Half Yearly Report

RNS Number : 7313R

Davis Service Group PLC

27 August 2010

 

27th August 2010

 

THE DAVIS SERVICE GROUP PLC

Interim results announcement

for the six months ended 30th June 2010

 

Financial Highlights

 

Revenue		Up 1% to £488.5 million (first half 2009: £481.5 million)
Adjusted operating profit*		Up 5% to £54.8 million (£52.0 million)
Adjusted operating margin*		Up 40bps to 11.2% (10.8%)
Adjusted profit before tax*		Up 2% to £41.0 million (£40.2 million)
Adjusted earnings per share*		Up 3% to 17.7p (17.2p)
Free cash flow		Up 47% to £37.9 million (£25.8 million)
Interim dividend per share		Maintained at 6.5p (6.5p)
Profit before taxation		Down 1% to £28.8 million (£29.2 million)
Basic earnings per share		Up 4% to 12.5p (12.0p)

* before £0.9m (£2.7m) exceptional charges and £11.3m (£8.3m) amortisation of customer contracts.

 

Operational Highlights

·; Nordic region:

o Revenue up 4% to £171.9m (£164.5m)

o Adjusted operating profit up 10% at £25.3m (£23.1m)

o Margin increase in Norway and Sweden with signs of economic improvement

·; Continent region:

o Revenue down 2% to £121.0m (£123.0m)

o Adjusted operating profit broadly maintained at £15.4m (£15.5m)

o Margin improvement in the workwear and facilities businesses

·; UK and Ireland:

o Revenue up 1% to £195.6m (£194.0m)

o Adjusted operating profit up 6% to £17.4m (£16.4m)

o 230bps margin improvement in textile maintenance

 

Christopher Kemball, Chairman of Davis Service Group, commented:

 

"The group has made good progress during the period. We are particularly pleased that our cost management actions have improved our operating margins and that the business has delivered strong free cash flow.

 

''We see current trading conditions continuing into the second half of the year giving the Board confidence in the outturn for the full year. Our priorities remain to improve our operational efficiency, to deliver strong cash flow and to maintain a robust balance sheet. 

 

"Looking forward we have a well established and well invested operating platform and the strategic review we are undertaking confirms the growth opportunities available to the group by building on this. We intend to deliver accelerated sales growth, to consolidate further our market leading positions and to enhance returns through greater capital efficiency''

 

 

For further information contact:

 

The Davis Service Group Plc Financial Dynamics

Peter Ventress, Chief Executive Richard Mountain

Kevin Quinn, Finance Director Telephone 020 7269 7291

Telephone 020 7291 (today until 12 noon)

Telephone 020 7259 6663 (thereafter)

 

Analyst Meeting

 

The company will be presenting to a meeting of analysts at 09.30am today. A live audiocast of the presentation and questions will be available on the company's website on www.dsgplc.co.uk. Questions will only be taken at the meeting.

 

Results for the six months ended 30th June 2010

 

We are pleased to report that the group has continued to make good progress during the period. Our textile maintenance businesses delivered a one percentage point improvement in operating margin compared with the same period of 2009 and after accounting for the loss in Clinical Solutions and Decontamination and central costs, we have seen a 5% improvement in adjusted operating profit to £54.8 million (£52.0 million). Our free cash flow was 47% stronger than last year at £37.9 million (2009: £25.8 million). This represented a 127% (87%) conversion of our adjusted profit after taxation.

 

Results

 

Revenue increased to £488.5 million in the period, up 1% (£481.5 million). Adjusted operating profit (before exceptional items and amortisation of customer contracts) was £54.8 million, up from the £52.0 million last year. Both revenue and adjusted operating profit growth include only a small impact from exchange rates, although the Euro has progressively weakened against Sterling since the start of the year. Our net finance expense was £13.8 million, an increase on the £11.8 million last year as a result of the refinancing we did in November 2009 to extend the maturity of our funding; this has offset the benefit of the improved cash flow. We expect the interest charge to be slightly lower in the second half if current interest rates prevail. Adjusted profit before taxation was £41.0 million, 2% above last year. Adjusted earnings per share were up 3% to 17.7 pence (17.2 pence). Our effective tax rate on adjusted profit before taxation was 26.6% and we expect the tax rate for the full year to be similar.

 

During the period we incurred net exceptional costs of £0.9 million. These included restructuring costs of £0.5 million, relating primarily to the closure of 3 plants and associated redundancy cost following the acquisition of the ISS business in Norway and we expect to incur a further £1.0 million in the second half on completing this integration. In addition, we have incurred acquisition costs of £0.4 million, which are expensed to the income statement following a change in accounting requirement (IFRS 3 revised). Amortisation of acquired customer contracts was £11.3 million compared with £8.3 million last year. Operating profit after these items was £42.6 million (£41.0 million) and profit before taxation was £28.8 million (£29.2 million). Basic earnings per share were up 4% to 12.5 pence compared with 12.0 pence in the first half of 2009.

 

Our net capital expenditure was £73.1 million (£72.8 million). This includes the investment in our new mat plant in Stockholm which was opened in May 2010 and the new workwear and mat plant in Czech Republic, opened in March 2010. The investment in textiles of £53.2 million (£51.6 million) represented 91% (84%) of the related depreciation. Overall, we expect net capital expenditure to be similar to depreciation in the second half of the year.

 

Free cash flow was £37.9 million (£25.8 million). We have contributed £4.0 million to the UK pension fund in the period and intend to contribute a further £2.0 million in the second half of the year in advance of completion of the triennial valuation, which is ongoing. At 30th June 2010 the accounting deficit for the group was £42.5 million (£32.9 million at the end of 2009). Acquisition consideration including deferred consideration and financial liabilities assumed, amounted to £47.6 million, including £41.6 million for the two acquisitions we announced in January relating to mat services in Norway and Sweden and to workwear in Germany. The impact of exchange rates increased net borrowings by £11.6 million and, after dividends paid of £22.9 million, net borrowings at 30th June 2010 were £528.6 million (31st December 2009: £484.9 million). The total facilities available to the group are £945 million with our revolving credit facilities totalling £590 million committed to June 2012 and our private placement notes extending from 2014 to 2021. We have £412.6 million of fixed rate borrowings with an average rate of 4.8%.

 

The interim financial information for the six months ended 30th June 2010 has been reviewed by PricewaterhouseCoopers LLP.

 

Dividend

 

The Board is recommending an interim dividend at the same level as last year of 6.5 pence. The dividend will be paid on 14th October 2010 to shareholders on the register at the close of business on 17th September 2010.

 

Nordic Region

 

Performance

Revenue increased 4% to £171.9 million (£164.5 million) and adjusted operating profit increased 10% to £25.3 million (£23.1 million). In constant currency and excluding acquisition benefits, revenue was down 2% but adjusted operating profit was up 1%. The adjusted operating margin increased to 14.7% from 14.0%.

 

The pace of economic recovery differs by country across the region. Norway was the stand out country, delivering good organic revenue growth and higher margins. This business is also benefitting from the integration of the mat services acquisition we made at the end of the last year. The recession has been shorter lived in Norway than in most other countries and the economy is now experiencing positive momentum.

 

Confidence is slowly starting to return to the Swedish economy after a very difficult 2009. The average number of wearers per contract for our textile rental business stabilised at the start of the year after a significant decline in 2009, and has seen some improvement in the second quarter. Björnkläder, our direct sale business, saw a solid improvement in revenue in the first half. In both these parts of the business we saw stronger margins than in the first half of 2009.

 

As previously indicated, our Danish business is seeing more difficult market conditions, having entered recession later. Although we have a good and resilient customer base and made some good customer gains, revenue was lower in the first half of the year compared with 2009.

 

The Baltic States continue to experience very difficult market conditions with revenue down and we reported a small loss overall.

 

Outlook

The pricing environment in the region remains robust overall and sales of new contracts are encouraging. As the economies of the countries in which we operate show more progress we expect to see an increase in the volumes per contract, which will drive revenue growth.

 

Continent Region

 

Performance

Revenue of our Continent region decreased by 2% to £121.0 million (£123.0 million) and adjusted operating profit was similar to last year at £15.4 million (£15.5 million). In constant currency, and excluding acquisitions, revenue was down 2% and adjusted operating profit was down 5%. The adjusted operating margin improved to 12.7% (12.6%).

 

Our workwear and facilities businesses in Germany, Holland and Poland have yet to see any significant upturn in their markets with revenue broadly flat overall. The German business is benefiting from the acquisitions we made at the start of the year and the integration is progressing well. Adjusted operating profit and margin moved ahead in Holland and Poland, benefiting from good cost control.

 

Our German Healthcare business continued to improve its operational focus and capabilities but the market remains competitive and we lost further volumes with revenue down 9% on last year. Despite this, the business held its adjusted operating margin at 5%, the same as full year 2009, with a reduction of costs to align with lower volumes. Should the business lose further significant volume, we may be required to take further restructuring action to improve margins.

 

The Austrian Healthcare business performed well in a stable market and our business in Czech Republic and Slovakia is making good progress with the opening of our new plant. We also made a small acquisition in Czech Republic which is increasing further our local presence.

 

Outlook

Growth in the German economy, which drives so much of the region's prospects, has yet to gain momentum but economic data in recent months has been more positive. We expect to benefit when this translates into sustainable improvement in employment, which is key to our business.

 

UK and Ireland

 

Performance

The performance of our UK Hotel and Healthcare businesses drove an excellent first half profit conversion in textile maintenance, which showed revenue of £162.3 million, down 2% on last year but with adjusted operating profit of £18.1 million, up 23%. The operating margin improved 230 basis points from 8.9% to 11.2%.

 

Like for like volumes in the key accounts of our hotel linen business were up 4% across the half and with the improvements to our cost base from last year, we more than doubled our operating profit. Revenue for the division was down slightly overall as we exited some accounts to improve the mix of business. The pricing environment has been tough but we have been able to recover our cost inflation.

 

Our healthcare linen business saw another period of good growth with more outsourced contract wins and higher like for like volumes. The current PaSA framework agreement, which was scheduled to end in May 2010, has been rolled forward and is now expected to be reviewed in November 2010. We continue to work with NHS Trusts to ensure we deliver the savings that are required in the current environment. We believe outsourcing can deliver the greatest savings where in-house operations are transferred.

 

Workwear in the UK continued to be challenging but we managed well with revenue and operating profit only slightly down. In Ireland, the economy was very difficult and this was reflected in significantly lower revenue, which could only be mitigated partially by cost cutting.

 

Revenue of our Clinical Solutions and Decontamination business was £33.3 million (£28.5 million) and we made an adjusted operating loss of £0.7 million compared with a profit of £1.7 million in 2009. We started up our decontamination services towards the end of the first half of 2009 and therefore the loss on the two principal contracts we operate of £2.6 million has no comparative in 2009. We have made progress in our decontamination service and capabilities but the efficiencies we require to make financial improvements have not been delivered. Overall volumes remain below expectation and we are pressing our customers to engage fully in resolving this issue, which is proving difficult. However, our sterile consumables and theatre linen businesses saw growth in revenue of 3% with higher profits.

 

Outlook

We expect hotels and healthcare to continue to deliver a strong performance in the remainder of the year, with workwear and Ireland remaining a challenge. We have taken some steps to improving the financial performance of our decontamination contracts but we expect this to have only a marginal impact on the loss rate in the second half of 2010.

 

Strategy Review Update

 

As previously indicated we are undertaking a strategic review of the group, which is now nearing completion.

 

We have a well established and well invested operating platform with leading positions in several core European markets, supported by strong and stable operational leadership.

 

The scope exists for the group to build upon this robust base through a greater degree of focus. In particular we intend to accelerate sales growth in core markets and our chosen business segments, to further consolidate and develop market leading positions and to enhance returns through greater capital efficiency. Our ambition is to grow our revenue organically in excess of the GDP of the markets we serve and to improve substantially our return on invested capital. All of these initiatives aim to enhance the group's established attributes of sustainable earnings growth and attractive income.

 

Across the group, we will focus upon capitalising on our market leadership primarily in the higher margin workwear, facilities and, specifically in the UK, the healthcare business. Through increased focus on sales and margin initiatives, and redeployment of capital, we see opportunities to grow with improved returns. Development of our hotel and restaurant businesses will be largely confined to the UK where we see the most significant opportunities to build on our strong position as market conditions improve.

 

We continue to review all the strategic options for our broader portfolio of businesses.

 

We will be presenting the full findings of our strategy review and proposals for implementation to the investment community at the beginning of November.

 

Outlook for the Group

 

We see current trading conditions continuing into the second half of the year giving the Board confidence in the outturn for the full year. Our priorities remain to improve our operational efficiency, to deliver strong cash flow and to maintain a robust balance sheet.

 

Looking forward we have a well established and well invested operating platform and the strategic review we are undertaking confirms the growth opportunities available to the group to build on this. We intend to deliver accelerated sales growth, to consolidate further our market leading positions and to enhance returns through greater capital efficiency.

 

Principal Risks and Uncertainties

 

Details of our principal risks and uncertainties were previously disclosed on pages 23 to 25 of the 2009 Annual Report and Accounts. Since then the risk associated with a flu pandemic is thought to have receded. The Board now recognises two new risks, one relating to the potential implications of the UK Bribery Act, and the other to the consequences of a breakdown in our quality control procedures in sterile or clean room production. Taking into account our strategic objectives outlined on page 2 of the 2009 Annual Report and Accounts, some or all of the principal risks and uncertainties summarised below have the potential to impact our results or financial position during the remaining six months of the financial year:

 

1 Delivering organic revenue growth

·; The European economies in which the group operates do not return to economic growth as forecast if the recovery is weaker than anticipated

·; Further deterioration in market presence and/or profitability of the German healthcare business

·; Reduction in hotel volumes and pressure on pricing in the UK and Ireland and Nordic Regions

 

2 Delivering on acquisitions

·; Failure to deliver in accordance with the Clinical Solutions and Decontamination business acquisition model

 

3 Maintaining operational efficiency

·; Unforeseen loss of capacity

·; One of our major textile suppliers is unexpectedly unable to meet our textile requirements

 

4 Maintaining a sound financial position

·; Insufficient free cash flow

·; Foreign currency exposures (in particular relating to the Euro) and interest rate volatility

·; Significant increase in the liability associated with the main UK defined benefit pension scheme

 

5 Maintaining health and safety and other governance matters as a priority

·; Breach of health and safety regulations or lack of cleanliness of staff and/or facilities

·; Breakdown in the required quality control procedures in our sterile or clean room production

·; Adverse media publicity

·; Failure to establish and maintain sufficient procedures designed to prevent an employee or another "associated person" from offering or accepting a bribe

 

6 Maintaining a motivated workforce driven by an experienced management team

·; Inadequate talent management

·; Inability to recruit and retain sufficiently qualified and experienced senior management

 

7 Reducing our impact on the environment

·; Non-compliance with Group Corporate Responsibility (CR) Policies including Environmental Policy

·; Historical environmental liabilities may exist

 

 

CONSOLIDATED INTERIM INCOME STATEMENT For the six months ended 30th June 2010

 

	Notes	Unaudited Six months to 30th June 2010 £m	Unaudited Six months to 30th June 2009 £m	Audited Year to 31st December 2009 £m
Continuing operations
Revenue	3	488.5	481.5	970.9
Cost of sales		(258.3)	(261.7)	(525.2)
Gross profit		230.2	219.8	445.7
Other operating income		0.9	2.5	3.1
Distribution costs		(94.2)	(92.6)	(182.2)
Administrative expenses		(79.4)	(73.8)	(144.8)
Other operating expenses		(14.9)	(14.9)	(36.5)
Operating profit	3	42.6	41.0	85.3
Analysed as:
Operating profit before exceptional items and amortisation of customer contracts and intellectual property rights	3	54.8	52.0	115.3
Exceptional items	4	(0.9)	(2.7)	(12.7)
Amortisation of customer contracts and intellectual property rights		(11.3)	(8.3)	(17.3)
Operating profit	3	42.6	41.0	85.3
Finance expense		(14.4)	(12.5)	(25.1)
Finance income		0.6	0.7	1.5
Profit before taxation		28.8	29.2	61.7
Taxation		(7.4)	(8.5)	(15.9)
Profit for the period		21.4	20.7	45.8
Profit attributable to non-controlling interests		0.3	0.3	0.7
Profit attributable to equity shareholders		21.1	20.4	45.1
		21.4	20.7	45.8
Earnings per share for profit attributable to the ordinary equity holders of the company, expressed in pence per share
- Basic and diluted	8	12.5	12.0	26.6

 

 

CONSOLIDATED INTERIM STATEMENT OF COMPREHENSIVE INCOME For the six months ended 30th June 2010

 

		Unaudited Six months to 30th June 2010 £m	Unaudited Six months to 30th June 2009 £m	Audited Year to 31st December 2009 £m
Profit for the period		21.4	20.7	45.8
Other comprehensive (loss)/income
Currency translation difference, net of tax		(23.7)	(25.1)	(4.5)
Actuarial losses, net of tax		(11.5)	(13.9)	(13.4)
Cash flow hedges, net of tax		20.4	(9.6)	(14.4)
Other comprehensive loss for the period, net of tax		(14.8)	(48.6)	(32.3)
Total comprehensive income/(loss) for the period		6.6	(27.9)	13.5
Total comprehensive income/(loss) attributable to:
Equity shareholders		6.7	(27.8)	13.0
Non-controlling interests		(0.1)	(0.1)	0.5

 

 

CONSOLIDATED INTERIM BALANCE SHEET As at 30th June 2010

	Notes	Unaudited Six months to 30th June 2010 £m	Unaudited Six months to 30th June 2009 £m	Audited Year to 31st December 2009 £m
Assets
Goodwill		434.5	438.0	461.7
Other intangible assets		65.2	45.1	68.0
Property, plant and equipment	9	503.3	518.5	535.3
Assets classified as held for sale		1.6	2.4	1.6
Deferred tax assets		14.9	16.5	30.4
Derivative financial instruments		75.7	21.1	24.7
Trade and other receivables		3.6	4.5	3.6
Total non-current assets		1,098.8	1,046.1	1,125.3
Inventories		43.5	39.0	39.9
Income tax receivable		6.6	11.9	8.8
Derivative financial instruments		0.5	0.3	0.2
Trade and other receivables		161.2	158.0	161.0
Cash and cash equivalents		75.5	71.8	272.2
Total current assets		287.3	281.0	482.1
Liabilities
Interest bearing loans and borrowings		(3.0)	(3.2)	(3.2)
Income tax payable		(10.9)	(19.8)	(17.8)
Derivative financial instruments		(1.3)	(0.1)	(3.4)
Trade and other payables		(186.5)	(175.4)	(206.0)
Provisions	10	(2.7)	(4.5)	(5.2)
Total current liabilities		(204.4)	(203.0)	(235.6)
Net current assets		82.9	78.0	246.5
Interest bearing loans and borrowings		(601.1)	(548.2)	(753.9)
Derivative financial instruments		(32.2)	(36.4)	(42.3)
Pension scheme deficits	14	(42.5)	(36.5)	(32.9)
Deferred tax liabilities		(60.9)	(54.2)	(62.6)
Trade and other payables		(1.7)	-	(1.8)
Provisions	10	(2.5)	(2.5)	(2.5)
Total non-current liabilities		(740.9)	(677.8)	(896.0)
Net assets		440.8	446.3	475.8
Equity
Share capital		51.5	51.4	51.5
Share premium		96.7	95.6	96.4
Other reserves		17.2	1.5	(3.3)
Capital redemption reserve		150.9	150.9	150.9
Retained earnings		120.9	143.6	176.5
Total shareholders' equity		437.2	443.0	472.0
Minority interest in equity		3.6	3.3	3.8
Total equity		440.8	446.3	475.8

 

 

CONSOLIDATED INTERIM CASH FLOW STATEMENT For the six months ended 30th June 2010

 

	Notes	Unaudited Six months to 30th June 2010 £m	Unaudited Six months to 30th June 2009 £m	Audited Year to 31st December 2009 £m
Cash flows from operating activities
Cash generated from operations	11	139.4	124.7	270.5
Interest paid		(14.1)	(12.9)	(25.1)
Interest received		0.6	0.7	1.5
Income tax paid		(14.9)	(13.9)	(24.2)
Net cash generated from operating activities		111.0	98.6	222.7
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired		(35.9)	(5.5)	(7.5)
Purchase of property, plant and equipment		(73.8)	(77.7)	(149.7)
Proceeds from the sale of property, plant and equipment	11	2.9	6.9	11.2
Purchase of intangible assets		(2.2)	(2.0)	(7.5)
Special pension contribution payments		(4.0)	(2.0)	(6.0)
Net cash used in investing activities		(113.0)	(80.3)	(159.5)
Cash flows from financing activities
Net proceeds from issue of ordinary share capital		0.3	-	0.9
Purchase of treasury shares and own shares by the Employee Benefit Trust		(2.5)	(0.8)	(3.4)
Drawdown of borrowings		19.2	20.0	199.3
Repayment of borrowings		(181.0)	(7.6)	(22.8)
Repayment of finance leases/hire purchase liabilities		(2.3)	(2.0)	(4.1)
Dividends paid to Company's shareholders	7	(22.9)	(22.9)	(33.9)
Dividends paid to minority interests		(0.1)	-	(0.1)
Net cash used in financing activities		(189.3)	(13.3)	135.9
Net (decrease)/increase in cash		(191.3)	5.0	199.1
Cash at beginning of period		272.2	72.5	72.5
Exchange (losses)/gains on cash		(5.4)	(5.7)	0.6
Cash at end of period		75.5	71.8	272.2
Free cash flow		37.9	25.8	76.7
Analysis of free cash flow:
Net cash generated from operating activities		111.0	98.6	222.7
Purchase of property, plant and equipment		(73.8)	(77.7)	(149.7)
Proceeds from the sale of property, plant and equipment		2.9	6.9	11.2
Purchase of intangible assets		(2.2)	(2.0)	(7.5)
Free cash flow		37.9	25.8	76.7

 

 

CONSOLIDATED STATEMENT OF CHANGES IN TOTAL EQUITY

As at 30th June 2010

	Attributable to shareholders of the company
	Share capital £m	Share premium £m	Other reserves £m	Capital redemption reserve £m	Retained earnings £m	Total £m	Minority interest £m	Total equity £m
At 1st January 2009	51.4	95.6	11.1	150.9	183.7	492.7	3.4	496.1
Profit for the period	-	-	-	-	20.4	20.4	0.3	20.7
Other comprehensive income:
Actuarial losses	-	-	-	-	(19.4)	(19.4)	-	(19.4)
Cash flow hedges	-	-	(13.3)	-	-	(13.3)	-	(13.3)
Currency translation	-	-	-	-	(26.1)	(26.1)	(0.4)	(26.5)
Tax on items taken directly to equity	-	-	3.7	-	6.9	10.6	-	10.6
Transactions with owners:
Purchase of own shares by the Employee Benefit Trust	-	-	-	-	(0.8)	(0.8)	-	(0.8)
Dividends	-	-	-	-	(22.9)	(22.9)	-	(22.9)
Value of employee service for share option schemes and share awards	-	-	-	-	1.8	1.8	-	1.8
At 30th June 2009 (unaudited)	51.4	95.6	1.5	150.9	143.6	443.0	3.3	446.3
Comprehensive income:
Profit for the period	-	-	-	-	24.7	24.7	0.4	25.1
Other comprehensive income:
Actuarial gains	-	-	-	-	0.6	0.6	-	0.6
Cash flow hedges	-	-	(6.7)	-	-	(6.7)	-	(6.7)
Currency translation	-	-	-	-	15.9	15.9	0.2	16.1
Tax on items taken directly to equity	-	-	1.9	-	4.6	6.5	-	6.5
Transactions with owners:
Issue of share capital for share option schemes	0.1	0.8	-	-	-	0.9	-	0.9
Purchase of own shares by the Employee Benefit Trust	-	-	-	-	(2.6)	(2.6)	-	(2.6)
Dividends	-	-	-	-	(11.0)	(11.0)	-	(11.0)
Value of employee service for share option schemes and share awards	-	-	-	-	0.7	0.7	-	0.7
At 31st December 2009	51.5	96.4	(3.3)	150.9	176.5	472.0	3.8	475.8
Comprehensive income:
Profit for the period	-	-	-	-	21.1	21.1	0.3	21.4
Other comprehensive income:
Actuarial losses	-	-	-	-	(15.5)	(15.5)	-	(15.5)
Cash flow hedges	-	-	28.4	-	-	28.4	-	28.4
Currency translation	-	-	-	-	(33.0)	(33.0)	(0.4)	(33.4)
Tax on items taken directly to equity	-	-	(7.9)	-	(5.7)	(13.6)	-	(13.6)
Transactions with owners:
Issue of share capital for share option schemes	-	0.3	-	-	-	0.3	-	0.3
Purchase of own shares by the Employee Benefit Trust	-	-	-	-	(2.2)	(2.2)	-	(2.2)
Dividends	-	-	-	-	(22.9)	(22.9)	(0.1)	(23.0)
Value of employee service for share option schemes and share awards	-	-	-	-	2.6	2.6	-	2.6
At 30th June 2010 (unaudited)	51.5	96.7	17.2	150.9	120.9	437.2	3.6	440.8

The number of treasury shares held by the company as at 30th June 2010 was 1,025,000 (30th June 2009: 1,025,000).

In addition, the number of own shares held in the Employee Benefit Trust as at 30th June 2010 was 1,765,938 (30th June 2009: 841,873).

 

NOTES TO THE INTERIM RESULTS

 

1 Basis of preparation

 

This condensed consolidated interim financial information does not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 31st December 2009 were approved by the Board of directors on 25th February 2010 and delivered to the Registrar of Companies. The auditors' report on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain a statement under Section 498 of the Companies Act 2006.

 

This condensed consolidated interim financial information has been reviewed, not audited.

 

This condensed consolidated interim financial information for the six months ended 30th June 2010 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, 'Interim financial reporting' as adopted by the European Union. The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the year ended 31st December 2009, which have been prepared in accordance with IFRSs as adopted by the European Union.

 

2 Accounting policies

 

Except as described below, the accounting policies applied are consistent with those of the annual financial statements for the year ended 31st December 2009, as described in those annual financial statements.

 

The following new standards and amendments to standards are mandatory for the first time for the financial year beginning 1 January 2010:

 

·; IFRS 3 (revised), 'Business combinations', and consequential amendments to IAS 27, 'Consolidated and separate financial statements', IAS 28, 'Investments in associates', and IAS 31, 'Interests in joint ventures'. The adoption of these standards has not had a material effect on the financial statements of the group except for the treatment of business combinations. The most significant changes to the group's previous accounting policies for business combinations are:

- All transactions costs are expensed

- All consideration to purchase a business is recorded at fair value at the acquisition date; any subsequent changes are recognised in the income statement.

The following new standards, amendments to standards and interpretations are mandatory for the first time for the financial year beginning 1 January 2010, but have no material impact on the group:

 

·; IFRIC 17, 'Distribution of non-cash assets to owners'.

·; IFRIC 18, 'Transfers of assets from customers'.

The following new standards, amendments to standards and interpretations have been issued, but are not effective for the financial year beginning 1 January 2010 and have not been early adopted. Their expected impact is still being assessed in detail by management:

 

·; IFRS 9, 'Financial Instruments'

·; IAS 24 (revised), 'Related party disclosures'

·; IAS 32 (amendment), 'Classification of rights issue'

·; IFRIC 14 (amendment), 'Prepayments of a minimum funding requirement'.

·; IFRIC 19, 'Extinguishing financial liabilities with equity instruments'.

3 Segmental information

 

The basis of segmentation and the basis of measurement of segment profit or loss are consistent with the annual financial statements for the year ended 31st December 2009. The segment results for the six months ended 30th June 2010 are as follows:

 

Continuing operations	Textile maintenance Nordic £m	Textile maintenance Continent £m	Textile maintenance UK and Ireland £m	Total textile maintenance £m	Clinical solutions and decontamination £m	Unallocated £m	Group £m
Total segment revenue	172.3	122.4	162.3	457.0	33.7	-	490.7
Inter-segment revenue	(0.4)	(1.4)	-	(1.8)	(0.4)	-	(2.2)
Revenue from external customers	171.9	121.0	162.3	455.2	33.3	-	488.5
Operating profit before exceptional items and amortisation of customer contracts and intellectual property rights	25.3	15.4	18.1	58.8	(0.7)	(3.3)	54.8
Exceptional items	(0.1)	(0.8)	-	(0.9)	-	-	(0.9)
Amortisation of customer contracts and intellectual property rights	(7.1)	(2.8)	(1.4)	(11.3)	-	-	(11.3)
Segment result	18.1	11.8	16.7	46.6	(0.7)	(3.3)	42.6
Net finance expense							(13.8)
Profit before taxation							28.8
Taxation							(7.4)
Profit for the period							21.4
Profit attributable to minority interests							0.3
Profit attributable to equity shareholders							21.1
Capital expenditure	28.8	39.6	23.7	92.1	1.7	0.5	94.2
Depreciation	24.1	23.6	30.8	78.5	2.2	0.1	80.8
Amortisation	8.3	3.2	1.8	13.3	0.4	-	13.7

Capital expenditure comprises additions to property, plant and equipment and intangible assets, including additions resulting from acquisitions through business combinations. The acquisition in the period was in the Textile maintenance Continent segment.

Sales between segments are carried out at arm's length. The company is domiciled in the UK. Revenue from external customers in the UK is £179.6 million (2009: £175.0 million), and the total revenue from external customers from other countries is £308.9 million (2009: £306.5 million).

 

Analysis of revenue by category:

 

	Six months to 30 June 2010 £m	Six months to 30 June 2009 £m
Sales of goods	27.4	25.3
Revenue from services	461.1	456.2
	488.5	481.5

 

 

3 Segmental information continued

 

The segment results for the six months ended 30th June 2009 were as follows:

 

Continuing operations	Textile maintenance Nordic £m	Textile maintenance Continent £m	Textile maintenance UK and Ireland £m	Total textile maintenance £m	Clinical solutions and decontamination £m	Unallocated £m	Group £m
Total segment revenue	164.9	123.7	165.5	454.1	28.8	-	482.9
Inter-segment revenue	(0.4)	(0.7)	-	(1.1)	(0.3)	-	(1.4)
Revenue from external customers	164.5	123.0	165.5	453.0	28.5	-	481.5
Operating profit before exceptional items and amortisation of customer contracts and intellectual property rights	23.1	15.5	14.7	53.3	1.7	(3.0)	52.0
Exceptional items	(4.5)	(0.1)	1.9	(2.7)	-	-	(2.7)
Amortisation of customer contracts and intellectual property rights	(4.8)	(1.5)	(2.0)	(8.3)	-	-	(8.3)
Segment result	13.8	13.9	14.6	42.3	1.7	(3.0)	41.0
Net finance expense							(11.8)
Profit before taxation							29.2
Taxation							(8.5)
Profit for the period							20.7
Profit attributable to minority interests							0.3
Profit attributable to equity shareholders							20.4
Capital expenditure	22.0	26.7	22.6	71.3	12.0	-	83.3
Depreciation	24.1	24.3	33.4	81.8	1.8	-	83.6
Amortisation	5.7	2.0	2.0	9.7	0.5	-	10.2

 

 

The segment assets and liabilities at 30th June 2010 are as follows:

 

	Textile maintenance Nordic £m	Textile maintenance Continent £m	Textile maintenance UK and Ireland £m	Total textile maintenance £m	Clinical solutions and decontamination £m	Unallocated £m	Group £m
Total assets	546.6	351.6	284.2	1,182.4	94.5	108.4	1,385.3
Total liabilities	124.0	70.4	99.5	293.9	14.0	636.6	944.5

 

The segment assets and liabilities at 30th June 2009 were as follows:

 

	Textile maintenance Nordic £m	Textile maintenance Continent £m	Textile maintenance UK and Ireland £m	Total textile maintenance £m	Clinical solutions and decontamination £m	Unallocated £m	Group £m
Total assets	523.2	340.5	286.8	1,150.5	93.7	82.9	1,327.1
Total liabilities	119.5	62.8	108.5	290.8	11.9	578.1	880.8

 

The segment assets and liabilities at 30th December 2009 were as follows:

 

	Textile maintenance Nordic £m	Textile maintenance Continent £m	Textile maintenance UK and Ireland £m	Total textile maintenance £m	Clinical solutions and decontamination £m	Unallocated £m	Group £m
Total assets	614.3	367.5	296.8	1,278.6	92.7	236.1	1,607.4
Total liabilities	153.5	70.7	87.8	312.0	15.2	804.4	1,131.6

 

 

Unallocated assets include segment assets for corporate entities and derivative financial instruments.

 

Unallocated liabilities include segment liabilities for corporate entities and derivative financial instruments.

 

4 Exceptional items

	Six months to 30th June 2010 £m	Six months to 30th June 2009 £m	Year to 31st December 2009 £m
Restructuring costs	0.5	2.8	8.7
Acquisition transaction costs	0.4	-	-
Goodwill impairment	-	1.6	6.0
Loss on property disposals	-	(1.7)	(2.0)
Total	0.9	2.7	12.7

 

The restructuring costs relate primarily to the integration costs incurred following acquisitions. This includes the closure of 3 plants and associated redundancy costs. The tax credit on these was £0.5 million (30th June 2009 £0.6 million).

 

Acquisition costs of £0.4 million have been expensed to the income statement in line with IFRS 3 (revised). These would previously have been accounted for as part of the business combination. The tax credit on these was £0.1 million.

 

In 2009, the group wrote off goodwill in relation to the direct sales businesses in Germany, Finland and the UK. There was no tax charge arising. Additionally, in 2009 the group realised a net profit on UK property disposals. The tax credit on this at 30th June 2009 was £0.5 million.

 

 

5 Seasonality

 

The hotels and restaurants markets are subject to some seasonal fluctuation. Higher revenues in the second and third quarters of the year are expected due to increased demand during the holiday season. Other than this, there is no significant seasonality or cyclicality affecting the interim result of the operations.

 

6 Taxation

 

The income tax expense is based on an effective annual tax rate estimated individually for each tax jurisdiction in which the group operates and applied to the pre-tax profit, excluding exceptional items, of the relevant entity. Tax on exceptional items is calculated separately and specifically on those items and is disclosed in note 4. The effective tax rate on adjusted profit before tax was 26.6% (30th June 2009: 26.5%).

 

A reduction in the UK corporation tax rate from 28% to 24% over four years from April 2011 was announced on 22 June 2010. The first reduction was not substantively enacted by 30 June 2010 and so did not impact the tax charge for the first six months of the year. The impact on the net assets of the Group of a 4% reduction in the tax rate over four years is estimated to be a benefit of £1.3 million in total.

 

7 Dividends

 

A final dividend relating to the year ended 31st December 2009 amounting to £22.9 million was paid in May 2010 (2008: £22.9 million), representing 13.5 pence per share (2008: 13.5 pence).

 

In addition, an interim dividend in respect of the financial year ending 31st December 2010 of [6.5] pence per ordinary share was proposed by the board of directors on 24th August 2010. It is payable on 14th October 2010 to shareholders who are on the register at 17th September 2010. This interim dividend amounting to £11.0 million is not reflected in these financial statements as it does not represent a liability at 30th June 2010. It will be recognised in shareholders' equity in the year to 31 December 2010.

 

8 Earnings per ordinary share

 

Basic earnings per ordinary share are based on the profit for the period attributable to the equity holders and a weighted average of 169,075,040 (30th June 2009: 169,737,810) ordinary shares in issue during the period and exclude the treasury shares and shares in the Employee Benefit Trust.

 

Diluted earnings per share are based on the group profit for the period and a weighted average of ordinary shares in issue during the period calculated as follows:

 

	30th June 2010 Number of shares	30th June 2009 Number of shares	31st December 2009 Number of shares
In issue	169,075,040	169,737,810	169,533,679
Dilutive potential ordinary shares arising from unexercised share options and awards	309,215	119,596	150,955
	169,384,255	169,857,406	169,684,634

 

An adjusted earnings per ordinary share figure has been presented to eliminate the effects of exceptional items and amortisation of customer contracts and intellectual property rights.

 

This presentation shows the trend in earnings per ordinary share that is attributable to the underlying trading activities of the total group.

 

 

The reconciliation between the basic and adjusted figures for the total group is as follows:

 

	Six months to 30th June 2010		Six months to 30th June 2009		Year to 31st December 2009
	£m	Earnings per share pence	£m	Earnings per share pence	£m	Earnings per share pence
Profit attributable to equity shareholders of the company for basic earnings per share calculation	21.1	12.5	20.4	12.0	45.1	26.6
Profit on sale of properties (after taxation)	-	-	(1.2)	(0.7)	(1.6)	(0.9)
Goodwill impairment (after taxation)	-	-	1.6	0.9	6.0	3.5
Restructuring items (after taxation)	-	-	2.2	1.4	5.7	3.3
Acquisition transaction costs (after taxation)	0.3	0.2	-	-	-	-
Amortisation of customer contracts and intellectual property rights (after taxation)	8.5	5.0	6.2	3.6	13.2	7.8
Exceptional tax credit due to change in tax rates	-	-	-	-	(1.6)	(0.9)
Adjusted earnings	29.9	17.7	29.2	17.2	66.8	39.4
Diluted basic earnings	-	12.5	-	12.0	-	26.6

 

9 Property, plant and equipment

 

During the six months ended 30th June 2010, the group acquired assets with a cost of £75.8 million (30th June 2009: £79.1 million), not including property, plant and equipment acquired through business combinations.

 

Assets with a net book value of £2.3 million were disposed of by the group during the six months ended 30th June 2010 (30th June 2009: £4.5 million) resulting in a net gain on disposal of £0.6 million (30th June 2009: £2.4 million).

 

The group's capital commitments at 30th June 2010 were £2.8 million (30th June 2009: £1.0 million).

 

10 Provisions

 

	Vacant Properties £m	Restructuring £m	Property disposals £m	Total £m
At 1st January 2010	0.5	4.7	2.5	7.7
Charged in the period	-	0.5	-	0.5
Utilised in the period	(0.1)	(2.6)	-	(2.7)
Currency translation	-	(0.3)	-	(0.3)
At 30th June 2010	0.4	2.3	2.5	5.2

 

All provisions except for the property disposal provision are current in nature.

 

Vacant properties

Vacant property provisions are made in respect of vacant and partly sub-let leasehold properties to the extent that the future rental payments are expected to exceed future rental income. It is further assumed, where reasonable, that the properties will be able to be sub-let beyond the present sub-let lease agreements. In determining the vacant property provision, the cash flows have been discounted on a pre-tax basis using the appropriate government bond rates.

 

Restructuring

Restructuring provisions comprise largely of employee termination payments. Provisions are not recognised for future operating losses.

 

Property disposals

The group has outstanding warranties, indemnities and guarantees given previously on a number of properties operated by businesses which have been disposed. The majority of these expire in 2017 with the remaining expiring by 2022.

 

 

11 Cash generated from operations

 

Reconciliation of profit for the period to cash generated from operations.

	Six months to 30th June 2010 £m	Six months to 30th June 2009 £m	Year to 31st December 2009 £m
Profit for the period	21.4	20.7	45.8
Adjustments for:
Taxation	7.4	8.5	15.9
Amortisation of intangible fixed assets	13.7	10.2	21.6
Depreciation of tangible fixed assets	80.8	83.6	166.2
Profit on sale of property	-	(1.9)	(2.0)
Profit on sale of plant and equipment	(0.6)	(0.5)	(0.9)
Restructuring costs (non-cash element)	-	2.8	5.9
Goodwill impairment	-	1.6	6.0
Onerous property lease	-	-	0.4
Finance income	(0.6)	(0.7)	(1.5)
Finance expense	14.4	12.5	25.1
Other non-cash movements	1.6	1.8	0.7
Changes in working capital (excluding effect of acquisitions,
disposals and exchange differences on consolidation):
Inventories	(4.3)	1.2	2.4
Trade and other receivables	(3.9)	(0.2)	5.2
Trade and other payables	12.2	(12.2)	(13.8)
Provisions	(2.7)	(2.7)	(6.5)
Cash generated from operations	139.4	124.7	270.5

In the cash flow statement, proceeds from sale of property, plant and equipment comprise:

	Six months to 30th June 2010 £m	Six months to 30th June 2009 £m	Year to 31st December 2009 £m
Net book amount	2.3	4.5	8.3
Profit on sale of property, plant and equipment	0.6	2.4	2.9
Proceeds from sale of property, plant and equipment	2.9	6.9	11.2

 

12 Reconciliation of net cash flow to movement in net debt

 

	Six months to 30th June 2010 £m	Six months to 30th June 2009 £m	Year to 31st December 2009 £m
(Decrease)/increase in cash	(191.2)	5.0	199.1
Cash outflow/(inflow) from movement in debt and lease financing	164.1	(10.3)	(172.4)
Changes in net debt resulting from cash flows	(27.1)	(5.3)	26.7
New finance leases	(2.0)	(1.5)	(3.0)
Bank loans and lease obligations acquired with subsidiaries	(3.0)	-	-
Currency translation	(11.6)	71.3	35.5
Movement in net debt in period	(43.7)	64.5	59.2
Net debt at beginning of period	(484.9)	(544.1)	(544.1)
Net debt at end of period	(528.6)	(479.6)	(484.9)

 

 

13 Acquisitions

 

On 4 January 2010, the group further strengthened its existing German Workwear business through the acquisition of 100% of the issued shares of a German Workwear business, for consideration of circa £14.8 million. The fair value exercise is in progress and therefore the amounts below are provisional, to be finalised in the 2010 accounts. The cash and deferred consideration payable is dependent on the fair value of the assets and liabilities at the date of acquisition and is therefore also provisional.

 

	Provisional fair values £m
Intangible assets	12.5
Property, plant and equipment	5.7
Inventory	0.3
Trade and other receivables	5.1
Cash and cash equivalents	1.1
Trade and other payables	(1.6)
Income tax payable	(1.6)
Interest bearing loans and borrowings	(3.0)
Deferred tax liabilities	(4.5)
Net assets acquired	14.0
Goodwill	0.8
Consideration satisfied by:	14.8
- Cash	6.1
- Deferred consideration	7.9
- Contingent consideration	0.8
	14.8

 

Acquisition related costs of £0.4 million are included in the income statement in exceptional items (note 4).

 

The contingent consideration arrangements require the group to pay the former owners additional contingent consideration on future sales. The future payable is up to a maximum undiscounted amount of £2.0 million. The contingent consideration has given rise to goodwill, none of which is expected to be deductible for tax purposes.

 

The fair value of trade and other receivables is £5.1 million and includes trade receivables with a fair value of £1.7 million. The gross contractual amount for trade receivables due is £2.0 million, of which £0.3 million is expected to be uncollectible.

 

Shown below are the revenues and profit for the year after tax as if the above acquisitions had been made at the beginning of the period.

 

	£m
Revenue	3.1
Operating profit	1.0

 

From the date of acquisition to 30th June 2010, the above acquisitions contributed £3.1 million to revenue and £0.7 million to profit after tax for the period.

 

During the period the group also paid deferred consideration on previous acquisitions. A reconciliation of the total net cash paid for acquisitions is provided below:

 

	£m
Net cash consideration	5.0
Deferred consideration paid on previous acquisitions	30.9
	35.9

 

The total consideration including net financial liabilities assumed and deferred consideration payable for the acquisitions is £47.6 million.

 

14 Pension schemes

The amounts recognised in the balance sheet are determined as follows:

 

	As at 30th June 2010 £m	As at 31st December 2009 £m
Present value of obligations	(257.4)	(246.6)
Fair value of plan assets	214.9	213.7
Net liability recognised in balance sheet	(42.5)	(32.9)
Analysed as:
- Pension scheme deficit and unfunded schemes	(42.5)	(32.9)
	(42.5)	(32.9)

 

Analysis of the movement in the net balance sheet liability:

 

		Six months to 30th June 2010 £m
At 1st January 2010		(32.9)
Current service cost		(1.4)
Interest cost		(6.6)
Expected return on plan assets		7.1
Actuarial loss recognised in other comprehensive income		(15.6)
Special contributions		4.0
Contributions paid		1.9
Currency translation		1.0
At 30th June 2010		(42.5)

 

15 Related parties

 

The nature of related parties as disclosed in the consolidated financial statements for the group as at and for the year ended 31st December 2009 has not changed. Further, there have been no significant related party transactions in the six month period ended 30th June 2010.

 

16 Contingent liabilities

 

The group operates from 128 laundries across Europe. Some of the sites have operated as laundry sites for many years, and historic environmental liabilities may exist, although the group has indemnities from third parties in respect of a number of sites. The extent of these liabilities and the cover provided by the indemnities are reviewed where appropriate with the relevant third party. Such liabilities are not expected to give rise to any significant loss.

 

17 Website policy

 

The directors are responsible for the maintenance and integrity of the company's website. Information published on the internet is accessible in many countries with different legal requirements. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

Statement of directors' responsibilities

 

The directors confirm that this condensed set of consolidated interim financial information have been prepared in accordance with IAS 34 as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7 and 4.2.8.

 

By order of the Board

 

Peter Ventress

26th August 2010

Chief Executive

 

Kevin Quinn

26th August 2010

Finance Director

 

 

Independent review report to The Davis Service Group plc

 

Introduction

 

We have been engaged by the company to review the condensed consolidated interim financial information in the interim financial report for the six months ended 30th June 2010, which comprises the consolidated interim income statement, consolidated interim statement of comprehensive income, consolidated interim balance sheet, consolidated interim cash flow statement, consolidated statement of changes in total equity and related notes. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated interim financial information.

 

Directors' responsibilities

 

The interim financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

 

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed consolidated interim financial information included in this interim financial report has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union.

 

Our responsibility

 

Our responsibility is to express to the company a conclusion on the condensed consolidated set of interim financial statements in the interim financial report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Disclosure and Transparency Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

 

Scope of review

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

 

Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated interim financial information in the interim financial report for the six months ended 30th June 2010 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

 

 

PricewaterhouseCoopers LLP

Chartered Accountants

London

26th August 2010

 

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