers are really high and directly correlate back to our retention levels as well. We also are pleased with an employee engagement survey, not just for Workwear, but across HORECA and across all of the divisions. And then going back to the CapEx investment that I mentioned earlier in Manchester, that GBP 4 million CapEx investment in Manchester allowed us to increase capacity over 40% in Manchester. So in turn, we are in consultation with our site in Lancaster, which is one of our smaller sites with a view of folding that site into Manchester. So that consultation has started. That investment in automation allows us move that work on volume in to Manchester. And also, we had leases coming to an end in Lancaster. So it made sense to do and to move that work. Overall, as we said, Workwear follows the employment market. As the employment market continues to improve, our Workwear business will accordingly. Outlook. Slide 23. We're encouraged with the trading momentum. As always, I think you can see in the numbers that we proactively manage costs. We constantly look at ways of -- from an investment perspective of how we can drive efficiencies. And once you balance resource and investment, then you can drive your efficiency and you get your volumes in line with your resource and you drive on. Integration of recent acquisitions, Ireland, Empire and Corsham, we're very, very pleased with that. We are expanding in the absence of acquisition. We're not -- we have taken on a new site in Crawley we've just opened, and we did the same a number of years ago when we opened up our hotel [ in Insight ] and Leeds. We've got a strong balance sheet to support organic investments, M&A and obviously, returns to shareholders. The Board remains confident about delivering another year of progress and improving margin in 2025. It's our intention to return GBP 30 million to shareholders, as we mentioned earlier, through buybacks. And the Board has been considering a move to Main Market, and we started that consultation, announced that this morning as well. Investment case, moving to slide -- well, actually, just before I do that to Slide 25. Slide 25 really is to show where our revenue has moved from 2012 to current date. So back in 2012, we had textile services dry cleaning facilities, whereas in 2024, we're 100% textile. And then on the slide on the right, HORECA versus Workwear, you can see that Workwear is 78% and 22% HORECA in 2012, and that's rebalanced to 72% HORECA and 28% Workwear in 2024. And that reflects the number of acquisitions and the growth that we've seen in HORECA, particularly over the last 10 years. And also on the bottom-left slide, you can see the number of acquisitions we have done in that period. Slide 26 just points to why we're an essential service provider. One of the key things that we do within our business within Workwear, Hotel Linen and Health Care is on time and in full delivery. Our trucks will turn up. They'll turn up on time to our customers with the correct volume. We're very proud of that, and we've got very high stats for that. And that, in turn, leads to good quality of service and good retention. Generally, we offer local service nationally, particularly in our Workwear plants within 50, 70-mile radius of our Workwear customers. So we're there should our customers have any issues to ensure that we get the service and give them the service that they've signed up for. We're on a sustainable journey, as I mentioned earlier, with regards to sustainability. And again, overall, our service, there's limited alternatives out there. Hotels need our Linen, restaurants need our Linen, chefs need our Linen, engineering companies need our Workwear, food companies need our garments for them to do their job. So for them to do their job, they need to ensure we do our job and we do it very, very well and something that we're very proud of. And that comes through good investment in our plant and machinery, but also in our people. We're very proud of our people and proud of what they deliver and each and every person that works with the Johnson Service Group is highly valued. Slide 27. It's really a consistent and proven strategy. We do what we say we're going to do. We said last year, we put out our numbers. We've delivered on them this morning. We consistently deliver. We consistently deliver on what we say from a market perspective and from an operational perspective. We've got a good track record of growth with quality and reliable service. We've got good M&A pipeline. Our average tenure of customer is high, and our margins continue to recover just over 12%, 12.1% now, and we're still on track to achieve our 14% or at least 14% by 2026. And that in turn with a very strong balance sheet itself. So overall, we're very pleased with 2024. But of course, all the focus now is on '25 and moving forward. So that's where we'll pause and invite any questions.

Tom Callan from Investec. So just one thing that I picked up in the statement actually this morning. I think there was mention to a 5-year renewal of a key customer on the HORECA side. I think we all know which customer that is. But could you just give us a bit more color where possible, obviously, notwithstanding commercial sensitivities and stuff. Just in terms of how that process went, what the feedback was from that particular customer and stuff?

Yes, sure. So we went through a tender process. We have a very good relationship with that customer, and that's built on exactly what I said just a few moments ago, on time and in full delivery of the service to that customer. And that relationship built up over the last 5 years. We consistently work with that customer in a partnership. We've got both got sustainability targets that we are working towards, but ultimately, it came down to the quality of service and our relationship with that customer, and we're very pleased to have resigned it for a further 5 years.

Chris Bamberry, Peel Hunt. Three questions, if I may, just do them one at a time, if that's okay. I guess looking at the extra GBP 6 million of cost from NIC, that sort of topic is going to be -- now it seems customer increase in the minimum wage. And I think someone in the statement you talked about kind of challenging for last year for price increases and renewals. So just really a little bit more on how you're delivering that. Are you actually bringing things forward just to get a better understanding.

Yes, sure. I mean the budget wasn't really very helpful for businesses overall in the whole industry. It's quite challenging. It's quite a big increase, not just for ourselves, but also for the customer base as well. But you mentioned it yourself that, unfortunately, I guess, we've been used to significant increases over the last number of years, particularly with minimum wage and now with national insurance. And we'll continue to do what we always do. We'll try and offset where we can with investment and with efficiency. And we've proven that we can do that over the last number of years. But we'll also have to have, in turn, some price increases to our customers as well. And those conversations are all challenging regardless of the level and quantum of the price increase, they're all challenging. But you come from a good, very good foundation of we deliver the service, we deliver it on time and in full. We say what we're going to do. We invest heavily in our business. You can see we invest heavily in our business. But also we've got cost challenges that we must have some support with as well. And that goes back to the relationships I said earlier with customers that you can have those discussions so that we actually find a reasonable way forward that suits the customer and suits ourselves.

Just looking at the Crawley plant, if I remember, it was meant to maybe lose about GBP 3.5 million or something this year and then it started to stretch and hit breakeven at some point in '26. Just how you see that shape last year into next year and the following year now?

I think the costs in '24 are a bit lower because we weren't actually processing. So some of the depreciation was delayed, et cetera. We expect the cost to reduce in '25 as the throughput builds. It just depends how quickly we can get new business through and what capacity we reach. But I think the breakeven, we still anticipate sometime in '26.

Finally, Workwear, I think in the first half, volumes were down about 3 and prices were up about 3 roughly to offset. Is that similar for the year as a whole or...

Similar. Similar for the whole year, yes.

James Beard at Deutsche Bank. Two questions from me, please. So firstly, on HORECA, can you talk through your expectations from a volume perspective looking into '25?

It's difficult to give an expectation this year, but we'd expect it to be in line with what we've said clearly in our numbers. But we're only in -- and we're just going into March. The real test in HORECA comes as you build into Easter and post Easter. But so far, they're in line with what we'd expect, but it's too early to say yet how the year is going to play out. We'll have more of a feel on that when we get to the half year.

And then secondly, I think, yes, I used to ask this at every meeting, but competition, what are you seeing from you your competitors on the ground at the moment?

I guess we always monitor our competitors. We treat every competitor the same. We follow our strategy, and our strategy is to follow our delivery of service, invest in our people, invest in our plants. There has been some pricing silliness in the market at times, but that's not unusual and it's something that we can actually monitor and address as we go through different tenders. But generally, the market is quite reasonable generally.

James Fletcher from Berenberg. First one, I was just going to ask you about the cost headwinds in the U.K. Does that make you think about Ireland and overseas a bit more perhaps over the U.K. than previous thoughts?