PDG.L Regulatory News (PDG)

Pendragon PLC

A much improved second half performance and a return to profitability in challenging market conditions were more than offset by significant underlying losses in the first half of the year, resulting in an overall underlying loss before tax in FY19. Financial performance in the first half was impacted by a combination of issues, with the principal driver being the impact of the clearance of used car stock from excess levels. The second half performance improved as a result of actions taken by management to re-set performance, which included the closure of 22 underperforming Car Store locations, better management of used vehicle inventory and a clear focus on operational cost management. The improvement in performance during the second-half puts the business on a much stronger footing for FY20. The company is closely monitoring the unprecedented impact of the COVID-19 virus and its potential impact on the economy. At the moment, and excluding any impact from COVID-19, the company expects Group underlying profit before tax for FY20 to be in line with market expectations, but will continue to watch the situation closely, particularly in light of the measures that were announced by the UK Government on 16 March. At this stage, it is too early to accurately quantify what the impact may be.

· Car Store

o A full market and operating model assessment of Car Store was completed during H1, which confirmed there is a significant and attractive market opportunity and that the proposition is well received by its target customers.

o Following this, a clear roadmap of short-term and long-term steps were established. The short-term actions included the closure of 22 Car Stores and one preparation centre in H2. In addition, following a review of capacity, a further preparation centre was closed.

o Significant performance improvements in the remaining 12 stores since the closure programme was completed, with underlying operating losses from the remaining 12 stores reducing to £(1.1)m in the fourth quarter. Further improvements are targeted during 2020.

· Franchised UK Motor

o H1 reported underlying operating loss of £(7.7)m (H1 2018 : £31.8m) , H2 reported underlying operating profit of £20.7m (H2 2018 : £21.2m).

o H1 2019 was impacted by the previously disclosed clearance of used car stock from excess levels.

o Used car gross margins stabilised at 7.8% in H2 vs 4.9% in H1.

o Further progress has been made with right-sizing the Franchised UK Motor operation with 6 Jaguar Land Rover sites either disposed of or closed in FY19.

o While market conditions remained challenging during H2, with the new car market down (1.1)%. The Group outperformed the new car market in the period, with H2 like-for-like new car unit sales growth of 2.3%.

o Underlying operating costs were well managed in H2 and on a proforma comparable IAS 17 basis, in total were down 5.6% (down 0.8% on an LFL basis) as a result of the previously announced cost reduction programmes.

· Software - Pinewood

o Underlying operating profit up 14.5% to £13.4m (2018 : £11.7m).

o The software business continues to perform well, with continued international expansion.

o Additional customers were added in multiple territories, including Norway and Sweden during 2019.

· Leasing - Pendragon Vehicle Management

o Underlying operating profit down 13.5% to £12.8m (2018 : £14.8m), as a result of the previously disclosed provision release of £2.8m in FY18.

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 Disposal of two franchise locations in 2019 (Mission Viejo and Newport Beach) for a combined consideration of £59.3m.

o This followed the initial disposal of Newport Beach Aston Martin in 2018 for £3.1m.

o Puente Hills Chevrolet disposal was completed in February 2020 for consideration of £16.5m.

o Discussions for the remaining two sites in the US Motor Group are continuing.

o On target for expected total gross proceeds from the combined sale of US assets of c.£100m pre-tax.

· We remain cautious given the ongoing level of economic uncertainty post the UK's exit from the EU, with trade terms only agreed until the end of 2020. We will continue to monitor market conditions and respond accordingly.

· The company has considered and will continue to monitor the threat and economic implications of COVID-19.  At the moment, and excluding any impact from COVID-19, the company expects Group underlying profit before tax for FY20 to be in line with market expectations, but will continue to watch the situation closely, particularly in light of the measures that were announced by the UK government on 16 March. At this stage, it is too early to accurately quantify what the impact maybe.

· The Group has taken some additional protective measures such as deferring commitments in our capital expenditure programme, increasing the flexibility we have in our marketing spend, closely monitoring inventory levels and developing alternating work schedules and home working options for employees.

"I am excited to have been appointed to the role of Chief Executive Officer of Pendragon and look forward to the prospect of leading the business through a period of rapid change and innovation in the automotive retail sector. Despite having only been with the business for a short period of time, it is clear this is a company with great potential and a very strong team.

"2019 was a year of transition for the Group that played out against challenging market conditions, however, we returned to profitable growth in the second half and this provides us with a solid platform for the coming year. At the moment, we are closely monitoring the impact of COVID-19 on the economy as the situation continues to develop.

 "We will be providing a fuller update on the Group strategy later in the year, which will continue to be based on four strategic pillars; the opportunity to create a strong, stand-alone used car brand, an improved and stable platform in the Franchised UK Motor division, delivering growth in Pinewood and further strengthening our leasing business. I am confident in the long-term prospects for Pendragon and look forward to communicating our strategy in more detail in due course."

1 Restated on a proforma IAS 17 basis to exclude the impact of IFRS 16 for comparison purposes

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 Trading dealerships only. The used selling price is retail vehicles only and excludes any trade vehicles.

2 Restated on proforma IAS 17 basis to exclude impact of IFRS 16 for comparison purposes

1 Trading dealerships only. The used selling price is retail vehicles only and excludes any trade vehicles. The new selling price excludes vehicles sold by our fleet business (National Fleet Solutions).

2 Restated on proforma IAS 17 basis to exclude impact of IFRS 16 for comparison purposes

1 Trading dealerships only. The used selling price is retail vehicles only and excludes any trade vehicles

2 Restated on proforma IAS 17 basis to exclude impact of IFRS 16 for comparison purposes

Used Car Market

The used car market in FY19 in the UK was 7.6m units, a fall of 0.1% against 2018. This represents a market opportunity that is c.3.3 times the size by volume of the new car market. The used market is more stable than the new vehicle sector, being less affected by fluctuations in the UK economy and providing a more reliable supply chain than the new market.

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 35.1m vehicles at FY19, a rise of 1.4% 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 2.311m in FY19 which is a reduction of 2.4% 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 44% of the total market in the year. 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 56% of the market in the year.

* 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 FY19, and the new fleet market fell by 1.7% in the year. All new car market figures are from the Society of Motor Manufacturers and Traders (SMMT).

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 year the Group has recognised a net charge of £97.7m of pre-tax non-underlying items against a charge of £92.2m in FY18. These include non-cash impairments, principally of goodwill and non-current assets amounting to £130.2m. There is £102.4m impairment of goodwill, £23.3m impairment of property assets primarily within Car Store, £2.6m impairment of property, plant and equipment and £1.9m 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 income of £3.0m represents a £4.8m credit relating to past service costs in respect of pension obligations and an interest charge on pension scheme obligations of £1.8m for FY19. The Group recorded gains on the sale of properties and businesses in the period of £33.3m. This included gains on disposal of businesses of £32.1m and gains on the sale of surplus property during the year of £1.2m. There were termination and severance costs of £5.5m in FY19, partially 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 £6.4m from £126.1m at 31 December 2018 to £119.7m at 31 December 2019. The net debt to underlying EBITDA ratio* was 1.5x for the rolling 12 months to FY19. 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.

The Group expects gross proceeds from the disposal of the entire US business of around £100m before tax. Proceeds of £3.1m had already been generated on the disposal of a single Aston Martin US business in July 2018, proceeds of £28.7m were generated from the disposal of the Mission Viejo Jaguar Land Rover business in July 2019 and proceeds of £30.6m were generated from the disposal of the Newport Beach Jaguar Land Rover business in December 2019. In February 2020, the Puente Hills Chevrolet business was disposed of for £16.5m. In total to date, total disposal proceeds of £78.8m have been received.

The final two disposals are expected to complete during FY20 with interest in both remaining sites.

6 Jaguar Land Rover franchise sites were either disposed of or closed in FY19. In addition, during January 2020 the Group announced it would be closing five Vauxhall franchise points. All of these are satellite locations and are not expected to materially impact on Group underlying profit.

* This is an Alternative Performance Measure (APM), see page 34 for more detail.

Cash Flow

The following table summarises the cash flows and net debt of the Group for the twelve-month periods ended 31 December 2019 and 31 December 2018 as follows:

Reconciliation to Consolidated Cash Flow Statement

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

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

The underlying operating cash flow was £64.1m in FY19 compared to £88.1m in FY18. This reduction was largely due to the impact of the clearance of used car stock from excess levels.

Non-underlying cash items of £5.7m comprised of redundancy costs of £5.5m in relation to three former Executive Directors, combined with the cost reduction exercise enacted during the second half of FY19. In addition, there was a cash outflow of £1.8m in relation to the Car Store closure programme and a cash inflow of £1.6m in relation to the settlement of historic VAT issues.

The net capital expenditure inflow of £23.0m (FY18: outflow of £26.3m) was principally due to the £72.4m cash inflow from business and property disposals, which more than offset the outgoing capital expenditure in the year.

Dividends of £9.7m (FY18: £22.5m) reflects the payment of the FY18 final dividend. No interim dividend was paid for FY19.

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 £13.3m is not a component of the operating result and a £19.2m depreciation charge, included in the underlying operating loss, has been added back. Under IFRS 16 the actual net cash paid and received of £39.9m in respect of lease payments and receipts is now presented as a financing cash flow.

Property and Investment, Acquisitions and Disposals

Our property portfolio is a key strength for our business. At FY19, the Group had £238.7m (£396.5m including IFRS16 right of use assets) of land and property assets (FY18 : £240.5m). There was a small reduction in this value as our disposals were matched by new property acquisitions and developments. Property assets classified as held for sale were £62.3m (FY18 : £32.8m).

Dividend

The Group is not proposing a final dividend for 2019.

Pensions

The net liability for defined benefit pension scheme obligations has decreased from £68.3m at FY18 to £59.0m at FY19. Movements in the respective assets and liabilities of the Pension Scheme largely offset each other, reflecting the hedging in place. The Group contributed £7.6m 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.

Following the full actuarial valuation of the company's pension scheme at 31 December 2018 showing a deficit of £117m, the company and trustees agreed to raise its annual contribution to the pension scheme to £12.5 million from 1 January 2020 from £7.6m of contributions in 2019.

Revolving Credit Facility (RCF)

In March 2020 the maturity date of the Group's RCF was extended by one year to 31 March 2022 and the facility size was reduced from £240m to £175m, in line with the Group's expected reduced requirements going forward. The Group has agreed to pay an increased margin of 0.50%.

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. 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:

Balance Sheet Summary

The following table summarises the balance sheet of the Group at 31 December 2019 and 31 December 2018. There is also a restated 2019 balance sheet that illustrates the balance sheet position presented on a proforma IAS 17 basis, excluding the impact of IFRS 16 for comparison purposes.

1 Restated to exclude impact of IFRS 16 for comparison purposes

2 On adoption of IFRS 16 on 1 January 2019 the Group has decided to re-define its net debt metric to exclude finance lease liabilities. This has resulted in the net debt at 31 December 2018 being adjusted by £1.5m, the finance lease liability at those dates. Net debt has been adjusted from £127.6m to £126.1m respectively at 31 December 2018.

Net assets have reduced from £345.6 million at FY18 to £168.9 million. The reduction in goodwill and intangibles is principally a result of a goodwill impairment charge of £102.4m recorded in the period. The Group has adopted IFRS 16 Leases from 1 January 2019. IFRS 16 introduces a single, on balance model for leases. As a result, the Group as a lessee has recognised a right or use asset of £159.2m representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This lease liability of £240.0m is the primary reason for the increase in creditors, partially offset by a reduction of £89.2m largely as a result of the lower level of stocking finance following the reduction in used car stock levels. Stock has been reduced by £120.6m versus FY18, principally as a result of the stock reduction exercise previously described.

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

** Non-underlying, see note 2 for explanation.

The Group adopted IFRS 16 Leases with effect from 1 January 2019 using the modified retrospective approach on transition and has accordingly not restated prior periods. As a consequence, the results for the year ended 31 December 2019 are not directly comparable with those of the prior period which were prepared using the accounting standard IAS 17 Leases.

The Group adopted IFRS 16 Leases with effect from 1 January 2019 using the modified retrospective approach on transition and has accordingly not restated prior periods. As a consequence, the results for the year ended 31 December 2019 are not directly comparable with those of the prior period which were prepared using the accounting standard IAS 17 Leases.

The Group adopted IFRS 16 Leases with effect from 1 January 2019 using the modified retrospective approach on transition and has accordingly not restated prior periods. As a consequence, the results for the year ended 31 December 2019 are not directly comparable with those of the prior period which were prepared using the accounting standard IAS 17 Leases.

The Group adopted IFRS 16 Leases with effect from 1 January 2019 using the modified retrospective approach on transition and has accordingly not restated prior periods. As a consequence, the balance sheet as at 31 December 2019 is not directly comparable with that of the prior period which was prepared using the accounting standard IAS 17 Leases.

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.

The Group adopted IFRS 16 Leases with effect from 1 January 2019 using the modified retrospective approach on transition and has accordingly not restated prior periods. As a consequence, the cash flows for the year ended 31 December 2019 are not directly comparable with those of the prior period which were prepared using the accounting standard IAS 17 Leases.

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 31 December 2018 being adjusted by £1.5m, the finance lease liability at that date from. £127.6m to £126.1m.

Notes

1 Basis of Preparation

The Group summary financial statements have been prepared and approved by the directors in accordance with international accounting standards being the International Financial Reporting Standards as adopted by the EU ('adopted IFRSs').

The summary financial statements are presented in millions of UK pounds, rounded to the nearest £0.1m. They have been prepared under the historical cost convention except for certain financial instruments which are stated at their fair value. In addition, non-current assets classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell.

The summary financial statements have been prepared on a going concern basis. In determining the appropriate basis of preparation of the financial statements, the directors are required to consider whether the Group can continue in operational existence for the foreseeable future.

The directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statement.

The preparation of summary financial statements in conformity with adopted IFRSs requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the summary financial statements and the reported amounts of revenues and expenses during the reporting year. Although these estimates are based on management's best knowledge of the amount, events or actions, actual results ultimately may differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Adoption of new and revised standards

The Group has adopted IFRS 16 Leases from 1 January 2019. IFRS 16 introduces a single, on balance model for leases. As a result, the Group as a lessee has recognised a right or 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 retailed 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 its 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 and reduced by payments made by the lessee.

Transition

The Group has a significant leasehold property portfolio which, in the most part, where 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 its 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 under IAS 17.

- Used previous assessments of whether leases are onerous instead of performing an impairment review.

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 at the same interest rate as applied to the head lease. There are no residual values applicable to these leases.

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 its 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.

Provision 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. Where these relate to leases in which the Group do not retain the risks and rewards of ownership of the property the provision previously recognised has been credited to reserves on transition.

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 has discounted lease payments using either it's incremental borrowing rate for shorter term leases or higher rates based upon market rates for borrowing against equivalent assets with similar risk profiles in specific markets for medium to longer term leases as at 1 January 2019 . The weighted average rate applied was 4.20%.

* Included within the £14.1m recognition exemption for leases with less than 12 months of lease term at transition, are £11.9m of lease commitments in the US business which is a discontinued operation held for sale. These US leases were deemed to be short leases on transition as the Group was reasonably certain that obligations under those leases would be discharged in 2019. These were assigned as part of the sales of US businesses which were completed in 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 year ended 31 December 2019 the Group recognised £19.2m of depreciation charges, a non-underlying impairment charge of £23.3m, an interest expense of £14.4m and made payments of £43.2m in respect of its lease liabilities. As a Lessor, the Group has an interest receipt of £1.1m having received payments of £3.3m 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 2019.

The following amounts have been presented as non-underlying items in these summary financial statements:

Goodwill has been reviewed for any possible impairment and as a result of this review there was an impairment charge of £102.4m made during the year (2018: £88.8m).

Group property, plant and equipment and assets held for sale have been reviewed for possible impairments. As a result of this review there was an impairment charge against assets held for sale of £1.9m during the year (2018: £1.2m) and property, plant and equipment of £25.9m (2018: £5.8m) which comprised impairment of owned assets of £2.6m and right of use assets of £23.3m. There were no reversals of previous impairment charges in respect of assets held for sale where anticipated proceeds less costs to sell have increased over their impaired carrying values (2018: £nil).

A Pension Increase Exchange exercise was carried out during the year and the impact of this has been to recognise a credit of £4.8m in the past service cost line. The past service costs for the previous year in respect of pension obligations is an estimate of the cost of GMP equalisation exercise undertaken in 2018.

The net financing return on pension obligations in respect of the defined benefit schemes closed to future accrual is shown as a non-underlying item due to the irregularity of this amount historically and it is not incurred in the normal course of business. A net expense of £1.8m has been recognised during the year (2018: £1.6m).

Other income consists of the profit or loss on disposal of businesses and property. This comprises a £32.1m (2018: £3.3m) profit on disposals of motor vehicle dealerships during the year (of which £33.0m was in respect of discontinued operations (2018: £2.7m)) and a £1.2m profit on sale of properties (2018: 12.4m). This does not include routine transactions in relation to the disposal of individual assets, and only relates to the disposal of motor vehicle dealerships and associated properties.

The Group announced during the year the closure of 22 Car Stores and one preparation centre following a full market and operating model assessment of the Car Store business. The resultant costs of closure of these sites of £1.8m have been recognised as a non-underlying item.

During the year there were termination and severance costs of £5.5m (2018: £nil).

We acquired CD Bramall PLC in 2004, with the company having made a claim in 2003 for VAT overpaid in respect of bonuses received by the company's leasing companies from OEMs during the period 1988-1995 (Fleming claims). These claims were refused by HMRC over the years for a number of reasons which gradually fell away through litigation with other parties. We were then left with a fundamental objection of principle by HMRC and so we litigated in 2017 and were successful (decision released August 2018). As the legal decision was one of principle only, we were then left to agree quantum with HMRC. This was concluded during the first half of 2019, resulting in a VAT repayment of just over £1.9m (cash received in June 2019) with interest to follow shortly of another £1.9m. Associated costs are expected to be £0.3m which will result in a net gain of £3.5m.

The tax charge in relation to non-underlying items referred to above is £3.3m (2018: credit of £3.0m). Despite the non-underlying items constituting an overall loss, a tax charge arises due to majority of the loss not being eligible for tax relief (goodwill impairment) and the gains arising on disposal of businesses arises in the US, which is taxed at higher rates.

3 Earnings per share