PDG.L Regulatory News (PDG)

Pendragon PLC

The first half of FY19 has been challenging for the Group, with financial performance impacted by a combination of issues. The principal driver of the Group's performance was the reduction in the level of used car stock to more appropriate levels, which was actively managed during the second quarter through a combination of both lower retail pricing and clearance through trade auction channels. These necessary actions resulted in significant losses in the period, exacerbated by market-driven reduction in used car values. By the end of the first-half, stock levels had been largely addressed and improved stocking policies introduced to significantly reduce the risk of excess stock re-occurring.

Despite challenging markets in the first half of the year, the Group has continued to provide an attractive customer proposition and remains a destination of choice for car-buyers, as demonstrated by Group like-for-like revenue growth of 2.9%. Like-for-like revenues in the Software business increased by 6.0%, while revenues in the Leasing business grew by 4.9% despite challenging conditions in the UK's rental and leasing market.

The Board initiated a detailed strategic and market review of the Car Store business and the challenges it has faced. This review confirmed that there continues to be a significant and attractive market opportunity for Car Store, however a number of short-term actions are required to improve performance, including a number of site closures. It is anticipated that these actions will have an immediate, and significant positive impact on the financial performance of Car Store. The Board remains very confident in the long-term potential of Car Store.

·; Car Store

o The Board commissioned a full market and operating model assessment of Car Store, which confirmed that there is a significant and attractive market opportunity and that the proposition is well received by its target customers.

o A clear roadmap of short-term and long-term steps has been established that the Group is confident will deliver Car Store's full potential.

o Short-term actions include the closure of 22 Car Stores and one preparation centre as these sites do not fit the long-term strategy. The majority of these sites are historic franchise locations that are not suited to the Car Store model.

o This leaves 12 Car Stores serviced by two preparation centres.

o Search for a Car Store Managing Director progressing.

·; Franchised UK Motor

o Franchised UK Motor delivered like-for-like revenue growth of 2.6% despite challenging trading conditions in both new and used cars.

o Significant increase in used car stock at the end of FY18 resulted in excess 'over-age' used stock. Total used car stock at the end of FY18 stood at £375m. By the end of HY19, the actions taken to return stock levels to the appropriate level had resulted in a reduction of £140m to £236m.

o Programme to reduce the excess used stock combined with the impacts of a c.7% decline in national used car values during the second quarter resulted in higher than expected losses.

o Further progress made with right-sizing the Franchised UK Motor operation with nine Jaguar and Land Rover franchise points either disposed of or closed in FY19. This included two disposals in the first half of FY19, two disposals completed post the half-year end in July and five franchise points closed in the first half.

·; Software - Pinewood

o The software business continues to perform well, and is in line with its overall plan.

·; Leasing - Pendragon Vehicle Management

o Continued high return on investment from a low capital base

o Valuable source of used car stock to the group.

·; US Motor Group

o Announced agreements for the disposal of two franchise locations (Mission Viejo and Newport Beach) for a combined consideration of c.£60m.

o Mission Viejo Jaguar Land Rover disposal subsequently completed on 1 July 2019 with proceeds of £28.2m received.

o Discussions for the disposal of the remainder of the US Motor Group are continuing, with the disposal of Puente Hills announced in August for consideration of c.£17m.

o Sales agreed (two complete, two in progress) for c.£80m. Significant progress towards expected proceeds of c.£100m pre-tax.

·; Economic and market conditions are very challenging. The heightened political and Brexit uncertainty, as to both outcome and timing, is adversely affecting customer confidence. We are not anticipating any improvement in this for the rest of our financial year and are closely monitoring market conditions and customer behaviour particularly during the important trading month of September.

·; As a result of these market conditions, Group underlying loss before tax for FY19 is now expected to be at the bottom of the Board's expectations. This outcome still reflects a meaningful recovery in profitability during the second half based upon self-help actions that the business is taking as well as the assumption that current market conditions do not deteriorate further. 

·; The Board remain committed to its long-term strategy to:

o Grow the Car Store used car business.

o Optimise the Franchised UK Motor operation, maximising performance and profitability in used, aftersales and new.

o Continue the international expansion of the software business, Pinewood.

o Further grow the leasing business

"Whilst market conditions have been challenging in the first half of 2019 with headwinds in both the used and new car markets the Group has continued to deliver like-for-like revenue growth. However, there has been a material decline in the Group's profitability principally as a result of the actions taken to address excess used car stock. We made significant progress reducing this exposure in the latter period of the first-half and we remain committed to the strategy of growth in the Group's used car proposition. The business is fully focussed on maximising performance, but we expect the market to continue to be challenging during the second half of 2019."

1 Restated to exclude impact of IFRS 16 for comparison purposes

Presentation

A presentation for analysts will take place today at 9.00am. There will be a conference call open for those unable to attend in person.

The details for the call are as follows:

United Kingdom Toll-Free: 08003589473

United Kingdom Toll: +44 3333000804

Conference password: 79371219#

o The business is organised into 5 segments, analysed as follows:

o Car Store - Own brand proposition for the sale of used vehicles in the U.K.

o Franchised UK Motor - sale and servicing of vehicles in the U.K.

o Software - Licencing of Software as a Service to global automotive business users

o Leasing - Fleet and contract hire provider. Source of used vehicle supply

o US Motor - Sale and servicing of vehicles in the U.S.

1 Restated to exclude impact of IFRS 16 for comparison purposes

1 Restated to exclude impact of IFRS 16 for comparison purposes

Used Car Market

The used car market in FY18 in the UK was 7.61m units, a fall of 2.2% against 2017. In the first half of FY19, there were 3.88m used cars sold in the UK, a fall of 1.6% on the prior year. However, this represents a market opportunity that is c.3.4 times the size of the new car market. Despite challenging economic conditions, the used market is more stable and provides a more reliable supply chain than the new vehicle sector.

Aftersales Market

The main determinant of the aftersales market is the number of vehicles on the road, known as the 'car parc'. The car parc in the UK has risen to 34.9m vehicles at HY19, a rise of 1.3% on the prior year. The car parc can also be segmented into markets representing different age groups. At the end of HY19, around 20% of the car parc was represented by less than three-year-old cars, around 20% by four to six-year-old cars and 60% is greater than seven-year-old cars. The demand for servicing and repair activity is less affected than other sectors by economic conditions, as motor vehicles require regular maintenance and repair for safety, economy and performance reasons.

New Car Market

The UK new car market was 1.269m in the first half of FY19 which is a reduction of 3.4% over the prior year. The UK new car market is divided into two markets, retail and fleet. The retail market is the direct selling of vehicle units to individual customers and operates at a higher margin than the fleet market. The retail market is the key market opportunity for the Group and represents 45% of the total market in the period. The fleet market represents the sale of multiple vehicles to businesses, and is predominately transacted at a lower margin and consumes higher levels of working capital than retail, and represents 55% of the market in period.

* Group Represented - defined as national registrations for the franchised brands that the Group represents as a franchised dealer.

The new retail market was down by 3.2% in the first half of FY19, and the new fleet market fell by 3.5% in the period.

Non-underlying Items

Non-underlying income and expenses are items that are not incurred in the normal course of business and are sufficiently significant and/or irregular to impact the underlying trends in the business. During the period the Group has recognised a net charge of £102.4m of pre-tax non-underlying items against a charge of £1.1m in FY18. These include non-cash impairments, principally of goodwill and non-current assets amounting to £102.5m. There is £78.2m impairment of goodwill, £22.8m impairment of property assets primarily within Car Store, £1.2m impairment of property, plant and equipment and £0.3m impairment of assets held for sale. These have been necessary following assessments of the carrying value of those assets which have been calculated by taking into account trading, market conditions on future cash flows and the current market capitalisation of the Group.

Pension costs of £0.9m represent the interest charge for the first half of FY19. The Group recorded losses on the sale of properties and businesses in the period of £1.1m. This included a loss of £0.8m on the sale of surplus property during the year, losses of £0.3m on the disposal of businesses and termination and severance costs of £1.4m. These costs were offset by a credit of £3.5m on settlement of historic VAT issues in respect of VAT reclaims and associated interest.

Capital Allocation

Net debt has reduced by £21.8m from £126.1m at 31 December 2018 to £104.3m at 30 June 2019. The net debt to underlying EBITDA ratio was 1.3x for the rolling 12 months to HY19. The net debt to underlying EBITDA ratio has moved from 0.9x at FY18 largely due to the trading impact of the stock clearance as detailed in the operating reviews.

We are expecting proceeds from the disposal of our US business in excess of £100m before tax. Proceeds of £3.1m have already been generated on the disposal of a single Aston Martin US business in July 2018 and proceeds of £28.2m were generated from the disposal of the Mission Viejo Jaguar Land Rover business in July 2019. Further disposals are well progressed with c.£31m expected from the disposal of Jaguar Land Rover Newport Beach and c.£17m from the disposal of Chevrolet Puente Hills. Both are expected to complete in the second half of FY19.

As part of the plan to redeploy capital, nine Jaguar and Land Rover franchise points either disposed of or closed in FY19. This included two disposals in the first half of FY19, two disposals completed post the half-year date in July and five franchise points closed in the first half.

Cash Flow

The following table summarises the cash flows and net debt of the Group for the six-month periods ended 30 June 2019 and 30 June 2018 as follows:

1 On adoption of IFRS 16 on 1 January 2019 the Group has opted to re-define it's net debt metric to exclude finance lease liabilities. This has resulted in the net debt at 30 June 2018 and 31 December 2018 being adjusted by £1.5m, the finance lease liability at those dates. Net debt has been adjusted from £106.6m to £105.1m at 30 June 2018 and £127.6m to £126.1m respectively at 31 December 2018.

2 Restated to exclude impact of IFRS 16 for comparison purposes.

The £57.5m cash inflow from working capital and contract hire vehicle movements was driven by the stock reduction as detailed in the operating reviews, together with a VAT timing benefit of c.£25m which is expected to reverse in the second half. The reduction in net capital expenditure was due to a £2.8m cash inflow from underlying replacement capital expenditure, which was a result of increased net proceeds from employee vehicles. There was a tax cash inflow due to the tax repayments relating to prior years.

The adoption of IFRS 16 on 1 January 2019 has resulted in changes to the way the cash flows in respect of lease rentals paid and received are reported, as, in adopting the modified retrospective method of transition the Group have not restated comparative information in the cash flow statement. In the prior period the net rental expense was presented in the income statement as an operating expense and subsequently an operating cash flow but for FY19 the equivalent charge into the income statement has instead been accounted for as a depreciation charge and net interest expense. In terms of cash flow reporting, the net interest expense of £6.3m is not a component of the operating result and a £9.8m depreciation charge, included in the underlying operating loss, has been added back. Under IFRS 16 the actual net cash paid and received of £16.7m in respect of lease payments and receipts is now presented as a financing cash flow for the first half of FY19.

Property and Investment, Acquisitions and Disposals

Our property portfolio is a key strength for our business. At HY19, the Group had £233.9m of land and property assets (HY18 : £236.1m) and property assets for sale of £41.3m (HY18 : £40.3m).

Dividend

The Group is not proposing an interim dividend for 2019. We intend to maintain dividend cover (defined as underlying earnings per share divided by dividend per share) at a minimum level of two times, with a progressive dividend approach in the future subject to the minimum dividend cover being a minimum of approximately two times.

Pensions

The net liability for defined benefit pension scheme obligations has increased from £68.3m at FY18 to £72.2m at HY19. Movements in the respective assets and liabilities of the Pension Scheme largely offset each other, reflecting the hedging in place. The Group contributed £3.6m to the Pension Scheme in the period following the Group commitment to pay annual contributions of £7.0m from 1 January 2017, increasing by 2.25% thereafter until July 2022.

Adoption of IFRS 16

IFRS 16 Leasing is a new accounting standard that was effective from 1 January 2019. The new standard replaces existing leases guidance, principally IAS 17 Leases. IFRS 16 introduces a single, on-balance sheet leases accounting model for lessees. A lessee recognises a right-of-use (ROU) asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. IFRS 16 has been applied using the modified retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 has been recognised as an adjustment to the opening balance of retained earnings at 1 January 2019, with no restatement of comparative information. Further details of this can be found in note 3. The impact of adopting IFRS 16 on the 2019 consolidated income statement can be seen below:

The balance sheet impact of the transition to IFRS 16 is summarised below;

* The discontinued operations are in respect of the Group's US business which is currently classified as held for sale (see note 15).

For cash flows of discontinued operations see note 15.

Note: The reconciliation of net cash flow to movement in net debt is not a primary statement and does not form part of the consolidated cash flow statement but forms part of the notes to the financial statements. On adoption of IFRS 16 on 1 January 2019 the Group has decided to re-define it's net debt metric to exclude finance lease liabilities. This has resulted in the net debt at 30 June 2018 and 31 December 2018 being adjusted by £1.5m, the finance lease liability at those dates, from £106.6m to £105.1m and £127.6m to £126.1m respectively.

Notes

1 Basis of Preparation

Pendragon PLC (the 'Company') is a public company incorporated, domiciled and registered in England in the UK. The registered number is 2304195 and the registered address is Loxley House, 2 Oakwood Court, Little Oak Drive, Annesley, Nottinghamshire, NG15 0DR. The condensed consolidated interim financial statements of the Company as at and for the six months ended 30 June 2019 comprise the Company and its subsidiaries (together referred to as the 'Group').

The financial statements are prepared on a going concern basis notwithstanding that the group has reported an underlying operating loss of £10.7m for the half year to 30 June 2019 (2018: underlying operating profit of £42.7m). Further, the directors consider that the current economic outlook presents significant challenges in terms of sales volume and pricing. Whilst the directors have instituted measures to preserve cash and secure additional finance, there is uncertainty over future trading results and cash flows.

The directors have prepared a going concern forecast for the 18 month period to 1 April 2021. Furthermore, the directors have prepared an additional downside case based on the impact of a no deal Brexit.

The company is seeking to sell the US dealership portfolio to provide additional working capital in line with previously disclosed group strategy. The company has agreed a purchase price on two dealerships but there can be no certainty that a sale will proceed or the timing of the cash flow related to the sale. Based on negotiations conducted to date the directors have a reasonable expectation that it will proceed successfully, should the plan sales fail to successfully complete the company expects to still maintain headroom on covenant calculation based on the downside forecasts providing mitigating actions within management control are taken. Accordingly the forecasts assume the continued availability of banking facilities sufficient to meet the Group's working capital needs.

As at 30 June 2019, the company had £300m of committed banking facilities, which includes a revolving credit facility of £240m that is due for renewal in March 2021. In line with the planned timeline the company and its advisers have commenced discussions with its bankers about the facility extension.

Based on the above, the directors believe it remains appropriate to prepare the financial statements on a going concern basis.

The condensed set of financial statements for the six months ended 30 June 2019 are unaudited but have been reviewed by the auditors.

Alternative Performance Measures

The Group uses a number of key performance measures ('KPI's') which are non-IFRS measures to monitor the performance of its operations. The Group believes these KPI's provide useful historical financial information to help investors and other stakeholders evaluate the performance of the business and are measures commonly used by certain investors for evaluating the performance of the Group. In particular, the Group uses KPI's which reflect the underlying performance on the basis that this provides a more relevant focus on the core business performance of the Group. The Group has been using the following KPI's on a consistent basis and they are defined and reconciled as follows:

Gross margin % - gross margin is defined as gross profit as a percentage of revenue.

Like for Like - results on a like for like basis include only businesses which have been trading for 12 consecutive months. We use like for like results to aid in the understanding of the like for like movement in revenue, gross profit and operating profit in the business. The difference to underlying results are simply those businesses which are not like for like which have recently commenced operation and therefore do not have a 12 month history plus any businesses closed during the current or previous period.

Operating margin % - operating margin is defined as operating (loss)/profit as a percentage of revenue.

Underlying operating (loss)/profit / (loss)/profit before tax - results on an underlying basis exclude items that are not incurred in the normal course of business and are sufficiently significant and/or irregular to impact the underlying trends in the business. The detail of the non-underlying results is shown in note 7.

Operating (loss)/profit reconciliation

(Loss)/profit before tax reconciliation

(Loss)/profit after tax reconciliation

Underlying basic earnings per share ('underlying earnings per share') - the Group presents underlying basic earnings per share as the directors consider that this is a better measure of comparative performance. Underlying basic earnings per share is calculated by dividing the underlying profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period. A full reconciliation of how this is derived is found in note 13.

Underlying diluted earnings per share - the Group presents underlying diluted earnings per share as the directors consider that this is a better measure of comparative performance. Underlying diluted earnings per share is calculated by dividing the underlying profit and loss attributable to ordinary shareholders by the weighted average number of ordinary shares in issue taking account of the effects of all dilutive potential ordinary shares, which comprise of share options granted to employees and LTIPs. A full reconciliation of how this is derived is found in note 13.

Net debt : Underlying EBITDA - the Group uses the ratio of net debt to underlying EBITDA to assess the use of the Group's financial resources. We have adjusted the underlying operating profit used in the calculation of EBITDA to present it on a pre IFRS 16 basis by treating the rentals paid of £18.3m in the period to 30 June 2019 as an operating expense. This is to ensure consistency in the rolling 12m period against our target measure of net debt : underlying EBITDA of between 1.0 and 1.5 which is based on a pre IFRS 16 basis.

Net debt : Underlying EBITDA - reconciliation

2 Statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting as adopted by the European Union. They do not include all 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 year ended 31 December 2018, which are prepared in accordance with International Financial Reporting Standards as adopted by the European Union.

These condensed consolidated interim financial statements were approved by the board of directors on 18 September 2019.

3 Significant accounting policies

As required by the Disclosure and Transparency Rules of the Financial Conduct Authority, the condensed set of financial statements has been prepared applying the accounting policies and presentation that were applied in the preparation of the Company's published consolidated financial statements for the year ended 31 December 2018, except as explained below.

Adoption of new and revised standards

The Group has adopted IFRS 16 Leases from 1 January 2019. IFRS 16 introduces a single, on balance sheet model for leases. As a result, the Group as a lessee has recognised a right of use asset representing it's right to use the underlying asset and a lease liability representing it's obligation to make lease payments. The Group also acts as a Lessor, and whilst Lessor accounting remains similar to that under the Group's previous accounting policies, where the substantial risks and rewards of ownership of the asset has been passed to it's Lessee then the underlying asset of the Group becomes that of a finance lease receivable.

Under the previous accounting policy the Group previously classified leases as either an operating lease or a finance lease depending upon whether it was deemed that substantially all of the risks and rewards of ownership had transferred. Under IFRS 16 the Group recognises a right of use asset for all leases with the exception of those deemed to be of low value or short term in nature, in which case lease payments are expensed on a straight line basis over the lease term. In its transition to IFRS 16 the Group has applied a modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings at 1 January 2019. Accordingly, the comparative information for 2018 has not been restated. The revised accounting policy is:

Significant accounting policies - Leases.

The Group recognises a right of use asset and a lease liability at the lease commencement date. The right of use asset is initially measured at cost, and subsequently at cost less accumulated depreciation and impairment losses, and adjusted for certain remeasurements of the lease liability. Depreciation is recognised on a straight line basis over the period of the lease the right of use asset is expected to be utilised.

The lease liability is initially measured at the present value of lease payments that are not paid at the commencement date, discounted by the interest rate implicit in the lease or when this is not readily attainable the Group's incremental borrowing rate. Generally the Group uses it's incremental borrowing rate as the discount rate.

The lease liability is subsequently increased by the interest cost on the lease liability and reduced by payments made. It is remeasured when there is a change in future lease payments arising from a change of index or rate, a variation in amounts payable following contractual rent reviews and changes in the assessment of whether an extension/termination option is reasonably certain to be exercised.

The Group has applied judgement in determining the lease term for some lease contracts which include renewal and termination options. The assessment of whether the Group is reasonably certain to exercise such options impacts the lease term and the subsequent recognition of the lease liability and right of use asset.

Where the Group acts as a Lessor, receipts of lease payments are recognised in the income statement on a straight line basis over the period of the lease unless it is deemed that the risks and rewards of ownership have been substantially transferred to the Group's lessee. If it is deemed that the risks and rewards of ownership have been substantially transferred then the Group will, rather than recognise a right of use asset, recognise a finance lease receivable, this being the present value of future lease receipts discounted at the interest rate implicit in the lease or if this is not specified the Group's incremental borrowing rate. The finance lease receivable will be increased by the interest received less payments made by the lessee.

Transition

The Group has a significant leasehold property portfolio which, in the most part, were previously accounted for as operating leases under IAS 17. The leases have a variety of lease terms and some include scheduled rent reviews, break options or provide for rent increases based upon future UK price indices.

At transition, for leases classified as operating leases under IAS 17, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Group's incremental borrowing rate as at 1 January 2019. Right of use assets as measured at either:

- their carrying amount as if IFRS 16 had been applied since the lease commencement date, discounted by the Group's incremental borrowing rate as at 1 January 2019. The Group has applied this methodology to the majority of it's property leases where sufficient historical information has been available to facilitate this.

- An amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments. This has been applied to a small number of property leases where it was not possible to ascertain sufficient historical data to enable a retrospective calculation. This method has also been applied to the Group's small number of non property leases, comprising of motor vehicles and items of plant and equipment.

The Group used the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17.

- Applied the exemption not to recognise right of use assets and liabilities with less than 12 months of the lease term remaining at 1 January 2019.

- Excluded initial direct costs from measuring the right of use asset at date of initial application.

- Used hindsight when determining the lease term if the contract contains options to extend or terminate the lease.

- Used the option to grandfather the assessment of which transactions are leases by applying IFRS 16 only to contracts that were previously identified as a leases.

The Group previously classified two properties as finance leases. These leases have been reassessed under IFRS 16 and reclassified as right of use assets.

As a Lessor the Group has sub-let a number of surplus properties with some of these matching the term of the under lease. In these instances the Group has deemed that it has none of the risks and rewards of ownership of the properties and has recognised a finance lease receivable based on expected lease receipts from the date of application, discounted by the Group's incremental borrowing rate at this date.

A small number of leased properties were ascribed values when acquired as part of previous business combinations. The carrying value of these assets have been reassessed under IFRS 16 and reclassified as right of use assets at the date of application.

The Group, during the period between 2005 and 2006 entered into sale and leaseback arrangements on some of it's properties. At the time it was deemed that the consideration received for these properties and the subsequent rents attached to the leases were in excess of their equivalent fair values at the time. An adjustment was made at the time of these transactions to reduce the profit on disposal of these properties and defer this over the remaining lease terms to offset the excess rentals payable in the future. This credit was held as deferred income in the financial statements. On transition to IFRS 16 the residual deferred income credit relating to these properties at 1 January 2019 has been allocated to the right of use asset.

The Group had previously recognised a provision for vacant properties which related to sub let properties where the rental income was insufficient to cover the lease costs paid. Where these relate to leases in which the Group retain the risks and rewards of ownership of the property the provision previously recognised has been credited to the right of use asset.

Impacts of transition

The impacts of the transition to IFRS 16 is summarised below;

When measuring lease liabilities for leases that were classified as operating leases, the Group discounted lease payments using it's incremental borrowing rate at 1 January 2019. The weighted average rate applied was 4.17%.

Included within the £55.3m recognition exemption for leases with less than 12 months of lease term at transition, are £53.6m of lease commitments in the US business which is a discontinued operation held for sale. It is expected that these leases will be assigned as part of the business sale which is expected to be concluded during 2019.

Impact for the period

As a result of initially applying IFRS 16, in relation to those leases which were originally classified as operating leases, the Group has recognised an interest and depreciation cost instead of an operating lease expense and as a Lessor on leases where the Group no longer has the risks and rewards of ownership, recognises an interest receipt instead of a rental income. During the six months ended 30 June 2019 the Group recognised £9.8m of depreciation charges, a non-underlying impairment charge of £22.8m, an interest expense of £7.0m and made payments of £18.3m in respect of it's lease liabilities. As a Lessor, the Group has an interest receipt of £0.7m having received payments of £1.7m in respect of the finance lease receivable.

Other standards - A number of other standards and interpretations are applicable to these condensed financial statements but are not expected to have a significant impact. A summary of these standards is presented in the consolidated financial statements of the Group for the year ended 31 December 2018.

4 Estimates and judgements

In preparing these interim financial statements, management has made judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates.

Except as described below, in preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2018.

As described in note 3 the Group has changed it's accounting policy in respect of leases on adoption of IFRS 16. The Group has had to apply judgement when determining, with reasonably certainty, the term over which to recognise the lease liability.

Assets held for resale are held at the lower of their carrying value and fair value less costs to sell. The fair value (a Level 2 valuation, determined based on prices for similar assets) is £155.7m.

During the six months ended 30 June 2019 management reassessed its estimates and assumptions in respect of employee post-retirement benefit obligations. The obligations under these plans are recognised in the balance sheet and represent the present value of the obligation calculated by independent actuaries, with input from management. These actuarial valuations include assumptions such as discount rates and return on assets, details of which are provided in note 22 below.

The estimates in respect of the anticipated tax rate to be applied for the full financial year 2019 and subsequently used in the preparation of the results for the six month period to 30 June 2019 are set out in note 11.

5 Comparative figures

The comparative figures for the financial year ended 31 December 2018 are extracted from the Group's statutory accounts for that financial year. Those accounts have been reported on by the company's auditor and delivered to the registrar of companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor 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.

6 Revenue

The Group's main operations and revenue streams are those described in the last annual financial statements. All the Group's revenue is derived from contracts with customers.

Disaggregation of revenue

In the following table, revenue is disaggregated by primary geographical market, major products/service lines and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue with the Group's four strategic divisions, which are its reportable segments, see note 8.

* The Group's US business is a discontinued operation which is currently classified as held for sale (see note 15).

7 Non-underlying Items

Non-underlying income and expenses are items that are not incurred in the normal course of business and are sufficiently significant and/or irregular to impact the underlying trends in the business.