Notes to the Interim Results

1.    General information

UP Global Sourcing Holdings plc ("the Company") and its subsidiaries (together "the Group") is a supplier of branded, value for money household products to global markets.

The Company is a public limited company, which is listed on the London Stock Exchange and incorporated and domiciled in the UK. The address of its registered office is UP Global Sourcing Holdings plc, Manor Mill, Victoria Street, Chadderton, Oldham, OL9 0DD.

This consolidated condensed 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 31 July 2018 were approved by the Board of Directors on 5 November 2018 and delivered to the Registrar of Companies. The comparative figures for the financial year ended 31 July 2018 are an extract of the Company's statutory accounts for that year. The report of the auditor on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 (2) or (3) of the Companies Act 2006.

This consolidated condensed interim financial information is unaudited but has been reviewed by the Company's Auditor.

2.    Basis of preparation

This consolidated condensed interim financial information for the six months ended 31 January 2019 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority (previously the Financial Services Authority) and with IAS 34, 'Interim Financial Reporting' as adopted by the European Union. The consolidated condensed interim financial information should be read in conjunction with the audited financial statements for the year ended 31 July 2018, which have been prepared in accordance with IFRSs as adopted by the European Union.

Going concern basis

The Group meets its day-to-day working capital requirements through its bank facilities.  After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future.  The Group's forecasts and projections, taking account of reasonable sensitivities, show that the Group should be able to operate within available facilities. The Group therefore continues to adopt the going concern basis in preparing its consolidated condensed interim financial statements.

3.    Accounting policies

The accounting policies applied are consistent with those of the annual financial statements for the year ended 31 July 2018, except for the following:

IFRS 9, Financial Instruments

IFRS 9 was effective for accounting periods beginning on or after 1 January 2018. The adoption of this standard has not had any material impact on the financial statements.

IFRS 15, Revenue from Contracts with Customers

IFRS 15 was effective for accounting periods beginning on or after 1 January 2018. The adoption of this standard has not had a material impact on the Group's income statement but does require the disclosure of the disaggregation of revenue in both the year-end and interim financial statements.

Treasury shares

Consideration paid for the purchase of treasury shares is recognised directly in equity. The cost of treasury shares held is presented as a separate reserve ("the treasury reserve"). Any excess of the consideration received on the sale of treasury share over the weighted average cost of the shares sold is credited to retained earnings.

4.    Operating segments

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is responsible for allocating resources and assessing performance of operating segments.

The Directors consider that there are no identifiable business segments that are subject to risks and returns different to the core business. The information reported to the Directors, for the purposes of resource allocation and assessment of performance, is based wholly on the overall activities of the Group. The Group has therefore determined that it has only one reportable segment under IFRS 8.

The results and assets for this segment can be determined by reference to the statement of comprehensive income and statement of financial position.

5.    Principal risks and uncertainties

The Directors consider that the principal risks and uncertainties, which could have a material impact on the Group's performance in the remaining 6 months of the financial year, remain substantially the same as those stated on pages 19-23 of the Group's Annual Report for the year ended 31 July 2018, which is available on the Group's website, www.upgs.com.

6.    Financial instruments

The Group's activities expose it to a variety of financial risks: market risk (including foreign exchange risk, cash flow and fair value interest rate risk and price risk), credit risk and liquidity risk.        

The condensed interim financial statements should be read in conjunction with the Group's Annual Report for the year ended 31 July 2018, as they do not include all financial risk management information and disclosures contained within the Annual Report. There have been no changes in the risk management policies since the year end.

7.    Revenue

The Group has disaggregated revenue into various categories in the following tables which are intended to depict the nature of the Group's revenue.

Geographical split by location:

Analysis of Revenue by Brand:

Analysis of Revenue by Major Products:

Analysis of Revenue by Strategic Pillar:

8.    Seasonality of operations

Overall the Group's product range is not significantly seasonal, however, retail demand is higher in the Christmas trading period. As a result, it is anticipated that the operating profits for the second half of the year ending 31 July 2019 will be lower than those for the six months ended 31 January 2019.

9.    Share-based payment charges

The share-based payment expense relates to the non-cash charge arising on a share option management incentive plan adopted immediately prior to the IPO. The options have been valued using the Monte Carlo option pricing model and are granted with a three-year vesting period and can be exercised up to seven years following the vesting date.

The above items have been shown separately in the Income Statement to better reflect the performance of the underlying business.

10.  Operating profit

EBITDA represents profit from operations before depreciation and amortisation. Underlying EBITDA represents EBITDA, as defined above, adjusted for the share-based payment charges set out in note 9 above. The Directors use EBITDA and underlying EBITDA as key performance indicators of the Group's business.

The following table sets forth a reconciliation of EBITDA and Underlying EBITDA to profits from operations for the periods indicated.

11.  Profit before taxation

The Directors also monitor the Group's performance with respect to profit before taxation and underlying profit before taxation. Underlying profit before taxation represents profit before taxation adjusted for the share-based payment charges set out in note 9 above.

The following table sets forth a reconciliation of profit before taxation and underlying profit before taxation for the periods indicated.

12.  Taxation

The interim period tax charge is accrued based on the estimated average annual effective income tax rate of 20.4% (six months ended 31 January 2018: 20.8%; year ended 31 July 2018: 21.0%). 

The effective income tax rates on the underlying profit before taxation was 20.1% (six months ended 31 January 2018: 20.3%; year ended 31 July 2017: 20.3%).       

The Chancellor announced in his Budget on 16 March 2016 that the main rate of corporation tax will be reduced to 17% from 1 April 2020 and the future current tax charges will reduce accordingly.

13.  Earnings per share

Basic earnings per share is calculated by dividing the net income for the period attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period.

Diluted earnings per share amounts are calculated by dividing the profit attributable to owners of the parent by the weighted average number of ordinary shares in issue during the financial year, adjusted for the effects of potentially dilutive options. The dilutive effect is calculated on the full exercise of all potentially dilutive ordinary share options granted by the Group, including performance-based options which the Group considers to have been earned.

The calculations of earnings per share are based on the following:

No dilution arises in the 6 months ended 31 January 2019 as the hurdle for the MIP Option Scheme (explained further in note 26 of the financial statements for the year ended 31 July 2018) was not achieved based upon the interim measurement of the criteria as at 31 January 2019.

The underlying earnings per share referred to below is based on the underlying profit for the period, which reflects the profit for the period after adding back the share-based payment charges set out in note 9 above and the tax effects as set out in note 12 above.

14.  Dividends

The final dividend declared in respect of the year ended 31 July 2018 was paid in the 6 months ended 31 January 2019.

An interim dividend of 1.16 p per share was approved by the Board on 26 April 2019 and will be paid on 26 July 2019 to shareholders on record as at 5 July 2019.

15.  Property, plant and equipment

16.  Trade and other receivables

The Directors believe that the carrying value of trade and other receivables represent their fair value. Trade and other receivables are denominated in Sterling, US Dollars, Euros and Canadian Dollars. In determining the recoverability of trade receivables, the Group considers any change in the credit quality of the receivable from the date credit was granted up to the reporting date.

17.  Trade and other payables

Trade payables principally consist of amounts outstanding for trade payables and ongoing costs. They are non-interest bearing and are normally settled on 30 to 60 days terms.

The Directors consider that the carrying value of trade and other payables approximates their fair value. Trade and other payables are denominated in both Sterling and US Dollars. UP Global Sourcing Holdings plc has financial risk management policies in place to ensure that all payables are paid within the credit timeframe and no interest has been charged by any suppliers as a result of late payment of invoices during the period.

18.  Borrowings

The Group is funded by external bank facilities provided by HSBC. The facilities provide the ongoing funding of the Group and comprise a revolving credit facility of £6.2 m, an import loan facility of £8.7 m and an invoice discounting facility of £17 m. The revolving credit facility runs to July 2020, the invoice discounting facility to June 2020 and the import loan facility, which is repayable on demand, is subject to annual renewal.

19.  Financial instruments

a)    Principal financial instruments

The principal financial instruments used by the Group, from which financial instrument risk arises are as follows:

b)    Financial assets

The Group held the following financial assets at amortised cost:

c)    Financial liabilities

The Group held the following financial liabilities, classified as other financial liabilities at amortised cost:

d)   Derivative  financial instruments

The Group held the following derivative financial instruments, classified as fair value through profit and loss on initial recognition:

The following is a reconciliation of the financial instruments to the statement of financial position:

Derivative financial instruments - Forward contracts

The Group mitigates the exchange rate risk for certain foreign currency trade debtors and creditors by entering into forward currency contracts. At 31 January 2019, the outstanding contracts all mature within 12 months of the period end (31 January 2018: 12 months; 31 July 2018: 12 months). At 31 January 2019, the Group was committed to buy US$33,000,000, to sell €15,250,000 and to sell CA$175,000, paying and receiving respectively a fixed sterling amount (31 January 2018: to buy US$15,750,000, to sell €8,950,000 and to sell CA$90,000; 31 July 2018: to buy US$28,750,000, to sell €12,400,000 and to sell CA$100,000). The forward currency contracts are measured at fair value using the relevant exchange rates for GBP:USD, GBP:EUR and GBP:CAD. The fair value of the contracts at 31 January 2019 is an asset of £318,000 (31 January 2018: £589,000 liability; 31 July 2018: £935,000 asset).

Forward currency contracts are valued using level 2 inputs. The valuations are calculated using the period end exchange rates for the relevant currencies which are observable quoted values at the period end dates. Valuations are determined using the hypothetical derivative method which values the contracts based on the changes in the future cash flows based on the change in value of the underlying derivative.

All of the forward contracts to buy US Dollars and some of those to sell Euros meet the conditions for hedge accounting, as set out in the accounting policies of the financial statements for the year ended 31 July 2018.

Derivative financial instruments - Interest rate swaps and interest rate caps

The Group has entered into interest rate swaps and interest rate caps to protect the exposure to interest rate movements on the various elements of the Group's banking facility. As at 31 January 2019, protection was in place over an aggregate principal of £17,659,000 (31 January 2018: £11,702,000, 31 July 2018: £11,600,000).

All interest rate swaps meet the conditions for hedge accounting, as set out in the accounting policies of the financial statements for the year ended 31 July 2018.

Interest rate swaps and caps are valued using level 2 inputs. The valuations are based on the notional value of the swaps and caps, the current available market borrowing rate and the swapped or capped interest rate respectively. The valuations are based on the current valuation of the present saving or cost of the future cash flow differences, based on the difference between the swapped and capped interest rates contracts and the expected interest rate as per the lending agreement.

20.  Events occurring after the reporting period

Interim dividend

As disclosed in note 14, an interim dividend of 1.16 p per share will be paid on 26 July 2019.

Save As You Earn Scheme

On 13 February 2019, the Company launched a Save As You Earn Scheme (the "SAYE Scheme"), offering all eligible employees the opportunity to participate in the future growth of the Company through the granting of share options. Eligible employees were invited to subscribe for options over ordinary shares of 0.25 pence each with an exercise price of 39.5 pence per Ordinary Share, representing a 20% discount to the average closing mid-market price between 15 January 2019 and 17 January 2019, being the three business days prior to opening of the SAYE scheme for application. The options have a savings contract start date of 1 March 2019 and are exercisable between 1 March 2022 and 30 September 2022 for the three-year contracts and between 1 March 2024 and 30 September 2024 for the five year contracts. 

Out of 138 eligible employees, 95 elected to participate in the SAYE Scheme and, pursuant to this, a grant of 1,268,914 options over ordinary shares was made on 13 February 2019, equating to 1.54% of the current issued share capital of 82,169,600 ordinary shares. It is currently intended that any future exercise of these options will be satisfied through the ordinary shares currently held in trust by the UP Global Sourcing Employee Benefit Trust ("EBT") (see below), with no dilution to existing shareholders.

Purchase of own shares

On 15 February 2019 the "EBT" acquired a further 155,807 shares in the Company for a total cost of £101,995, including the associated acquisition costs. Following this transaction, the EBT holds 2,526,807 shares, representing 3.1% of the Company's issued share capital with voting rights. 

Awards under the Company's Performance Share Plan

On 11 March 2019, options over 1,120,000 ordinary shares in the Company were granted, at nominal value, to certain employees, under the rules of the Company's Performance Share Plan (the "PSP"), to retain and incentivise certain members of senior management.  

Following a three-year performance period, commencing on 1 August 2019 and ending on 31 July 2022, the options may then vest over a two-year period commencing on the assessment by the Remuneration Committee of the performance conditions, and lapse on the tenth anniversary of the date of grant. The options are subject to rigorous financial performance conditions and continued employment within the Group. It is currently intended that any future exercise of these options will be satisfied through the ordinary shares currently held in trust by the "EBT" (see above), with no dilution to existing shareholders

21.  Related party transactions

22.  Future significant accounting changes: IFRS 16, Leases

The new standard recognises a leased asset and a lease liability for almost all leases and requires them to be accounted for in a consistent manner. This introduces a single lessee accounting model and eliminates the previous distinction between an operating lease and a finance lease.

IFRS 16 will be first adopted in the Group's report and accounts for the year ending 31 July 2020, with adoption being on a full retrospective basis, including the restatement of the balance sheet at 31 July 2018 and restatement of the income statement for the year ending 31 July 2019.

Current significant operating leases include the Group's four principal properties (Manor Mill, Heron Mill, Guangzhou and Cologne) along with certain other plant and equipment.

The Group is finalising its assessment of IFRS 16 with some further work still required to determine the final impact however current indications of the impact on the income statement for the six months ended 31 January 2019 are as follows:

⁽¹⁾        EBITDA will increase as operating lease rental charges are removed.

⁽²⁾        Depreciation will increase with the additional charge on the right of use assets.

⁽³⁾        Finance charges will increase due to the interest on the finance leases.

The more significant impact from the introduction of IFRS 16 will be on the balance sheet, where, including some estimation, current indications of the cumulative impact from the restatement on the prior periods' income statements and from the recognition of assets and liabilities as at 31 January 2019, are as follows:

There will be no impact on net cash flow.

Statement of Directors' Responsibilities                                                                                 

The Directors' confirm that these consolidated condensed interim financial statements have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting, as adopted by the European Union. The interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:                                   

•     an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining  six months of the financial year; and      

•    material related party transactions in the first six months and any material changes in the related party transactions described in the last annual report.

The Directors of UP Global Sourcing Holdings plc are listed on pages 32 to 35 of the Group's Annual Report for the year ended 31 July 2018, which is available on the Group's website, www.upgs.com.

For and on behalf of the board of directors