Merlin Entertainments Regulatory News (MERL)

Merlin Entertainments plc - 2019 Interim Results

Performance to date broadly in line with Board expectations

1 August 2019

Merlin Entertainments, Europe's leading and the world's second-largest visitor attraction operator, today reports results for the 26 weeks ended 29 June 2019.

Key highlights

• During the period the Group adopted IFRS 16, the new accounting standard for leasing. The 2018 results have therefore been restated compared to previously reported figures to be on an IFRS 16 basis.

• During the period the Group disposed of its two Australian ski resorts. These have been accounted for as discontinued operations in both periods and accordingly the results above relate to the continuing operations of the Group excluding the ski fields.

• To aid understanding of these items, a reconciliation to previously reported numbers is shown on page 12.

Summary

• Group organic revenue grew by 6.5%, driven by like for like revenue growth of 2.3% as Midway Attractions and Resort Theme Parks return to growth, and the continued roll out of new attractions and accommodation;

• Midway Attractions organic revenue grew by 8.1%, with a steady recovery in London trading and growth elsewhere;

• Resort Theme Parks organic revenue growth of 4.1% driven by product investment, accommodation openings and favourable trading at Easter;

• LEGOLAND Parks organic revenue increased by 4.6% with continued accommodation openings offsetting challenging trading in the existing estate;

• Accommodation revenue grew by 14.5% on a constant currency basis and now represents 24% of theme park revenue;

• Significant cost pressures, partially mitigated by the Productivity Agenda, have limited EBITDA growth;

• Increased depreciation charge relating to the significant investment in the business, and an increased tax charge due to US legislation, combined with the operating performance, resulted in a 24.7% decline in adjusted earnings per share; 

• Improved cash generation, with operating free cash flow of £110 million, representing growth of 2.4%;

• No dividend proposed, following the 28 June announcement regarding the Recommended Offer;

• Continued focus upon long term investment opportunities, with progress against the opening of new LEGOLAND parks and roll out of new brands. 

Nick Varney, Chief Executive Officer, said:

"Group performance year to date has been broadly in line with our expectations in the seasonally quieter first half of the year, with 6.5% organic revenue growth driven by a combination of like for like growth, continued contribution from new openings and the benefit of a diversified portfolio.

After a number of years of headwinds, it is pleasing to see both Midway and Resort Theme Parks (RTP) returning to better levels of like for like revenue growth, with improved cash generation. In Midway, we have seen an improvement in London trading and a generally solid performance elsewhere driving 4.5% like for like revenue growth, whilst RTP has delivered like for like growth of 3.0% despite difficult comparatives. Trading in LEGOLAND Parks has however been more disappointing. Although we enjoyed a strong Easter and Spring Break performance, trading since then has been affected by poor weather in May and June, difficult market conditions in a number of countries and limited momentum from 'The LEGO Movie 2'.

With eight new Midway attractions opened in the period, 372 new accommodation rooms, and the ongoing development of new LEGOLAND parks, we continue to build on our position as a unique, multi-format international operator of strongly branded and IP-led location based entertainment."

Delivering on the strategy

The Group has made further progress against its strategic growth drivers so far in 2019, and has also expanded and diversified its portfolio:

Growing the existing estate through planned investment cycles 

·; Compelling new propositions opened across the estate, including:

o Midway Attractions - 'Broadway' experience at Madame Tussauds New York and 'Penguin Ice Adventure' at SEA LIFE Bangkok Ocean World

o LEGOLAND Parks - 'The LEGO Movie World' at LEGOLAND Florida and 'The Haunted House Monster Party' at LEGOLAND Windsor

o Resort Theme Parks - 'Colossos' roller coaster at Heide Park.

Exploiting strategic synergies 

·; Productivity Agenda on track to deliver £35 million of efficiency savings by 2022

o UK-based finance Shared Service Centre to open next month

o A number of central functions rationalised

o Continued pilot of 'lean' practices in our theme parks

·; Successful launch of Merlin Monthly Membership programme, now accounting for approximately 30% of all UK-wide Pass sales.

Transforming our theme parks into destination resorts

·; Total of 372 new rooms planned for 2019 now open, comprising:

o 142 room Castle Hotel at LEGOLAND Billund Resort

o 128 room Magic Hotel at Gardaland Resort

o 102 'Stargazing Pods' at Alton Towers Resort.

Rolling out new Midway attractions

·; Eight new Midway attractions opened to date, including two pilots of the new Peppa Pig World of Play in the US, and a Dungeon within Alton Towers Resort

·; SEA LIFE San Antonio scheduled to open towards the end of 2019. 

New LEGOLAND park developments

·; Continue to target a 2020 opening for LEGOLAND New York, although timetable and cost are under pressure given the scale and complexity of the project

o Accommodation is now expected to open in 2021

·; Construction contracts now awarded in South Korea, scheduled to open by 2022

·; Discussions ongoing regarding development agreements in China.

Recommended Offer

Merlin announced on 28 June a Recommended Offer for the Company. Documents related to the shareholder and court meetings, which are expected to take place on 3 September, will be published today on the Company's corporate website.

Dividend

Following the announcement made on 28 June regarding the Recommended Offer for the Company, the Board is not recommending an interim dividend payment.

Footnotes to key highlights table:

(1) Visitors represents all individual visits to Merlin owned or operated attractions.

(2) Growth from like for like businesses and new business development at constant currency and excluding growth from acquisitions.

Audio webcast

An audio webcast for analysts, hosted by Anne-Francoise Nesmes, will be held this morning at 09:30 and can be accessed via Merlin's corporate website, www.merlinentertainments.biz.

Participant Dial in: +44 (0) 203059 5844

Participant Access Code: 306925

Contact details:

For further information please contact:

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About Merlin Entertainments plc

Merlin Entertainments plc is a global leader in location based, family entertainment. As Europe's Number 1 and the world's second-largest visitor attraction operator, Merlin now operates over 130 attractions, 20 hotels and 6 holiday villages in 25 countries and across 4 continents. Merlin's purpose is to deliver memorable experiences to 67 million guests around the world, through its iconic global and local brands, and the commitment and passion of its c.28,000 employees (peak season). The Company invests in the development of outstanding visitor experiences across multiple formats, and consistently achieves above 90% guest satisfaction levels.

It is headquartered in Poole, Dorset, UK and is listed on the London Stock Exchange (MERL.L). In 2018, Merlin had revenues of £1.7 billion and underlying EBITDA of £494 million. Reflecting its longstanding strategy of diversification and global expansion, Merlin generates over 70% of profits from outside of the UK.

Merlin's strategy since its inception in 1999 has been to create a high growth, high return family entertainment company based upon strong brands and a global portfolio that is naturally balanced against the impact of external factors. It operates two distinct products - Midway attractions and theme parks.

'Midway' attractions are high quality, branded, indoor attractions, with a typical 1-2 hour dwell time, located in city centres, shopping malls or resorts. There are approximately 120 Midway attractions across 22 countries, with chainable brands including SEA LIFE, Madame Tussauds, The Eye (observation attractions), The Dungeons and LEGOLAND Discovery Centres. Midway also incorporates the Little BIG City brand which has attractions in Berlin and Beijing, and two new brand concepts: The Bear Grylls Adventure which opened its first attraction last year in Birmingham, UK, and Peppa Pig World of Play, a pre-school play experience with initial roll out in China and the US.

Merlin's theme parks are larger multi-day outdoor resort destinations, incorporating on-site themed accommodation. These are organised into two specific Operating Groups, based on the brands.

• LEGOLAND Parks - Eight LEGO themed interactive theme parks appealing to younger families with children aged 2-12. The LEGOLAND Parks estate spans seven countries across three continents, with plans already announced for further parks in New York, US and South Korea and discussions ongoing regarding parks in China.

• Resort Theme Parks - Six nationally recognised destination theme parks arranged around a central theme. Resort Theme Parks include Alton Towers, THORPE PARK, Chessington World of Adventures, Warwick Castle in the UK, and Gardaland (Italy) and Heide Park (Northern Germany).

The trend towards shorter, more frequent breaks has supported the growth of Merlin's themed on-site accommodation within its theme parks. Merlin has c.4,500 rooms across a variety of accommodation formats and price points, including four-star hotels, lodges and glamping.

Merlin delivers safe, memorable experiences every day for its guests through its own brands or, increasingly, through exclusive partnerships with Intellectual Property owners. It is supported by its unique internal department - Merlin Magic Making - providing development, creative, production and project management expertise.

Merlin is committed to being a force for good, aiming to make a difference to the communities linked to its business. Merlin's Magic Wand (www.merlinsmagicwand.org) is a charity which supports children facing challenges of serious illness, disability or adversity to experience the magic of Merlin's attractions, and SEA LIFE Trust (www.sealifetrust.org), promotes and contributes to marine conservation around the world.

See Merlin Backstage (www.backstage.merlinentertainments.biz or www.facebook.com/merlinbackstage) for an insight into how Merlin delivers memorable experiences to its many millions of visitors to its attractions.

Visit www.merlinentertainments.biz for more information and follow on Twitter @MerlinEntsNews.

Number of attractions

Movement in the number of attractions between 29 December 2018 and 29 June 2019:

Note:

(1) Madame Tussauds

(2) LEGOLAND Discovery Centre

(3) Midway Attractions Operating Group

(4) LEGOLAND Parks Operating Group

(5) Resort Theme Parks Operating Group

Attractions opened to date in 2019 comprise Alton Towers Dungeon; LDC Beijing, San Antonio and Shenyang; SLC Malaysia and Shenyang and Peppa Pig World of Play in Dallas and Michigan.

Attractions sold in the period comprise the two ski fields in Australia.

Number of rooms

Movement in the number of accommodation rooms between 29 December 2018 and 29 June 2019:

Note: Excludes campsite pitches at LEGOLAND Deutschland and LEGOLAND Billund.

Chief Executive Officer's review

Group performance summary

Group performance year to date has been broadly in line with Board expectations, with organic revenue growth of 6.5% driven by a combination of like for like growth, the continued contribution from the opening of new Midway attractions and the expansion of the accommodation offering at our theme parks. We've seen growth in the number of visitors and continue to achieve strong levels of guest satisfaction. Organic revenue growth has been offset by cost pressures resulting in limited EBITDA growth.

Like for like revenue growth of 2.3% has been driven by a better performance in our Midway and Resort Theme Parks Operating Groups, both of which have experienced headwinds in recent years. In Midway, we have seen an improvement in London visitation and trading elsewhere has also been generally solid, whilst in Resort Theme Parks, we have shown continued revenue growth, despite the difficult comparatives. Offsetting this, trading in LEGOLAND Parks has however been more challenging. Although we enjoyed a strong Easter and Spring Break performance, trading since then has been affected by poor weather, difficult conditions in a number of markets and limited momentum from 'The LEGO Movie 2'.

The opening of eight new Midway attractions has contributed positively to the growth in revenue, and includes two pilots of Peppa Pig World of Play - our first in the US. We continue to invest in the three new brands - Peppa Pig World of Play, Little BIG City and The Bear Grylls Adventure - and will assess their commercial performance and refine the propositions over the coming months.

We continue to implement our strategy to develop our theme parks into resorts with the opening of 372 rooms across three parks, including two hotels and an innovative extension to the holiday village at Alton Towers, where we now have six types of accommodation ranging from luxury treehouses to the excellent value 'Stargazing Pods'. The guest feedback on our investment in accommodation remains strong, and Merlin is a global leader in themed accommodation. Developing our theme parks for short breaks is not limited to expanding our accommodation offering but developing the full park experience through investments in features and second gates. The opening of a Dungeon at Alton Towers has received positive guest feedback and we recently announced that we will be opening a LEGOLAND Waterpark at Gardaland in 2020, further supporting the development of what is already a fantastic resort. Our long-standing discipline around investment returns remains an area of focus, and we continue to take a long term view, accepting where appropriate a temporary reduction in reported returns.

Given the backdrop of ongoing, significant cost pressures - in particular related to staff - and investment in Midway openings, EBITDA grew by 1.4% at reported foreign exchange rates. We continue to seek opportunities to improve the operating efficiency of the business, refusing to compromise the guest experience for short term gain. To this end, our Productivity Agenda is well underway and we remain on track to deliver £35 million of savings by 2022. In the period, we have rationalised a number of our central functions, continued to invest in kiosk technology and we will shortly launch our Shared Service Centre in Basingstoke, UK which will help facilitate efficiency improvements within our back office finance functions. Operationally, we seek to further simplify and streamline the operations of our smaller Midway attractions, and in the parks, we are expanding our 'lean' pilots - applying principles of continuous improvement.

Beluga Whale Sanctuary

In June, the SEA LIFE Trust, together with expert support from partner Cargolux Airlines International, successfully transferred the two beluga whales, Little Grey and Little White, from Shanghai to their new home on the island of Heimaey on the southern coast of Iceland. The ground-breaking journey saw the whales transported over 6,000 miles via air, land and sea to a purpose-built care pool ahead of their introduction to the Beluga Whale Sanctuary in Klettsvik Bay later in the year. We have been pleased to see such positive social media response in China to our project, and we hope the establishment of this world-first facility will encourage other entertainment operators to review their policies towards keeping cetaceans in captivity.

Operating Group Review

Midway Attractions

Organic revenue grew by 8.1% in the Midway Attractions Operating Group reflecting like for like growth of 4.5% and the positive contribution from New Business Development.

Trading in London, the largest of our five regional Divisions has, as anticipated, continued to improve. The business has grown steadily in the first half of 2019, benefiting from stronger inbound tourism as it recovers following the terrorist attacks of 2017, and as a result of the weaker Sterling. The Operating Group's like for like performance was also impacted by the re-opening of the LEGOLAND Discovery Centre in Shanghai, following its temporary closure last year. Finally, the adverse effect on visitation of the removal of the beluga whales from Chang Feng Ocean World in Shanghai has been significant for the site, but consistent with previous expectations. Elsewhere across the Midway portfolio, revenue growth has been solid.

Our Midway roll out programme contributed an additional £14 million revenue in the period (of which £1 million related to SEA LIFE Nagoya which is included in the LEGOLAND Parks result), with new brands or openings in new markets representing approximately half of this.

Underlying EBITDA was broadly flat on a constant currency basis. The margin declined however from 36.0% to 33.2% partly as a result of the ongoing cost pressures in the existing estate, but primarily due to the significant investment in openings of new brands or attractions in new markets. These attractions typically have lower rates of return at the outset as they establish themselves, contributing revenue, but limited profit.

The small increase in EBITDA, combined with growth in depreciation driven by continued investment in the existing estate, Productivity Agenda and New Business Development, resulted in a decline in operating profit of £6 million (9.7% at constant currency).

LEGOLAND Parks

Organic revenue grew by 4.6% in the LEGOLAND Parks Operating Group, driven by the continued roll out of new accommodation offsetting a decline in like for like revenue.

142 accommodation rooms have been added to the LEGOLAND estate with the opening of the Castle Hotel at LEGOLAND Billund Resort. Total accommodation revenue grew by 19.6% on a constant currency basis to represent 25% of LEGOLAND Parks revenue (2018: 22%).

Like for like revenue declined by 0.7%. Although the Operating Group delivered a strong Easter and Spring Break performance, trading since then has been more challenging due to poor weather and difficult trading conditions in a number of markets. Additionally, whilst our new 'The LEGO Movie World' land at LEGOLAND Florida has enjoyed favourable guest feedback, there has otherwise been limited trading momentum as a result of the film itself. Nevertheless, we continue to enjoy levels of Guest Satisfaction in excess of 90%, and have further improved our 'Top Box' measure.

Underlying EBITDA declined by 2.5% on a constant currency basis, representing a margin decline from 32.7% to 30.7%. This is the result of the decline in like for like revenue, continued cost pressures and, to a lesser extent, increasing pre-opening costs related to LEGOLAND New York.

Operating profit declined by 9.5% on a constant currency basis due to the decline in EBITDA and increased depreciation associated primarily with the continued investment in accommodation.

Resort Theme Parks

Organic revenue grew by 4.1% in the Resort Theme Parks Operating Group, reflecting like for like revenue growth of 3.0% and the contribution from new accommodation.

230 rooms were opened during the period comprising the 128 room Magic Hotel at Gardaland Resort, and 102 'Stargazing Pods' at Alton Towers Resort. Total accommodation revenue grew by 3.8% on a constant currency basis to represent 21% of revenue (2018: 21%). 

The good like for like performance, despite challenging comparatives, is a result of product initiatives such as 'Room on the Broom' at Chessington World of Adventures and the relaunch of 'Colossos' at Heide Park together with favourable Easter weather in the UK.

As a result of the revenue growth, underlying EBITDA improved slightly and the seasonal operating loss narrowed to £9 million. 

Chief Financial Officer's review

Revenue

Reported revenue was £763 million and grew 6.5% on an organic basis.

On a like for like basis, revenues grew by 2.3%, or £16 million, reflecting growth in the Midway Attractions and Resort Theme Parks Operating Groups, and a decline in LEGOLAND Parks.

New Business Development added a total of £33 million to growth, including £15 million from the roll out of accommodation and £14 million from new Midway attractions.

EBITDA

Underlying EBITDA grew by 1.4% on a reported basis, but declined by 0.8% at constant currency. The margin decline from 26.7% to 25.0% is driven primarily by the continued significant investment in Midway attractions where openings of new brands or attractions in new markets typically have lower rates of short term return, and the decline in like for like revenue in LEGOLAND Parks. Additionally, whilst our Productivity Agenda remains on track to deliver £35 million of savings by 2022, there continue to be underlying cost pressures across the Group, most significantly in staff costs, with like for like growth in operating expenses of 4.5% (excluding costs related to the Recommended Offer announced on 28 June).

Operating profit

Depreciation and amortisation grew by 12.1% (10.9% on a constant currency basis) to £112 million as a result of the continued investment in the existing estate, and the roll out of new attractions and accommodation.

Reflecting the seasonality of the business, with the expectation of growth in EBITDA to be weighted towards the second half of 2019, and as a result of the growth in depreciation, operating profit declined by 10.8%, or 14.2% on a constant currency basis.

Interest

Net finance costs of £45 million decreased slightly on the prior period. Our full year expectations are unchanged from those provided at preliminary results in February.

Taxation

The underlying tax charge on profit before taxation for the 26 weeks ended 29 June 2019 is based on management's best estimate of the full year effective tax rate for continuing operations of 25.5% (26 weeks ended 30 June 2018: 22.8%; 52 weeks ended 29 December 2018: 18.4%). The 2018 full year ETR of 18.4% reflected the one-off impact of prior year adjustments following changes to US tax legislation. Without that impact, the rate would have been 23.0%. The increase for the 26 weeks ended 29 June 2019 is primarily due to further refinement of US legislative changes.

Significant factors which may impact the Group's future effective tax rate include the USA tax reforms, the ability to continue with our current financing arrangements and changes to local or international tax laws.

Foreign exchange rate sensitivity

Merlin's income statement is exposed to fluctuations in foreign currency exchange rates principally on the translation of our non-Sterling earnings. The tables below show the impact on 2019 revenues and EBITDA of re-translating them at 2018 foreign exchange (FX) rates. The seasonality of the Group results in a bias towards non-European earnings in the first half of the year.

Note: Weighted-average FX rates

Note: Weighted-average FX rates

Earnings per share (EPS)

Basic earnings per share was 2.4p (2018: 3.3p).

Adjusted earnings per share, which excludes the impact of exceptional items, was 2.5p (2018: 3.3p).

Dividend

Following the announcement made on 28 June regarding the Recommended Offer for the Company, the Board is not recommending an interim dividend payment.

Cash flow

Merlin continues to be cash generative, delivering operating free cash flow (being EBITDA less existing estate capital expenditure) of £110 million in the period (2018: £107 million).

The Group invested £162 million (2018: £190 million) in capital projects during the period, including £81 million in the existing estate and £81 million on New Business Development. 2019 capex is now likely to be slightly below that previously guided, in part due to accommodation at LEGOLAND New York which is now expected to open in 2021. Disposals of subsidiaries totalled £92 million in respect of the Australian ski fields transaction that completed in April.

The Group's proceeds from borrowings of £20 million (2018: £125 million outflow) reflect net drawdowns in the period under the Group's revolving credit facility. In 2018 the outflow included repayments of term loans as part of the refinancing in April of that year.

Net debt

Net debt decreased by £10 million from the year end as a result of the cash generation in the period, partly offset by the adverse impact of foreign exchange movements and movements in lease liabilities. Following the refinancing that took place in 2018, in April we extended the maturity of the Revolving Credit Facility by a further year to 2024.

Risks and uncertainties

The Directors consider that the principal risks and uncertainties which could have a material effect on the Group's performance in the remaining 26 weeks of 2019 are the same as described on pages 34-40 of the 2018 Annual Report and Accounts. These are summarised as:

• Health, safety and security risks including those related to international terrorism; and

• Commercial and strategic risks including those over innovation; brand development and customer satisfaction; people availability and expertise; competition and Intellectual Property (IP); commercial impact of external threats to city centres leading to displacement of tourists; availability and delivery of new sites and attractions; animal welfare; IT robustness; technological developments, cyber security including GDPR; and

• Financial process risks including those over anti-bribery and corruption; liquidity and cash flow risk; and foreign exchange translation risk.

While not captured within the Group's ongoing principal risk assessments, the Board continues to keep the potential implications of Brexit for the Group's operations under review. Further details can be found on page 36 of the 2018 Annual Report and Accounts.

Reconciliation from H1 2018 as reported to H1 2018 as restated

The transition to IFRS 16 and the presentation of discontinued operations resulted in the restatement of the June 2018 income statement as follows:

.

Restatement of 2018 full year results

The transition to IFRS 16 and the presentation of discontinued operations resulted in the restatement of the income statement for the 52 weeks ended 29 December 2018 as follows:

1.1 BASIS OF PREPARATION

Merlin Entertainments plc (the Company) is a company incorporated in the United Kingdom. The condensed consolidated interim financial statements as at and for the 26 weeks ended 29 June 2019 (2018: 26 weeks ended 30 June 2018) comprise the Company and its subsidiaries (together referred to as the Group) and the Group's interests in jointly controlled entities.

The consolidated financial statements of the Group as at and for the 52 weeks ended 29 December 2018 are available on request from the Company's registered office at Link House, 25 West Street, Poole, Dorset, BH15 1LD.

All values are stated in £ million (£m) except where otherwise indicated.

Statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34 'Interim financial reporting' as adopted by the EU. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group as at and for the 52 weeks ended 29 December 2018.

These interim financial statements are not statutory accounts. The statutory accounts for the 52 weeks ended 29 December 2018 have been reported on by the Company's auditors and delivered to the Registrar of Companies. The auditor's report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

Going concern

The Group continues to trade profitably, reporting a profit for the period on continuing operations of £24 million (26 weeks ended 30 June 2018: £33 million) and continues to generate cash with net operating cash inflows of £208 million (26 weeks ended 30 June 2018: £242 million).

The Group is funded by senior unsecured notes due for repayment in 2022 and 2026 and a multi-currency revolving credit facility maturing in April 2024. The Group's forecasts show that it is expected to be able to operate within the terms of these facilities. Further details of these facilities are provided in note 4.1.

After reviewing the Group's statement of financial position, available facilities, cash flow forecasts and trading budgets, the Directors believe the Group to be operationally and financially sound and have a reasonable expectation that the Group has adequate resources to continue in operational existence for the next 12 months.

The Directors note that the Group is currently the subject of an offer for a cash acquisition by Motion Acquisition Limited, which, if approved by shareholders and subsequently completed, will be effected by means of a Scheme of Arrangement under Part 26 of the Companies Act 2006. The Board intends to recommend this offer be accepted (with the exception of Søren Thorup Sørensen who has not participated in the decision because he is the Chief Executive Officer of KIRKBI Invest A/S, a member of the acquisition consortium).

Having considered the Board's recommendation to shareholders in relation to the acquisition offer, the Directors have not identified any information which impacted their assessment of going concern. Accordingly, the Group continues to adopt the going concern basis in preparing its condensed consolidated interim financial statements.

Significant accounting policies

The accounting policies adopted in the preparation of these condensed consolidated interim financial statements are consistent with the policies applied by the Group in its consolidated financial statements as at and for the 52 weeks ended 29 December 2018, except for the adoption as of 30 December 2018 of IFRS 16 'Leases'.

1.1 BASIS OF PREPARATION CONTINUED

IFRS 16 'Leases'

IFRS 16 'Leases' became effective for 2019 reporting periods onwards and introduces a single, on-balance sheet lease accounting model for lessees.

The Group has considered its entire lease portfolio which substantially relates to land, buildings and infrastructure assets, as follows:

• For leases previously classified as operating leases, the Group has recognised a new asset in the form of a right-of-use (ROU) asset, together with an associated lease liability. The income statement now includes a depreciation charge for the ROU asset and an interest expense on the lease liability. This replaces the previous accounting for operating leases that were expensed within operating expenses on a straight-line basis over the term of the lease. Where the Group's lease expense is linked to turnover or other performance criteria, this element continues to be recorded as rent within operating expenses.

• Existing finance leases have also been reviewed against the new standard. As a result a number of leases entered into under historic sale and leaseback transactions have been re-assessed due to differences in the accounting treatment between IAS 17 and IFRS 16 of unguaranteed residual values. This has required re-assessment of the values of leased assets at inception and their treatment under IFRS 16 in subsequent periods. Regarding classification, these assets were accounted for as PPE under IAS 17 but are treated as ROU assets under IFRS 16.

• The Group has elected to take recognition exemptions for short term leases and leases of low-value items. Leases that fall within the Group's defined parameters for these exemptions have been excluded from the IFRS 16 lease accounting requirements and will be expensed on a straight-line basis over the life of the lease.

Judgements and estimates

IFRS 16 requires certain judgements and estimates to be made. The most significant of these relate to the following:

• The discount rate used in the calculation of the lease liability, which involves estimation. Discount rates are calculated on a lease by lease basis. For the property leases that make up substantially all of the Group's lease portfolio this results in two approaches. For a small volume of high value leases, the rate implicit in the lease can be calculated and is therefore adopted. Otherwise, for the majority of leases the rate used is based on estimates of incremental borrowing costs. These will depend on the territory of the relevant lease and hence the currency used; the date of lease inception; and the lease term. As a result, reflecting the breadth of the Group's lease portfolio; the transition approach adopted which has required estimation of historic discount rates; and estimations as to lease lives, there are a large number of discount rates within a wide range.

• IFRS 16 defines the lease term as the non-cancellable period of a lease together with the options to extend or terminate a lease, if the lessee were reasonably certain to exercise that option. Where a lease includes the option for the Group to extend the lease term, the Group makes a judgement as to whether it is reasonably certain that the option will be taken. This will take into account the length of time remaining before the option is exercisable; current trading; future trading forecasts as to the ongoing profitability of the attraction; and the level and type of planned future capital investment. A small number of large leases held by the Group came into effect as part of a sale and leaseback transaction that occurred in 2007. These leases have an initial lease period of 35 years, with an option to extend for two further periods of 35 years, subject to an adjustment to market rates at that time. At this point it is not reasonably certain that these leases will be renewed, taking into account the factors noted above. This judgement is reassessed at each reporting period. A reassessment of the remaining life of the lease could result in a recalculation of the lease liability and a material adjustment to the associated balances.

Transition approach and impact

The Group has applied IFRS 16 from 30 December 2018, using the fully retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 has been recognised, in line with IAS 8 'Accounting policies, changes in accounting estimates and errors', by restating the 52 week period ended 29 December 2018 and making an opening equity adjustment as at 31 December 2017. The Group is not required to make any adjustment for leases in which it is a lessor except where it is an intermediate lessor in a sub-lease. The Group has applied the practical expedient to grandfather the definition of a lease on transition. This means that IFRS 16 has been applied to all contracts entered into before 30 December 2018 and identified as leases in accordance with IAS 17 and IFRIC 4.

The Group's leverage threshold loan covenants are under 'frozen-GAAP' and as such the adoption of IFRS 16 does not impact the ability to comply with them.

1.1 BASIS OF PREPARATION CONTINUED

The impact on transition can be summarised as follows:

The ROU assets above include balances relating to leases previously accounted for as finance leases, as well as asset retirement provisions on leased properties. Both of these items were previously classified under property, plant and equipment.

The Group has recognised total lease liabilities of £1,183 million at 29 December 2018. This included existing finance lease liabilities of £200 million so the impact of adopting IFRS 16 was therefore £983 million. Under IAS 17, at the same date the Group reported future minimum lease payments under non-cancellable operating leases on an undiscounted basis totalling £1,852 million.

1.1 BASIS OF PREPARATION CONTINUED

The transition to IFRS 16 resulted in the restatement of the June 2018 income statement as follows:

The transition to IFRS 16 resulted in the restatement of the June 2018 cash flow statement as follows: