INSPIRING
TOMORROW’S
MEMORIES
MERLIN ENTERTAINMENTS PLC
ANNUAL REPORT
AND ACCOUNTS 2018
A T A G L A N C E
GLOBAL OPPORTUNITIES
AND EXPANSION
A BAL ANCED,
GLOBAL PORTFOLIO
S INCE OU R
FORMATION
IN 1999, THE
PU RSU IT OF
OU R STR ATEGY HAS
RESU LTED IN A PORTFOLIO
OF AS SE TS DIVERS IFIED BY
GEOGR APHY, BY FORMAT,
AND BY CU STOMER T YPE .
• Operating across 25 countries and 4 continents,
we now generate over 70% of our profits from
outside the UK.
• Whilst Merlin is not immune to external,
• Our portfolio of Midway attractions and theme
parks means that we are relatively balanced against
weather fluctuations, with approximately 60% of
revenue coming from outdoor attractions.
geo-political shocks, the breadth and scale
of the portfolio helps limit their impact.
• With over two-thirds of our visitors being domestic,
we are not reliant upon the ‘fly-in’ markets.
OUR BR ANDS
M I D W AY AT T R A C T I O N S
Geography(1)
Tourist/domestic(2)
Weather exposure(1)
UK: 31%
CONTINENTAL
EUROPE: 25%
NORTH
AMERICA: 27%
ASIA PACIFIC: 17%
DOMESTIC: 72%
TOURIST: 28%
OUTDOOR: 62%
INDOOR: 38%
(1) Based on 2018 revenue
(2) Based on a sample of visitors answering the question ‘What is your home country?’
27
T H E M E P A R K S
Amazing Discoveries
United Kingdom: 11
Continental Europe: 18
North America: 8
Asia Pacific: 9
Famous Fun
United Kingdom: 2
Continental Europe: 4
North America: 7
Asia Pacific: 10
Playful Learning
United Kingdom: 2
Continental Europe: 3
North America: 11
Asia Pacific: 4
Continental Europe: 1
Asia Pacific: 1
United Kingdom: 1
Asia Pacific: 2
Playful Learning
United Kingdom: 1
Continental Europe: 2
North America: 2
Asia Pacific: 3
Fantastical Escapism
United Kingdom
Wild Adventure
United Kingdom
Big Fantasy Adventure
Italy
Asia Pacific: 1
Asia Pacific: 1
Asia Pacific: 2
Scary Fun
United Kingdom: 5
Continental Europe: 3
North America: 1
Asia Pacific: 1
Eye Opening
United Kingdom: 2
Asia Pacific: 1
Asia Pacific: 1
United Kingdom: 1
Extraordinary
Adventure
Germany
Insane Fun
United Kingdom
Ultimate Castle
United Kingdom
Key
Existing Merlin attractions
Existing UK attractions
2018 new attractions
CONTENTS
Company Overview
Chairman’s Statement
Strategic Report
Market Overview
Business Model
Chief Executive’s Report
Our Six Strategic Growth Drivers
Case Studies
Q&A – Operating Groups
Q&A – MMM and New Openings
Financial and Operating Review
Principal Risks
People
Responsible Business
Governance
Corporate Governance Statement
Board of Directors
Corporate Governance Report
Nomination Committee Report
Health, Safety and Security
Committee Report
Audit Committee Report
Directors’ Remuneration Report
Directors’ Report
Directors’ Responsibilities Statement
Independent Auditor’s Report
Financial statements
Consolidated income statement
Consolidated statement of
comprehensive income
Consolidated statement of fi nancial position
Consolidated statement of changes in equity
Consolidated statement of cash fl ows
Notes to the accounts
Merlin Entertainments plc
Company fi nancial statements
Notes to the Company fi nancial statements
Other information
Financial record
Glossary
Other fi nancial information
Shareholder information
02
04
06
08
10
14
16
22
24
26
34
42
48
58
60
62
66
68
70
74
90
92
93
100
101
102
103
104
105
148
150
155
156
158
159
M E R L I N E N T E R T A I N M E N T S P L C
01
OUR PURPOSE
HIGHLIGHTS AND KPIs
DELIVERING MEMOR AB LE
E XPERIENCES TO OU R GU ESTS
In a busy and increasingly fragmented world, time is at a premium.
Especially time together with friends and family.
At its heart, Merlin is about creating truly memorable experiences
from these moments together. Memories to be shared at the school
gates, on social media or on the journey home, but remembered forever.
67.0m
V I S ITO R S
2018
2017
2016
+1.4%
67.0
66.0
63.8
How we report our results
Details on the period under review and performance measures used are set out in the Financial and
Operating Review on page 33. We use certain ‘alternative performance measures’ in our reporting in
order to present our trading performance in the most helpful and meaningful way; that section explains
the measures used and why we use them.
Executive Directors’ remuneration is linked to certain KPIs, as indicated by the following symbol
More details on Directors’ remuneration are set out in the Directors’ Remuneration Report on
pages 74 to 89.
.
Terms used throughout this document are defi ned in the Glossary on pages 156 to 157.
£1,688m
R E V E N U E
Reported growth
Organic growth
Like for like growth
£327m
U N D E R LY I N G
O PE R ATI N G PRO F IT
Reported growth
Organic growth
+1.3%
+3.4%
£323m
TOTA L O PE R ATI N G
PRO F IT
+5.9%
+5.2%
+1.8%
2018
2017
2016
1,688
1,594
1,428
2018
2017
2016
327
323
302
£285m
PRO F IT B E F O R E TA X
22.5p
B A S I C E P S
22.9p
A DJ U STE D E P S
2018
2017
2016
+9.5%
22.5
20.5
19.5
2018
2017
2016
+11.7%
22.9
20.5
19.5
95%
GUEST SATISFACTION
Based on guest satisfaction surveys. Our target is a
score over 90%.
86%
E M PLOY E E
E N G AG E M E NT
Based on our annual employee survey (see
page 42). Our target is a score over 80%.
8.9%
R E T U R N O N
C A PITA L E M PLOY E D
2018
2017
2016
8.9%
9.1%
9.6%
0.03
H E A LTH A N D SA F E T Y
The Medical Treatment Case (MTC) rate
captures the rate of guest injuries requiring
external medical treatment relative to 10,000
guest visitations. The reduction in the rate in
2018 is therefore a positive outcome.
2018
2017
2016
95%
96%
94%
2018
2017
2016
86%
86%
89%
2018
2017
2016
0.03
0.04
0.06
INFORMATION ONLINE
Visit our website:
www.merlinentertainments.biz
02
C O M P A N Y O V E R V I E W
A YEAR OF MEMOR ABLE
EXPERIENCES
JULY
LEGOLAND Discovery Centre Birmingham opens.
‘LEGO City: Deep Sea Adventure’ opens at
LEGOLAND California.
MERLIN ENTERTAINMENTS I S A
GLOBAL LE ADER IN LOC ATION
BASED, FAMILY ENTERTAINMENT.
As Europe’s number one and the world’s second-largest
visitor attraction operator, Merlin now operates over 120
attractions, 18 hotels and 6 holiday villages in 25 countries and
across 4 continents.
In 2018 the Company delivered memorable experiences to 67 million visitors
worldwide, through its iconic global and local brands and the commitment and
passion of its c.28,000 employees (peak season).
We operate two distinct types of visitor attraction;
• Our Midway Attractions are high quality, branded, predominantly indoor
attractions with a typical one to two hour dwell time located in city centres,
shopping malls or resorts.
• Our Theme Parks are larger multi-day outdoor destination venues,
incorporating on-site themed accommodation. These are organised into
two Operating Groups, based on the brands – LEGOLAND Parks and
Resort Theme Parks.
JUNE
World’s first sanctuary for beluga whales announced.
03
2018
OCTOBER
The Bear Grylls
Adventure in Birmingham,
UK, Peppa Pig World
of Play in Shanghai (see
case study on pages 20
to 21) and the Shanghai
Dungeon open.
APRIL
252 room hotel and SEA LIFE
Centre open at LEGOLAND
Japan, developing the park into
a resort.
250 room LEGOLAND
California Castle Hotel opens,
doubling the capacity of
on-site accommodation.
2017
SEPTEMBER
Little BIG City Beijing and LEGOLAND Discovery Centre
Columbus open.
Merlin Magic Wand celebrates tenth anniversary.
MIDWAY AT TR ACTIONS
LEGOL AND PARKS
RESORT THEME PARKS
We have high quality, chainable brands and are the only company
to successfully operate the Midway model on a global scale. We are
increasingly partnering with third party Intellectual Property owners
to create new brands which complement the portfolio and broaden
our appeal across all key target demographics.
Located worldwide, LEGOLAND Parks are aimed at families with
younger children and have LEGO as the central theme. Highly
themed accommodation is central to our strategy to develop the
customer offering. Merlin holds the global, exclusive rights to the
LEGOLAND brand.
Resort Theme Parks are national brands aimed at families, teenagers
and young adults, with themed accommodation at all locations.
They have high brand and customer awareness in their local
markets and include the leading theme parks in the UK, Italy and
Northern Germany.
MARCH
‘Wicker Man’ roller coaster opens at
Alton Towers Resort (see case study
on pages 16 to 17).
142 room Pirate Island Hotel
opens at LEGOLAND Deutschland
(see case study on pages 18 to 19).
Opening of ‘Peppa Pig Lands’ at
Gardaland and Heide Park Resorts.
40.4m
Visitors
£677m
Revenue
GLOBAL BRANDS
SEA LIFE
Madame Tussauds
LEGOLAND Discovery
Centre
The Dungeons
The Eye
15.6m
Visitors
£637m
Revenue
LOCATIONS
Billund, Denmark
California, USA
Dubai, UAE
Florida, USA
Günzburg, Germany
Johor, Malaysia
Nagoya, Japan
Windsor, UK
11.0m
Visitors
£367m
Revenue
BRANDS
Alton Towers Resort,
UK
Chessington World of
Adventures Resort, UK
Gardaland Resort, Italy
Heide Park Resort,
Germany
THORPE PARK Resort,
UK
Warwick Castle, UK
Find out more on page 23
Find out more on page 23
Find out more on page 22
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLC 04
C H A I R M A N ’ S S T A T E M E N T
STR ATEGIC PROGRESS AND
ORGANIC GROW TH
05
MERLIN ENTERTAINMENTS
CONTIN U ES TO MAKE
STR ATEGIC PROGRES S AND
RE PORTS CONTIN U ED
ORGANIC GROW TH .
INVESTMENT CASE
1. Attractive markets,
with underlying growth
characteristics and
favourable dynamics
2. Diversified portfolio of world
class brands and assets
3. Multiple levers of growth
through our Six Strategic
Growth Drivers (see pages
14 to 15)
4. Strict financial discipline and
investment criteria
5. Committed to Being a Force
for Good
Trading and strategy
After several challenging years, 2018 saw a number
of important strategic developments and a year of
continued steady organic growth.
Our strategy to expand the LEGOLAND parks
footprint continued. Construction began in the first
half of the year on the LEGOLAND New York
Resort, which is progressing towards the planned
2020 opening, while at the end of the year we
reached agreement with the local province for the
funding of LEGOLAND Korea. We continue to
believe there is the scope for 20 LEGOLAND
parks worldwide and continue a number of
progressive discussions about new partnership
agreements in the key China marketplace.
Merlin’s unique themed accommodation offering
continues to drive growth across our theme park
estate. We are therefore pleased to have a strong
medium term pipeline for a variety of different
accommodation formats at multiple locations
across both theme park Operating Groups,
which will add to the 4,000 plus rooms in the
current portfolio.
In the Midway Attractions Operating Group, 2018
saw the pilot openings of the new Intellectual
Property (IP) based attraction formats, ‘Peppa Pig
World of Play’ and ‘The Bear Grylls Adventure’,
aimed at the pre-school and adventure seeker
markets respectively. While these attractions are
still in their infancy, we are encouraged as they
continue to broaden the Group’s appeal within
different markets and geographies. Furthermore,
these investments reflect our ever-growing
relationships with third party IP holders who seek
to leverage their content through location
based entertainment.
Governance and the Board
The recent externally facilitated evaluation exercise
confirmed that the Board and its Committees each
remain effective. No major concerns were
identified and the Board was described as strong,
with a good mix of skills, experience and culture,
with a collegiate, supportive and collaborative
approach. The review also noted the appropriate
level of constructive challenge during meetings.
Ken Hydon stood down as a Non-executive
Director and Chairman of the Audit Committee in
the year and on behalf of the Board, I would like to
thank Ken for the significant contribution he has
made to Merlin over his years of service.
Andrew Fisher OBE was appointed to the Board as
a Non-executive Director in July 2018. Having led
the successful growth of a number of technology-
focused enterprises over the past 20 years,
Andrew will add his experience in digital consumer
and technology markets to the Board’s already
wide range of skills. Andrew has also joined the
Audit Committee which is now chaired by Trudy
Rautio, who brings a wealth of relevant financial
experience to the role.
Further details on Merlin’s Corporate Governance
arrangements and activities are set out in the
Corporate Governance Statement and Report on
pages 58 to 65.
Dividends
At the Annual General Meeting in May, the Board
will be recommending that we pay a final dividend
of 5.5 pence per share. Taken together with the
interim dividend of 2.5 pence per share paid last
September, this will equate to a full year dividend of
8.0 pence per share, up 8.1% on 2017.
With respect to 2018 trading, Midway Attractions
saw the key London market starting to recover
from the impacts of terrorism that had so affected
2017 performance. In LEGOLAND Parks, a
broadly flat performance in the existing estate was
augmented by the expansion of the LEGOLAND
Japan Resort by adding a hotel and SEA LIFE
Centre to the park that had opened in 2017, with
themed accommodation expansion in other parks
also driving organic growth. Finally, Resort Theme
Parks reported strong organic growth driven by
the major resorts at Alton Towers and Gardaland,
reflecting ongoing product investment and
favourable weather. The trading performance
is reviewed in further detail within this
Annual Report.
Responsibility and sustainability
Merlin is committed to responsible corporate
citizenship. This commitment informs our
governance structures and the operation of our
businesses, notably in the area of health and safety
where a constant focus on keeping our guests,
employees and other visitors safe and secure is our
overriding priority.
Our commitment to reducing our environmental
impact continues with a particular focus in 2018 on
plastic pollution. The Group partnered with
Coca-Cola Great Britain in an innovative initiative
to encourage more recycling and towards the end
of the year the Group announced the phasing out
of plastic straws within all of its owned attractions
worldwide as part of a number of initiatives to
remove single-use plastics from the business.
Our partner charity, the SEA LIFE Trust, continues
with activities to protect marine wildlife. Supported
by the Group, in 2018 it announced a world first
when construction started on a beluga whale
sanctuary in Iceland. This will initially provide a new
home for two beluga whales currently housed in
one of our aquariums in China and has the
potential to offer a more natural habitat for other
captive beluga whales in the coming years. During
the year SEA LIFE Conservation, Welfare and
Engagement (CWE) was formed to continually
improve standards in animal welfare and advocacy
for marine conservation.
Merlin’s Magic Wand, our partner children’s charity,
celebrated its tenth birthday in 2018. The charity
continues to deliver magical experiences around
the world to children who are facing challenges of
serious illness, disability or adversity, with over
600,000 attraction visits taking place since the
charity began. The charity also ‘takes the magic’ to
local children’s organisations with community
outreach activities, and has now installed 46
‘Magic Spaces’ in children’s homes and hospitals.
As active members of the ‘Members of Business
Disability Forum’ we also work to further improve
experiences for guests with accessibility challenges.
Further details, together with our approach to
non-financial reporting, are set out on pages
48 to 57.
Our people
I am, as always, extremely grateful to Merlin’s
management team and our many thousands of
employees across the world who continue to drive
the Group’s strategic progress and are the
foundation of our relations with our guests,
communities and other stakeholders.
Looking forward
With Merlin’s core strengths and assets, together
with the backdrop of evolving, but attractive,
market fundamentals, we continue to see
significant global opportunity for the Company in
2019 and beyond.
Sir John Sunderland
Chairman
27 February 2019
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLC 06
M A R K E T O V E R V I E W
AT TR ACTIVE MARKET
OPPORTUNIT Y
MERLIN OPER ATES IN A
FU NDAMENTALLY AT TR ACTIVE
MARKE T, ENJOYING U NDERLYING
GROW TH CHAR ACTERI STICS
AND FAVOU R AB LE DYNAMICS .
Growth in global leisure and tourism
spend continues to be fuelled by increasing
disposable incomes in both developed and
emerging economies, and ever greater value
being placed upon time together with friends
and family.
AT TR ACTIVE
MARKET
FUNDAMENTALS
ASIDE FROM THE
GROW TH
CHAR ACTERISTICS ,
THE MARKET FOR
LOCATION BASED
ENTERTAINMENT
OFFERS AT TR ACTIVE
FUNDAMENTALS .
High barriers
to entry
Obtaining relevant planning
permissions and capital investment
for major theme park projects is
invariably highly challenging.
Fragmented
marketplace
The market for visitor attractions is
relatively fragmented. This provides
the opportunity for acquisitions and
partnerships, with many non-natural
owners of assets.
Digitalisation
Unlike many consumer-facing
businesses, Merlin sees limited
threat, but significant opportunity,
from the increasing importance of
digital and technology which allow
for enhanced guest experiences.
1.3bn
TOURIST ARRIVALS GLOBALLY
(Source – UNW TO, Citi Research)
6.3%
USA ANNUAL GROWTH IN EXPERIENCE
RELATED SERVICES 2014-2016
(Source – McKinsey & Company / US Bureau
of Economic Analysis)
3 in 4
AMERICANS PRIORITISE
EXPERIENCES OVER PRODUCTS
(Source – Expedia and Center for
Generational Kinetics)
$3.2tn
GLOBAL LEISURE AND TRAVEL
MARKET 2025
USA & China
DRIVE THE GROWTH
TRAVEL AND LEISURE SPEND IN
$ BILLIONS – 2015 AND 2025 FORECAST
(Source – Euromonitor International Passpor t/
McKinsey & Company, CityScope Database)
U S A
2025
2015
C H I N A
2025
2015
944
629
392
200
07
STRUCTUR AL TRENDS
WITHIN THIS L ARGE AND GROWING
MARKET MERLIN BENEFITS FROM
THREE STRUCTUR AL TRENDS .
1.3 billion international
tourist arrivals
INTERNATIONAL TOURIST
ARRIVALS (millions)
Growing demand for a truly
immersive, IP-led experience
• Of which over half are holiday,
leisure or recreation. Merlin benefits
through our presence in Gateway cities.
2017
• Growing wealth in emerging markets
drives growth in travel, both
domestically and internationally.
1,323
2007
911
Merlin has multiple global, or near-global,
IP agreements. These range in scale from
relationships at a local level for specific
attractions, through global, multiproduct
relationships with some exclusivity, all the
way up to our core global, multiproduct
and exclusive relationship with LEGO.
Our standalone, IP-led attractions include
LEGOLAND (parks and Discovery
Centres), Peppa Pig World of Play,
The Bear Grylls Adventure and
DreamWorks Tours – Shrek’s Adventure!.
Growth in short breaks
and demand for themed
accommodation
•
Aside from the benefit from
short breaks enjoyed in Merlin’s
Gateway cities, 21% of Merlin’s theme
park revenue was generated from
accommodation in 2018.
UK SHORT BREAK
HOLIDAYS (millions)
2016
• Between 1996 and 2016, growth in UK
short breaks was twice that of longer
one/two week holidays (Source – ONS).
1996
7.4
2.8
B R AND PORTFOLIO
THROUGH OUR DIVERSE
PORTFOLIO, WE ARE
ABLE TO CAP TURE ALL
OF THESE AT TR ACTIVE
DYNAMICS ACROSS
DEMOGR APHICS ,
INCRE ASINGLY FOCUSED
ON NEW BR ANDS .
FAMILIES
LEGOLAND parks
SEA LIFE Centres
Alton Towers
Shrek’s Adventure!
Gardaland
LEGOLAND Discovery
Centres
Warwick Castle
Heide Park
Chessington World of
Adventures
PRE-SCHOOL
FAMILIES
Peppa Pig World of Play
CITY CENTRE
TOURISTS
Madame Tussauds
The Dungeons
The Eye Brand
SEA LIFE Centres
Little BIG City
TEENAGERS AND
YOUNG ADULTS
THORPE PARK
The Dungeons
Alton Towers
Heide Park
Gardaland
ADVENTURE/
EXPERIENCE
SEEKING
The Bear Grylls
Adventure
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONSTRATEGIC REPORT
08
B U S I N E S S M O D E L
DELIVERING VALUE FOR ALL
OUR STAKEHOLDERS
FOUNDATION S AND
COMPETENC IES
BR ANDS AND ASSETS
• Synergistic relationship with LEGO (the world’s top
toy brand)
• Chainable and global Midway attraction brands
• Resort Theme Parks attractions are typically number one
or two in their respective markets
IP PARTNERSHIPS
• Global, exclusive rights to the LEGOLAND IP
• Established and growing global, regional and local IP
partnerships, for example with Star Wars, CBeebies,
Bear Grylls and Peppa Pig
UNIQUE PORTFOLIO OF
SKILLS
• Experienced research teams identify potential sites for new
attractions and negotiate with local landlords, developers
and civic bodies
• Unique creative teams develop content for all attractions
and work with IP partners on new concepts
• In-house production capabilities for wax figures, LEGO
model production and attraction theming create
efficiencies and reduce costs
• World class animal welfare expertise and ethical
animal husbandry
• We can project manage any scale of construction project
including individual rides and attractions in our existing
estate, new Midway attractions across the globe and full
scale LEGOLAND parks
Find out more on pages 24 to 25
TOGETHER OUR INDIVIDUAL
BUSINESSES CRE ATE AN
E XPANDING , DIVERSE PORTFOLIO
OUR OPER ATING GROUPS
PORTFOLIO SYNERGIES
MIDWAY
AT TR ACTION S
Find out more on page 23
LEGOL AND
PARKS
Find out more on page 23
RESORT
THEME PARKS
Find out more on page 22
OUR CUSTOMER OFFERING
VISITOR REVENUE
• Admissions, increasingly booked in advance, including cluster/
multi-day tickets and annual passes
• Fastrack passes
• Food outlets – from snacks to gourmet restaurants
• Photos – print and digital downloads
• Retail – souvenirs, clothing, LEGO
• Established investment cycles drive
growth at each attraction, funded by
groupwide operating free cash flow
• Increasing scale and global reach
improve opportunities for worldwide
IP partnerships
• Synergy benefits go across Operating
Groups in key markets where we can
sell annual passes and enhance
marketing opportunities
• Opportunities for multiple attractions
at one location via city centre
‘clustering’ and ‘second gates’ at theme
park resorts
• Six complementary strategic
growth drivers
ACCOMMODATION
• A wide range of themed accommodation for short
break visitors – hotels, chalets and lodges, glamping
• Multiple options cater for different demographics
and price points
09
VALUE CRE ATED
FOR STAKEHOLDERS
CUSTOMERS
• Guest satisfaction constantly
monitored at each attraction
to drive improvement, with a
continued focus on ‘Top Box’,
‘Net Promoter’ scores and
social media engagement
95%
GUEST
SATISFACTION
EMPLOYEES
• Around 28,000 employees
at peak season committed
to delivering memorable
experiences
Find out more on pages
42 to 47
86%
EMPLOYEE
ENGAGEMENT
COMMUNITIES
• Merlin’s attractions operate
responsibly at the heart of
their communities, contributing
to the local economy
• We partner with two charities
to provide children with
memorable experiences and
to protect the marine
environment
Find out more on pages
54 to 57
INVESTORS
• We aim to deliver returns, long
term value and dividend
growth to shareholders
>100k
MERLIN ’ S
MAGIC
WAND
VISITS
8.0p
DIVIDEND
PER SHARE
UNDERPINNED BY STANDARDS IN ...
Health, safety and security
Industry leading standards, a rigorous safety culture and complete
commitment from our teams
Corporate governance
Diverse, experienced Board and effective Committees
provide oversight
Business responsibility
Ethical operating culture and animal welfare standards,
with a commitment to manage environmental impacts
Find out more on pages 68 to 69
Find out more on pages 58 to 65
Find out more on pages 48 to 57
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONSTRATEGIC REPORT
10
11
C H I E F E X E C U T I V E ’ S R E P O R T
DEVELOPING THE
PL ATFORM FOR GROW TH
V I S ITO R S
67.0m
£327m
U N D E R LY I N G
O PE R ATI N G PRO F IT
MERLIN MADE GOOD STR ATEGIC
PROGRES S THROUGHOUT 2018 .
OU R LONG TERM INVESTMENTS
HAVE FU RTHER DE VELOPED
THE PL ATFORM FOR
FUTU RE GROW TH .
Merlin is uniquely placed to
exploit the growing
opportunities to partner with
leading owners of Intellectual
Property content and provide
additional ways in which to
deliver memorable experiences.
OUR STR ATEGY
To create a high growth, high
return, family entertainment
company based on strong
brands and a global portfolio
that is naturally balanced
against the impact of
external factors.
These four strategic elements are identified
by the following icons throughout this
Annual Report.
High growth
High return
Strong brands
Global portfolio
2018 overview
Merlin made further good strategic progress
during 2018, delivering organic growth in
underlying EBITDA of 6.2% and underlying
operating profit of 3.4%. We welcomed a record
67 million visitors whilst continuing to report
strong guest KPIs, including a three percentage
point increase in our ‘Net Promoter’ score,
to 57%. We have further strengthened our
pipeline of attractive opportunities alongside
investing in our existing brands, underpinning
our platform for continued growth.
Growth in the year was driven primarily by our
New Business Development programme, which
saw us open a record 644 accommodation
rooms and seven new Midway attractions – the
majority of which were either new brands or
attractions in new markets. The pilot openings of
our two new brands – ‘Peppa Pig World of Play’
and ‘The Bear Grylls Adventure’, in Shanghai
and the UK respectively, have already received
encouraging guest feedback. These openings
represent an entry into exciting new market
categories for Merlin and underscore our focus
in strengthening our position as an operator
of location based entertainment partnering
with leading owners of Intellectual Property.
2018 trading saw an improvement in trends
across a number of our businesses. Midway
London, which had been adversely impacted by
the 2017 terrorist attacks, returned to growth
in the second half of the year; and Resort
Theme Parks saw exceptionally strong like for
like growth, benefiting from successful product
investment and very favourable weather. This
performance was partially offset by the cost
headwinds we have been highlighting for several
reporting periods, as well as a quieter year
for ‘new news’ in our LEGOLAND parks.
Since the year end we have announced our
intention to open a LEGOLAND park in
South Korea, having reached an agreement
with the local province regarding funding. This
is important for the continued development
of the LEGOLAND estate, and the planned
opening by 2022 will maintain our LEGOLAND
Parks momentum, following the targeted
opening of LEGOLAND New York in 2020.
Market overview
Merlin operates in an attractive marketplace,
benefiting from underlying growth
characteristics and favourable dynamics. At
its heart is increasing disposable income in
both developed and emerging economies,
and the ever greater value being placed upon
time together with friends and family.
Firstly, we continue to see the long term growth
opportunity through international tourism,
benefiting our Gateway city attractions such as
those in London, New York and Hong Kong.
Globally, there were 1.3 billion tourist arrivals
in 2017 – over half of which were travelling
for leisure or recreation – representing a
3.8% CAGR over the past decade. This has
been driven in part by the continued growth
in emerging markets, with increasing levels of
wealth in countries such as China and India set
to continue over the coming years. We therefore
remain confident that the market opportunity for
our Gateway city attractions remains significant.
Secondly, the increase in short breaks, in
addition to fuelling international travel, sees
more and more people take ‘staycations’. Short
breaks in the UK have grown at twice the rate of
longer holidays over the past 20 years. We are
increasingly well positioned to meet this demand
through our growing offering of themed, on-site
accommodation and ‘second gate’ attractions to
extend dwell time. Furthermore, the relatively
lower cost to the guest of ‘staycations’ has
historically provided balance to Merlin’s portfolio
during more challenging economic conditions.
Finally, Merlin is uniquely placed, given its global
reach and multi-format expertise, to exploit the
growing opportunities to partner with leading
owners of Intellectual Property content. These
partnerships provide Merlin with additional ways
in which to deliver memorable experiences,
whilst offering those partners opportunities
to increase engagement with their customers.
Merlin has long enjoyed success through flagship
partnerships such as that with LEGO, and was
pleased to launch two new IP-based brands in
2018. We see opportunities to develop further
relationships with more IP or content owners
over the coming years, building on the success of
existing relationships.
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C H I E F E X E C U T I V E ’ S R E P O R T
13
Our ongoing product
investment and innovation,
and relentless focus on
creating memorable
experiences for our guests
throughout 2018, have
resulted in continued strong
levels of guest satisfaction.
In addition to these existing market drivers, we
continue to carefully monitor broader consumer
tastes and trends, particularly with regards
to new concepts. The exponential growth in
formats such as ‘pop-ups’ and Escape Rooms is
of increasing interest, and we have already begun
trialling some of these as part of offerings within
our existing attractions, with Escape Rooms
now in Madame Tussauds San Francisco and
The Bear Grylls Adventure in Birmingham, UK.
Strategy update
With this attractive market backdrop, Merlin’s
purpose is about creating truly memorable
experiences for our guests; creating memories
to be shared at the school gates, on social
media or simply on the journey home.
Since the creation of Merlin in 1999, our strategic
vision has been to create a high growth, high
return, family entertainment business naturally
balanced against external factors. Specifically,
we aim to continue to diversify our portfolio,
by geography, brand and customer, ensuring
a balance of indoor and outdoor attractions
and international and domestic visitation.
In pursuit of this, Merlin has consistently
focused on its six strategic growth drivers
(see pages 14 to 15). Progress against
these in 2018 has been as follows:
Existing estate capex – investment in the existing
estate helps to maintain and grow visitation
and guest satisfaction. In addition to the major
capex investments in 2018, such as the ‘Wicker
Man’ roller coaster at Alton Towers and ‘LEGO
City: Deep Sea Adventure’ at LEGOLAND
California, new innovations included immersive
‘build and play’ features in our LEGOLAND
Discovery centres, and Madame Tussauds’ first
‘intelligent’ wax figure in Shanghai. Following
our decision in Q3 2017 to rebalance our
capital allocation more towards new business
opportunities, Midway Attractions and Resort
Theme Parks existing estate capex spend was
carefully reduced in 2018. At the same time
the team retained a clear focus on maintaining
our levels of guest satisfaction. This capital
discipline has resulted in Group existing estate
capex reducing to 9% of revenue, remaining
within our target range of 8% to 10%.
Strategic synergies – we continue to leverage
the growing scale of the Group through
areas such as procurement, promotional
activity and technology. The roll out of the
accesso® e-commerce platform is substantially
complete, whilst our 2019 focus will be
upon further developing the digital guest
journey and the launch of the first Merlin
Annual Pass membership programme.
Short break positioning – the success of our
accelerated investment in on-site themed
accommodation and developing our theme
parks into short break resorts remains
compelling. Accommodation revenue grew
by 28% in 2018 on a constant currency basis
and has doubled over the past five years,
now representing 21% of revenue across our
theme park Operating Groups compared to
13% in 2013. Accommodation continues to
drive improved levels of guest satisfaction
and increases in advanced bookings. In
2018 we opened 644 rooms across three
LEGOLAND parks, and anticipate opening
372 rooms across a range of formats in 2019.
Midway roll out – we continue to see the
opportunity to open new Midway attractions
globally, based on both our existing and new
brands. We opened seven new attractions in
2018, including pilots of our three new brands
– ‘Little BIG City’ (the first pilot attraction of
which was launched in Berlin in 2017), ‘Peppa Pig
World of Play’ and ‘The Bear Grylls Adventure’.
Our pipeline continues to comprise a mixture
of new brands or attractions in new markets, as
well as the core brands in established markets.
Over time, these will broadly balance out,
though 2017-18 reflected proportionally more
emerging market and new brand openings.
In 2019, we target opening ten attractions.
Opening new LEGOLAND parks – 2018
represented the first full year of trading of
LEGOLAND Japan, and the resort was enhanced
further through the addition of a SEA LIFE centre
and 252 bedroom hotel. We made encouraging
progress during the year towards the opening
of LEGOLAND New York, scheduled to open
in 2020, and we have subsequently announced
our intention to open a park in South Korea by
2022. We remain in active discussions, some of
which are advanced, with a number of potential
partners to develop several LEGOLAND parks
in China. The current investment phase for
LEGOLAND parks will continue to have the
effect of reducing near term, reported Group
ROCE given the projects’ gestation periods and
funding structures, but we are confident in the
long term opportunity and returns outlook.
Strategic acquisitions – whilst we remain
active in assessing inorganic opportunities
against our clear investment criteria, we
made no acquisitions during 2018.
Health, safety and security
The health, safety and security of our guests and
employees remains our number one priority and
we will continue to invest time and resource in
improving our already high standards. In 2018,
we developed further global partnerships with
third party organisations related to matters
of health, safety and security with the aim of
mutually sharing any learnings, and launched
a number of internal initiatives including the
Company’s HSS magazine called ‘The Shield’
and a new series of line manager-led briefings.
Productivity Agenda
Merlin has successfully mitigated significant
cost pressures in recent years, resulting from
legislative changes such as the UK National
Living Wage, and significant increases in utilities
and business rates. We are also increasingly
seeing the impact of tighter labour markets
in many parts of the world such as Southern
California, Bavaria and the South East of
England. To date this cost mitigation has been
achieved largely through attraction-level
savings and tactical efficiency improvements.
Mindful of these continuing cost pressures, we
have been focused on our Productivity Agenda
which seeks to consolidate a number of initiatives
to provide long term, sustainable savings across
the Group. As a result, we have identified
annualised savings of up to £35 million which we
expect to deliver by 2022, incurring overall one-
off operating costs related to the implementation
of this programme of approximately £35 million.
These cost savings will be delivered through
back office savings, such as our ‘Finance 21’
project, operational efficiencies by evolving our
business model, the application of continuous
improvement principles in our attractions, and
in many cases through better use of technology
and automation. In addition to delivering financial
savings, our programme seeks to improve
productivity, better enabling our attraction staff
and general managers to focus upon what truly
delivers memorable experiences for our guests.
Guest satisfaction
Our ongoing product investment and innovation,
and relentless focus on creating memorable
experiences for our guests throughout 2018,
have resulted in continued strong levels of guest
satisfaction. Guest feedback is monitored daily
through the touchscreens at our attractions,
generating over one million reviews each
year. In 2018 we delivered an overall guest
satisfaction score across the Group of 95%,
and a ‘Net Promoter’ score of 57%, which
increased by three percentage points.
Employee engagement
We know that the better engaged our
employees are, the better our guests’
experiences will be. We are therefore pleased
to report that our annual employee survey
– ‘The Wizard Wants to Know’ – which was
completed by 95% of our employees, shows
that 94% enjoy working at Merlin. Employee
engagement at Merlin remains significantly above
global benchmarks. We’re not stopping there
though. In 2018 we developed a new employer
brand and value proposition; ‘Love Your Work.
Work Your Magic’, as we seek to attract,
recruit and retain the very best people, and
work is under way to encourage even greater
diversity and inclusivity within the workplace
through a number of new people initiatives.
Our team of 28,000 employees should be
proud of what we have achieved this year, and
I would like to thank them for their continued
dedication and for delivering another year
of fun, safe, and memorable experiences for
our millions of guests around the world.
Nick Varney
Chief Executive Officer
27 February 2019
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O U R S I X S T R A T E G I C G R O W T H D R I V E R S
PROGRESS , GROW TH AND
PL ANS FOR THE FUTURE
HIGH GROW TH
STRONG BR ANDS
HIGH RETURN
GLOBAL PORTFOLIO
GROW TH DRIVER
PROGRESS
2019 OUTLOOK
ME ASURING PROGRESS
Planned investment
cycles in the
existing estate
Investment in the existing estate allows us to grow
visitation to the attraction, provides us with
something new to market, and provides a degree
of pricing power. Each attraction has a planned
investment cycle with varying capex levels that
help to smooth overall expenditure across the
portfolio and ensure investments are funded from
operating free cash flow.
We made significant investments across all
Operating Groups ranging from IP-based features
such as the DC Comics ‘Justice League’
experiences, through to new roller coasters such
as the ‘Wicker Man’ at Alton Towers Resort. As
planned, total investment reduced in 2018 as we
reallocate capital to new business opportunities.
Find out more on pages 16 to 17
Exploiting strategic
synergies
We continue to leverage the growing scale of the
Group through areas such as procurement,
promotional activity and technology. In doing so
we always seek to improve the customer’s
experience, for example, by streamlining the guest
journey on our e-commerce platforms.
The roll out of the accesso® e-commerce platform
for online revenue is substantially complete and
several projects are now under way as part of our
Productivity Agenda initiative to deliver long term
operational efficiencies.
Developing our
theme parks into
destination resorts
Adding on-site, themed accommodation improves
guest satisfaction, increases the catchment area
for our parks, and increases the level of
pre-booked revenue.
Opening new
Midway
attractions
We are expanding our estate of Midway
attractions, rolling out a combination of core
and new brands, in both established and
developing markets.
Opening new
LEGOLAND parks
We are expanding our current estate of eight
LEGOLAND parks that we operate under three
models (operated and owned, operated and
leased, operated under management contract).
A total of 644 accommodation rooms were opened
during 2018 across LEGOLAND Japan, transforming
the park which opened in 2017 into a resort,
LEGOLAND Deutschland’s new Pirate Island Hotel,
and LEGOLAND California, where a second hotel
doubled the on-site accommodation capacity.
Find out more on pages 18 to 19
Seven new Midway attractions opened in 2018.
These included Little BIG City Beijing, our second
attraction under that new format, the first Dungeon
attraction in Asia in Shanghai, and pilots of two new
IP-based brands – The Bear Grylls Adventure in the
UK and Peppa Pig World of Play in Shanghai.
Find out more on pages 20 to 21
2018 was the first full year of trading for
LEGOLAND Japan that expanded into a full
resort in the year with the opening of the on-site
hotel and the SEA LIFE Nagoya second gate
attraction. LEGOLAND New York is now
under construction.
T
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S
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S
I
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Each year we plan that all existing estate attractions will have ‘something new’
for customers to enjoy. In 2019 major investments will include the launch of
the iconic Colossos roller coaster at Heide Park while LEGOLAND Florida
will see the first of our ‘LEGO Movie World’ investments. At SEA LIFE
Sydney Aquarium, visitors will be able to experience the world’s largest
Great Barrier Reef exhibit in the state of the art, interactive ‘Day and Night
on the Reef’.
Work will continue on our projects to evolve and simplify our operating
models across both theme parks and Midway attractions.
The ‘Finance 21’ project will start to roll out a cloud based software
solution that will underpin the strategy to optimise the Group’s
finance organisation.
We plan to open on average approximately 500 rooms per annum in the
medium term (372 in 2019 at LEGOLAND Billund, Alton Towers and
Gardaland) and will continue the investment in second gates to further
develop resorts.
Reflecting our plan to roll out new brands in new locations, 2019 will see
ten openings overall. More Peppa Pig World of Play attractions will expand
that new IP-based brand in China and the USA. There will also be a
number of core brand openings with a suite of LEGOLAND Discovery
Centres and SEA LIFE Centres scheduled to open in the USA, China
and Malaysia.
Construction on LEGOLAND New York will ramp up during 2019 in line
with our schedule to open in 2020.
Strategic
acquisitions
We operate in relatively fragmented markets, with
non-natural owners of attractions. This provides
opportunities for acquisitions.
Reflecting our strict investment criteria, no
acquisitions were made in 2018.
We continue to monitor the market for acquisition opportunities.
Organic revenue
growth
5.2%
in 2018
Accommodation
+644
rooms across three
LEGOLAND parks
Accommodation revenue
growth
27.7%
in 2018 (constant currency)
Midway attractions
+7across six brands in four countries
launching two new brands
LONGER TERM FOCUS ARE AS
Productivity Agenda
Our Productivity Agenda initiatives will look to evolve the Group’s operations
over the next few years. We expect to see the benefits of this in lower
operating costs, with up to £35 million annualised cost savings by 2022. At the
same time we will continue to focus on the guest experience, for example
through the use of improved technology.
Short break accommodation
We see a continued market demand for our themed accommodation in the
short break holiday market. Our investments in this area to date have proved
very successful, generating strong financial returns and helping to increase
guest satisfaction over their longer visit to a Merlin destination. Accordingly, we
plan to have opened approximately 2,500 new rooms between 2018 and 2022
across both theme park Operating Groups.
LEGOLAND parks
At the start of 2019 we announced that agreement has been reached with the
local province in respect of LEGOLAND Korea, which will be a fully owned
and operated resort, scheduled to open by 2022. Our increasing level of
consultancy and study agreements give us confidence for further opportunities
in China and we continue to believe that there is the potential for 20
LEGOLAND parks worldwide.
Intellectual Property (IP)
We see the growing importance of IP content and how location based
entertainment can be a platform for this, providing greater ways to deliver
memorable experiences, whilst offering partners opportunities to engage with
consumers in a richer way. We see the opportunity to develop multiple
relationships with IP or content owners over time and believe Merlin is
uniquely placed to develop such relationships given our strong credentials, and
our multi-format, global reach.
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17
RESORT THEME PARKS
FLAMING NEW
ADVENTURES
The laughter coming from the
‘Wicker Man’ is the ultimate
indicator for me that it’s done its
job – happy and delighted guests
enjoying the adrenaline and fun of
the theme park, on an innovative
and creative product that adds to
our great compendium of world
class roller coasters.
Ian Crabbe
Divisional Director,
Alton Towers Resort
GROW TH DRIVER
PL AN NED INVESTMENT
C YCLES IN THE
E XISTING ESTATE
Each of our existing attractions follow a
planned capital investment cycle enabling them
to plan ahead and increase capacity. A major
roller coaster investment at a theme park
creates marketing ‘new news’ that generates
media and customer interest, thereby
growing visitation.
‘ WICKER MAN ’ ROLLER
COASTER AT ALTON
TOWERS
The process to create the ‘Wicker Man’ started
more than four years ago as Alton Towers
looked to create a new ‘family thrill’ ride. The
Merlin Magic Making (MMM) creative team took
on the challenge to create an innovative theme
that was exciting enough for thrill-seekers and
also one that most of the family can enjoy, and
from there came the idea of putting wood and
fire together.
MMM then project managed the construction
as the ‘Wicker Man’ took shape – 7,500 tonnes
of sustainably sourced wood creating over
2,000 feet of track to give riders the unique
‘woodie’ experience.
In its first year of operation the ‘Wicker Man’
has been really well received, winning industry
awards, delivering on its investment criteria and
helping drive significant revenue growth and
high customer satisfaction levels.
We believe that the ‘Wicker Man’ has attracted
more visitors back to the resort, boosting the
local and regional economy and providing new
and exciting job opportunities.
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GROW TH DRIVER
DE VELOPING OU R
THEME PAR K S INTO
DESTINATION R ESORTS
Merlin currently has over 4,000 rooms across its
estate. We see continued strong guest demand
for themed accommodation and an ongoing trend
towards short breaks. Adding accommodation
increases the park catchment area, improves
guest satisfaction and provides strong returns
on investment.
LEGOL AND
DEUTSCHL AND
PIR ATE ISL AND HOTEL
For the start of the 2018 season the German
resort introduced its fourth, themed overnight
accommodation; the 142 room, €27 million Pirate
Island Hotel, further extending the capacity of the
accommodation offering. Exceptionally high
satisfaction levels and occupancy of up to 95%
show that the pirate theme is as popular as ever.
Buccaneer motifs on the walls, a huge mast in the
lobby, ship-shaped bunk beds and a cosy tavern
with a family-style dining concept provide a pirate
atmosphere in the whole hotel complex.
Combining these details with LEGO models of all
shapes and sizes, LEGOLAND Deutschland
creates a one-of-a-kind family experience.
In 2008 the resort earned 6% of its revenue from
its 97 rooms. Following subsequent investments
in a range of accommodation types, that has now
increased to 29% of revenue coming from 461
rooms. With approximately 60% of our holiday
village guests coming from outside Germany, this
expansion means LEGOLAND Deutschland is
now a truly international resort.
G U E S T S AT I S FAC T I O N
97%
>90%
P E A K O C C U PA N C Y
The Pirate Island Hotel has seen
really strong guest satisfaction
scores, giving guests wishing to
come and visit us an even wider
choice as we continue to
develop LEGOLAND
Deutschland into an
international resort destination.
Martin Kring
Divisional Director,
LEGOLAND Deutschland
Resort
LEGOLAND PARKS
TREASURED
EXPERIENCES
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21
MIDWAY ATTRACTIONS
A WORLD
OF PLAY
It’s a pleasure to see the smiles
on children’s faces as they step
into the world of Peppa Pig –
the attraction is packed full of
activities that will provide our
youngest visitors with a truly
memorable experience.
Yuna Wang
Attraction Manager,
Peppa Pig World of Play
Shanghai
GROW TH DRIVER
OPEN ING NE W
M IDWAY AT TR AC TIONS
Opening new Midway attractions delivers
organic growth through core and new
brands across existing and developing
markets. Merlin is uniquely placed with its
strong existing brands and relationships with
IP holders. New attractions can tap into
different demographics such as the
pre-school family market, helping to further
diversify our portfolio.
PEPPA PIG WORLD OF
PL AY SHANGHAI
Peppa Pig is a hugely successful, critically
acclaimed pre-school animated series for
girls and boys that has global reach,
extremely high awareness and is still
growing in many markets. In 2017 Merlin
announced a partnership to open
attractions in all territories excluding
the UK.
The first Peppa Pig World of Play opened in
October 2018 in the LCM Mall in Pudong,
Shanghai. The attraction boasts ten amazing
play areas, each recognisable from the much
loved TV series, including Peppa’s Family
Home, Madame Gazelle’s School Bus,
Peppa’s Treehouse and Rebecca Rabbit’s
Underground Adventure.
We have plans to open further Peppa Pig
World of Play sites at locations in China and
the USA during 2019, with hopefully many
more to come in the future.
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Q & A – O P E R A T I N G G R O U P S
VIEWS FROM OUR OPER ATING
GROUP LEADERS
23
RESORT
THEME PARKS
LEGOL AND
PARKS
MIDWAY
AT TR ACTIONS
Fiona Eastwood
Hans Aksel Pedersen
Nick Mackenzie
Q. What is your best guest story of 2018?
Q. How do you see the marketplace changing and your
It’s always great to receive feedback from guests and one that really
stands out for me relates to a mum visiting Alton Towers Resort with
her autistic son. She wrote to thank the team for the way they made time
for her son; sitting with him to answer all of his questions and providing
exciting facts at Alton’s SEA LIFE which made him feel important. She
said that her son’s confidence had grown due to the kindness and amount
of time the staff had spent with him. She ended with a comment that it’s
clear the team there love what they do. This to me epitomises what we
do and the difference our team can make in delivering amazing,
memorable experiences.
Q. What were your key achievements in 2018?
As well as delivering a strong trading performance on the back of great
new product offering and smart marketing, for example, on local season
passes as part of our strategy to build loyalty, drive revenue and hedge
against weather, it would be how we delight our guests as evidenced by
our continued high guest satisfaction across our resorts.
position in it?
We have the challenge of operating in a world that’s rapidly changing;
with a plethora of choice for thrill-seekers and young adults from
pop-ups to increased escapism from in-home entertainment. With
pressure on families to find time to be together and escape the ‘day to
day’, our role is to deliver unmissable, memorable experiences that tap
into the fear of missing out amongst the teen and young adult
demographic and deliver on togetherness and escapism for families. In
doing this, we need to ensure we have a strong digital customer journey
to delight our guests from the ‘hello’ to the ‘goodbye’ and everything in
between. We see the potential for growth in the family short break and
‘staycation’ market, where we will continue to transform our parks into
resorts by building our unique themed accommodation.
Q. What are you proudest of in 2018?
Q. What are your key achievements in 2018?
During 2018 one of our main achievements was to significantly increase
our accommodation offering, opening new hotels at three resorts in
Germany, Japan and the USA. At LEGOLAND California, for example,
we doubled the on-site accommodation capacity with the new 250 room
LEGOLAND Castle Hotel. With an overall guest satisfaction score of
93%, we are proud to share one typical comment – ‘I cannot rate this
place highly enough! Give yourselves a round of applause because your
ability to make us feel so welcomed, special and all the amenities your
hotel provided was simply spectacular!’.
Q. How do you see the marketplace changing and your position in it?
We are aware that competition is fierce so we need to aim to beat our
best performance every day. This comes from a combination of both the
product offering and how our staff interact with guests. If guests come
for their first visit and we ‘blow their socks off’ then they will return –
the challenge is then to keep up that level of performance for their
second visit and hopefully many more to come. Memorable experiences
still reign and Merlin delivers these unique family experiences through
exceptional staff and high quality attractions. Luckily our business is built
on LEGO play, fun and imagination, and we’ll probably not run out of that
any day soon!
Midway London is our largest division so it was reassuring to see growth
in the cluster in the second half of the year, as visitors return to London
following the suppressed trading we saw in 2017 after the terror
incidents early in that year. Similarly, in Istanbul, another location where
there have been security concerns in recent years, our cluster of three
attractions reported strong growth, confirming our view of the long
term potential of that exciting marketplace.
Q. What are you proudest of in 2018?
Ever since Merlin acquired Living and Leisure Australia in 2012, and
reflecting our long held view that cetaceans should not be kept in
captivity, we have been committed to finding a sustainable solution to the
long term care of the beluga whales we inherited at Changfeng Ocean
World in Shanghai. So it was great that in June 2018 we confirmed that in
early 2019 we will hand over the care of ‘Little Grey’ and ‘Little White’ to
our partner charity, the SEA LIFE Trust, at the world’s first beluga whale
sanctuary, now being constructed at a small bay on the south coast of
Iceland. We will be telling the amazing story of their journey throughout
the SEA LIFE estate in 2019, as they move to a more natural and wild
habitat – hopefully somewhere that more belugas currently housed in
aquariums will call home in the future.
Q. What are you and your team most excited about in 2019?
Q. What are you and your team most excited about in 2019?
In 2019 we open ‘The LEGO Movie World’ at LEGOLAND Florida
Resort – based on the first LEGO movie and the 2019 sequel that hits
cinemas around the world from February. This state of the art
experience will put guests right in the middle of Bricksburg, the city
where Emmet lives in the movies, featuring two new rides, the chance to
meet the characters from the movies, a giant themed playscape, and the
complete transformation of an existing interactive boat ride. The sights
and sounds will be fully immersive, bringing the movie franchise to life in a
way that only a LEGOLAND park could. This is a significant investment
at LEGOLAND Florida and the first of what we plan to be a global roll
out of a programme of ‘LEGO Movie Worlds’ in the coming years.
There is a wide range of great products this year that really show the
breadth of what Midway offers. At SEA LIFE Sydney Aquarium there will
be a full year’s trading from the ‘Day and Night on the Reef’, recreating
the wonders of that unique habitat across 24 hours of the day. At
SEA LIFE Bangkok Ocean World we will see a new ice themed penguin
attraction, while Madame Tussauds New York will showcase the best of
Andrew Lloyd Webber’s Broadway musicals, as we take guests on a fully
immersive journey through the magical world of Broadway. Finally, we
are looking forward to ‘The LEGO Movie 2: The Second Part’, where our
LEGOLAND Discovery Centres will have movie themed events across
the estate.
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25
Q & A – M M M A N D N E W O P E N I N G S
UNIQUE SKILLS THAT
SUPPORT OUR STR ATEGY
MERLIN MAGIC
MAKING
Mark Fisher
Q. What are the challenges you face and how are you responding?
There are always new entrants into our marketplace with competitors
bringing new ideas and formats. So we continue to undertake significant
product research and development to make sure we stay competitive,
including launching specific projects to invest in new concepts and work
with up and coming businesses.
Within our teams we also look to unlock even more of our potential – a
large part of the MMM team are highly skilled creative people such as
designers, sculptors or hair stylists and colourists and in 2018 we have
taken the opportunity to determine how we can tap into these skills to
create new and exciting products to intrigue and enthral our guests. For
example, we can make lifelike masks that allow actors to walk amongst
our guests – creating gasps as a buzz flies around the attraction…and
then Harry and Meghan appear!
Q. What is your best guest story of 2018?
MMM is all about creating something new for guests, so I always like
seeing people’s reactions when they see something we have created for
the first time. In 2018 we welcomed the first guests to The Bear Grylls
Adventure in Birmingham and loved hearing them say ‘Wow!’ when they
first entered the attraction – no wonder the guest satisfaction scores so
far are so high!
A second example is where we can take our highly developed skills and
match them to new technology to create a new amazing experience for
guests, such as at Madame Tussauds London where we introduced a
talking and gesticulating Donald Trump. It is extremely satisfying to unveil
a figure and see every person reaching for their phone to take a picture
and then a selfie to prove to their friends and family that they were there!
MERLIN MAGIC MAKING (MMM) –
THE UNIQUE RESOURCE SITTING AT THE HEART OF
MERLIN, SUPPORTING ALL OUR ATTRACTIONS WITH
SPECIALISTS IN FOUR AREAS
Finding the magic
Utilising consumer insight and research, MMM’s experienced research
teams find new business opportunities, ranging from the strategic roll
out of the Midway estate to potential acquisitions.
Creating the magic
Driving innovation across the Group, MMM creates high-class
compelling propositions across the existing estate and new attractions.
This includes creating Merlin’s very own in-house Intellectual Property
(IP) and working with IP partners on new concepts.
Producing the magic
MMM takes these creative ideas and then uses its in-house production
facilities to produce amazing content for all our attractions across each
Operating Group. MMM makes LEGO models, wax figures and
attraction theming, also working closely with our animal specialists to
ensure that Merlin provides the best animal care possible as we source
creatures for display in our attractions.
Delivering the magic
MMM’s project management teams produce world class attractions for
our guests to enjoy. They deliver all of Merlin’s major existing estate
capital projects and new Midway attractions, the latter being handed
over to the New Openings team who manage the opening and are
responsible for operations in the first 18 to 24 months of trading.
Q. What are you and your team most excited about in 2019?
There are almost too many to highlight! A big piece of ‘new news’ will be
the launch of Colossos at Heide Park, featuring an epic 25 metres long
fiery creature that’s tangled itself up with the roller coaster. Each time a
train passes the iconic creature it reacts with a surge of spectacular
anger, spewing fiery smoke from its eyes and mouth and shooting eight
metre flames from its head!
We’re also very excited about our continued investment into our
uniquely themed accommodation with the launch of the Magic Hotel at
Gardaland. We will also see the new Dungeon at Alton Towers, the start
of ‘The LEGO Movie World’ roll out at LEGOLAND Florida, and more
Peppa Pig World of Plays as that new IP-branded attraction format
expands across China and the USA.
NEW
OPENINGS
John Jakobsen
Q. What is your best guest story of 2018?
I walked with a group of young Chinese visitors through our new
Dungeon attraction on Nanjing Road in Shanghai. It was fantastic to see
how the Dungeon idea of Scary Fun certainly also works with our
Chinese audience – there was a combination of screams and laughter, just
as there should be! Two hours before that I was watching two to four
year olds and their parents enjoying Peppa Pig World of Play and wishing
I had brought my two year old granddaughter. This was a great reminder
of the variety we have in our portfolio of brands and how Merlin is able
to nurture our own IPs as well as turn other IPs into successful location
based entertainment offerings.
Q. What were your key achievements in 2018?
We managed seven new openings in 2018. Five of these openings were
either new brands or in markets where we had not opened that brand
before. Five of the openings also took place over a short period in
September and October, which was a challenge to achieve. But it all
worked very well and we got great collaboration not just from within the
New Openings team, but also from many parts of the Group who came
to support these openings.
Q. How do you see the marketplace changing and your
position in it?
We obviously see consumers spending more and more time in front of
screens. At the same time there is – and always will be – a demand for
spending time together as a family. The families are very critical and
selective about the location based entertainment experiences they
choose. Merlin’s well-established brands and our ability to work with
IP holders make us well positioned at the top of the list for
consumers’ choices.
NEW OPENINGS –
A SPEC IALIST TE AM WITH T WO
ARE AS OF FOCUS
Opening new LEGOLAND parks
Utilising our experience of opening LEGOLAND parks and leveraging
our strong relationship with LEGO, New Openings locate potential
new sites and provide consultancy services to potential new
business partners.
They then work closely with civic and development bodies, negotiate
construction and development contracts, and manage the multi-year
build process.
Finally they set up park operations and recruit teams, before opening
and operating the park for the post opening period.
Opening new Midway attractions
New Openings use these same skills to take over a completed
attraction from MMM before managing the opening and operating the
attraction for the first 18 to 24 months of trading.
Q. What are you and your team most excited about in 2019?
2019 will be a busy year on many fronts! On the LEGOLAND parks side
we will have an intense period for LEGOLAND New York which is under
construction. This project will go from its current 15 staff members and
then ramp up to about 1,000 when we open in early 2020. At the same
time, we will be getting construction under way in Korea – and probably
lining up for our first park in China.
We are also very excited about our strong Midway openings schedule.
We plan to open LEGOLAND Discovery Centres and SEA LIFE Centres
across a number of USA and Asia locations, while at the same time
continuing the expansion with more Peppa Pig World of Play attractions
in China and the USA.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONSTRATEGIC REPORT 26
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F I N A N C I A L A N D O P E R A T I N G R E V I E W
INVESTING FOR THE
FUTURE
WE CONTIN U E TO INVEST
C APITAL WHERE WE ANTICIPATE
GOOD LONG TERM RE TU RN S ,
WHILE AL SO MAKING
PROGRES S ON OU R
PRODUCTIVIT Y AGENDA .
+9.7%
O PE R ATI N G F R E E
C A S H F LOW
+11.7%
A DJ U STE D E P S
G ROW TH
Introduction
In 2018 the Group’s trading performance reflected the diverse nature of
Merlin’s portfolio, with overall growth driven by our new business
development activity and the strong demand for our themed accommodation
offering. In a challenging cost environment we mitigated many of those
pressures, and made progress on our Productivity Agenda that we believe will
deliver cost savings and efficiency benefits in years to come. We continued to
invest capital both in the existing estate where returns are generated
immediately, as well as our Midway roll out and LEGOLAND park
developments where trading profits and cash flow will be seen in future years.
Presentation of results
Revenue and trading
In 2018 the Group has adopted IFRS 15, the new accounting standard for
revenue accounting. In the first year of adoption, this change creates an
increase in revenue of £35 million and an equal and opposite increase in cost
of sales. This primarily results from revenue derived from third party
arrangements such as tickets purchased through online travel agents. Under
IFRS 15, and depending on the terms of the relevant contractual arrangements,
Merlin records revenue at the higher amount paid by the visiting customer
rather than the lower amount received by the Group from the intermediary
third party. In addition, Merlin partners with third parties in the operation of
in-attraction offerings such as photo operations and games, where there are
some small changes in revenue, depending on the role of each party in the
operation of those offerings.
There is no adjustment to previously reported 2017 numbers, and a negligible
impact on EBITDA. To aid comparability, growth rates within these reported
results refer to movements excluding the impact of IFRS 15 unless otherwise
stated. Also, and unless otherwise stated, all growth rates are presented on a
constant currency basis, that is, as if the 2018 results were retranslated at 2017
average rates.
Underlying results and exceptional items
Our Productivity Agenda initiatives will together look to streamline and evolve
the Group’s back office and operations. We expect to incur total costs of
approximately £35 million on this programme and plan to see the benefits of
this in lower operating costs with up to £35 million of annualised costs savings
by 2022. In order to present the underlying performance of the business more
accurately, the costs of these initiatives are reported within exceptional items.
Unless otherwise stated, the commentary below refers to underlying results,
that is, before the impact of exceptional items.
Revenue
Reported revenue increased to £1,688 million. Organic revenue growth,
excluding the impact of IFRS 15, was 5.2%, rising to £1,653 million. On a like for
like basis, revenue grew by 1.8%, reflecting growth in the Resort Theme Parks
Operating Group and broadly flat performances in the Midway Attractions
and LEGOLAND Parks Operating Groups.
We made good progress with our new business development. We opened
seven new Midway attractions, which together with the full year benefit of
2017 openings, contributed £11 million to revenue growth. Similarly new
accommodation added £44 million. Study agreements regarding prospective
LEGOLAND parks and the full year effect of LEGOLAND Japan resulted in a
further £2 million contribution to revenue.
EBITDA
Underlying EBITDA increased to £494 million resulting in a margin of 29.9%
(29.3% including the impact of IFRS 15). This increase reflects strong trading
within Resort Theme Parks and the increased accommodation offering across
the theme parks, offset by the cost pressures noted elsewhere.
The cost base at our attractions is relatively fixed in the short term so any
increases and decreases in revenue normally flow through to the operating
result. If revenue is anticipated to fall short of our expectations, we will
implement localised cost management initiatives to protect profitability, as far
as possible. Operating margins are also impacted by underlying uncontrollable
external cost pressures, such as those arising from wage legislation or property
taxes. Our more structural Productivity Agenda initiatives will over time help
mitigate such cost pressures.
Operating Group margins are also affected by the source and mix of revenue
in the existing estate and the dilutive effect of new attractions and
accommodation, which typically have lower margins than the existing estate
and incur costs in the pre-opening period.
Central costs, whilst relatively fixed in nature, will change over time as central
functions evolve to support the increasing breadth and scale of the business.
Net central costs of £46 million were £2 million lower than in 2017. This
reflects increased income in respect of study agreement and consultancy
activities that are accounted for centrally, offset by underlying cost increases.
Foreign exchange
Merlin is exposed to fluctuations in foreign currency exchange rates on
transactions and the translation of our non Sterling earnings. Retranslating 2018
performance at 2017 rates would result in a £25 million benefit to revenue and
a £9 million benefit to EBITDA. We set this out in more detail by major
currency on page 158.
Operating profit
Depreciation and amortisation grew by 12.0% to £167 million reflecting the
impact of continued investment in attractions and accommodation and, in
particular, the opening of LEGOLAND Japan. On a constant currency basis,
underlying operating profit increased by 3.4% to £327 million.
Exceptional items
Exceptional costs of £4 million were incurred in delivering on our Productivity
Agenda, resulting in total operating profit of £323 million. More details on the
exceptional items are set out on page 33.
Revenue (without the adoption of IFRS 15)
Revenue (as reported)
EBITDA
Depreciation and amortisation
Operating profit
Net finance costs
Profit before tax
Taxation
Profit for the year
Earnings per share
ROCE
Operating free cash flow
Leverage on net debt to underlying EBITDA
Total
52 weeks ended
29 December 2018
£m
Underlying
52 weeks ended
29 December 2018
£m
Underlying
52 weeks ended
30 December 2017
£m
1,653
1,688
490
(167)
323
(38)
285
(55)
230
22.5p
1,653
1,688
494
(167)
327
(38)
289
(55)
234
22.9p
8.9%
345
2.4x
1,594
1,594
474
(151)
323
(52)
271
(62)
209
20.5p
9.1%
315
2.4x
Underlying
organic growth
(constant
currency)(1)
5.2%
6.2%
(12.0)%
3.4%
Underlying
growth
(actual
currency)
3.7%
5.9%
4.3%
(10.5)%
1.3%
26.1%
6.5%
11.6%
11.9%
11.7%
9.7%
See ‘How we report our results’ on page 33 for details of how we report our financial performance.
(I) Organic growth represents growth from like for like businesses and new business development at constant currency and accounting standards and excludes growth from acquisitions.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONSTRATEGIC REPORT 28
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F I N A N C I A L A N D O P E R A T I N G R E V I E W
Existing estate performance
Overall, revenue grew by 0.1% on a like for like basis. The improvement in
trends was driven primarily by London which returned to growth in the
second half of the year, following the 2017 terrorist attacks. Our portfolio of
attractions outside of Gateway cities, which comprises predominantly
LEGOLAND Discovery Centres and SEA LIFE Centres saw continued growth,
albeit impacted by the hot summer weather in Northern Europe which
resulted in challenging trading conditions for a number of our attractions. We
expect the non-Gateway city Midway attractions to deliver inflationary growth
over time.
Underlying EBITDA declined by 3.0% on a constant currency basis and
resulted in a margin of 32.3% (31.0% including the effect of IFRS 15). The
decline in margin was driven predominantly by the greater proportion of
investment in openings of new brands or attractions in new markets, together
with a number of non-recurring factors. These included the temporary
closure of the LEGOLAND Discovery Centre in Shanghai due to the
refurbishment of the shopping centre within which it is located and the
non-recurrence of a sales tax rebate received in 2017. Otherwise, the
margin was largely unchanged.
Existing estate capex of £50 million was down slightly from 2017 despite the
increased size of the estate, reflecting the capital allocation decision
communicated in October 2017. This resulted in strong operating free cash
flow conversion of 76% (2017: 77%).
Geographic performance
Merlin has the longer term aim of sourcing revenues equally from Europe, the
Americas and Asia Pacific regions. 2018 performance against this is as follows:
Europe (56% of revenue, 2017: 55%) saw organic revenue growth of 5.0%,
driven by strong trading in the Resort Theme Parks attractions which are all
in Europe.
The Americas (27% of revenue, 2017: 27%) saw organic revenue growth of
6.6%, driven by new Midway attractions and the opening of the 250 room
LEGOLAND California Castle Hotel.
Asia Pacific (17% of revenue, 2017: 18%) grew 3.8% on an organic basis. This is
predominantly due to the opening of new Midway attractions in the region and
the 252 room hotel at LEGOLAND Japan.
Midway Attractions
Midway reported organic revenue growth of 1.1%, driven by the continued roll
out of new attractions and a broadly flat like for like performance.
New business development
Our Midway roll out programme can be segmented into two different types of
investment: our existing brands opening in developed markets, and those
attractions representing either pilots of new brands, or attractions opening in
developing markets or in markets in which Merlin is less established. The two
categories have significantly different profiles, with the latter typically
generating lower short term returns and seeing greater fluctuations in visitor
numbers as we build the brand or establish our presence in the new market.
They are, however, a key part of our pipeline as they provide the platform for
longer term growth and improving returns.
In 2018, we opened seven attractions which, combined with those opened in
2017, contributed an additional £11 million to revenue growth in 2018.
Attractions opened in 2018 comprised LDC Birmingham, the Shanghai
Dungeon, LDC Columbus, Peppa Pig World of Play Shanghai, The Bear Grylls
Adventure Birmingham and Little BIG City Beijing. SEA LIFE Nagoya is
accounted for in the LEGOLAND Parks Operating Group.
Visitors (m)
Revenue (without the adoption of IFRS 15 – £m)
Revenue (as reported – £m)
Underlying EBITDA (£m)
EBITDA margin (%)
Underlying operating profit (£m)
2018
40.4
650
677
210
32.3
139
2017
40.7
656
656
220
33.5
152
Growth
(actual
currency)
Organic growth
(constant
currency)
Like for like
growth
(0.9)%
(1.0)%
3.1%
(4.7)%
1.1%
0.1%
(3.0)%
(8.3)%
(6.9)%
LEGOLAND Parks
LEGOLAND Parks reported organic revenue growth of 6.4% in 2018 as the
roll out of new accommodation offset a broadly flat like for like performance.
A total of 644 new accommodation rooms were opened in 2018, comprising
the 142 room Pirate Island Hotel at LEGOLAND Deutschland, the 252 room
hotel at LEGOLAND Japan and the 250 room LEGOLAND California Castle
Hotel. Combined with the rooms opened in 2017, this resulted in
accommodation revenue growth of 39.7% on a constant currency basis.
On a like for like basis, revenue declined by 0.3%, following several years of
very strong growth which were driven by both well-targeted product
investments and support from LEGO movie releases. Conversely, 2018 saw
limited ‘new news’, reflecting a low point in our capital investment cycle and no
LEGO movies.
Visitors (m)
Revenue (without the adoption of IFRS 15 – £m)
Revenue (as reported – £m)
Underlying EBITDA (£m)
EBITDA margin (%)
Underlying operating profit (£m)
Resort Theme Parks
Resort Theme Parks reported an improved performance in 2018, with organic
revenue growth of 9.1%.
The Operating Group enjoyed strong trading throughout the peak summer
season and the Halloween period which is now one of the most important
trading periods of the year, due to successful product offerings such as
‘Scarefest’ at Alton Towers, resulting in like for like revenue growth of 8.6%.
Our major capex investment at Alton Towers – the ‘Wicker Man’ roller
coaster – drove growth in visitation and revenue per capita, whilst the
introduction of ‘Peppa Pig Lands’ at Heide Park and Gardaland proved similarly
successful, supporting significant growth in the young family and pre-school
markets. Additionally, very favourable weather in both the UK and Continental
Europe allowed for a more positive market backdrop following the difficult
conditions which adversely impacted 2017 performance.
Visitors (m)
Revenue (without the adoption of IFRS 15 – £m)
Revenue (as reported – £m)
Underlying EBITDA (£m)
EBITDA margin (%)
Underlying operating profit (£m)
LEGOLAND Japan, which opened in April 2017, saw improved profitability in
2018. This was due to the non-recurrence of pre-opening costs, the effect of
which more than offset a slight decline in attendance which is typical for new
theme parks, following their opening year. Including the benefit of the new
hotel and SEA LIFE, the resort saw growth in revenue compared to 2017.
Underlying EBITDA grew by 7.7% on a constant currency basis and resulted in
a margin of 38.2% (38.1% including the effect of IFRS 15). The slight
improvement in margin, despite the like for like revenue decline and underlying
cost inflation, is due largely to the uplift related to LEGOLAND Japan following
its opening in April 2017.
Depreciation increased by £9 million primarily relating to LEGOLAND Japan.
Operating free cash flow conversion improved to 81% (2017: 80%) with
existing estate capex of £45 million (2017: £45 million).
2018
15.6
636
637
242
38.2
194
2017
15.3
609
609
230
37.8
191
Growth
(actual
currency)
Organic growth
(constant
currency)
Like for like
growth
2.2%
4.4%
4.6%
5.5%
1.7%
6.4%
(0.3)%
7.7%
3.9%
Accommodation revenue grew by 7.3% on a constant currency basis. This
reflected the full period benefit of the 76 room CBeebies Hotel which opened
in 2017, and continued growth in our existing accommodation.
Underlying EBITDA grew by 23.1% on a constant currency basis and resulted
in a margin of 24.5% (24.0% including the effect of IFRS 15). The margin
increase is a result of continued tight cost control and strong like for like
revenue growth.
Operating free cash flow conversion improved to 59% (2017: 39%) due to
growth in EBITDA and an £8 million reduction in existing estate capex.
2018
11.0
360
367
88
24.5
51
2017
10.0
329
329
72
21.8
36
Growth
(actual
currency)
Organic growth
(constant
currency)
Like for like
growth
9.6%
9.4%
11.5%
22.7%
9.1%
8.6%
23.1%
38.6%
39.9%
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONSTRATEGIC REPORT
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31
F I N A N C I A L A N D O P E R A T I N G R E V I E W
Cash flow
Operating cash flow
Merlin continues to be highly cash generative, delivering operating free cash
flow (being underlying EBITDA less existing estate capital expenditure) of
£345 million in 2018 (2017: £315 million). Net cash flow from operating
activities for the 52 weeks to 29 December 2018 was £450 million
(2017: £413 million).
Financing activities
During the year, we successfully refinanced a significant portion of the Group’s
debt facilities. The issuance of a US Dollar denominated bond, enlarging the
revolving credit facility (RCF) to £600 million from £300 million and utilising
surplus cash on the balance sheet enabled us to repay the existing term loans
which were due to mature in March 2020. At 29 December 2018 £148 million
of the RCF was drawn down (2017: £nil).
Investing activities
A total of £332 million was incurred on capital expenditure in 2018. The total
comprised £149 million invested in the existing estate and £183 million on new
business development (NBD), of which £78 million related to attractions or
accommodation not yet opened. NBD investment represented £88 million in
developing new accommodation across our theme park estate, £60 million in
respect of new Midway attractions that either opened in 2018 or will open in
2019, and £35 million on the longer term investments of developing new
LEGOLAND parks, primarily LEGOLAND New York.
Grants received of £14 million relate to LEGOLAND Korea. The local
government has agreed to support direct funding for the project totalling
KRW 80 billion (£56 million), of which this was the first instalment.
The cash outflow of £220 million on repayment of borrowings
(2017: £132 million inflow) reflects these transactions and the subsequent use
of additional surplus cash to pay down the RCF.
The refinancing has extended our average maturity, as well as providing us
with greater flexibility to finance working capital requirements and capital
investment. All covenant requirements were satisfied throughout the year.
Interest payments of £44 million (2017: £45 million) include the part year impact
of the refinancing.
Merlin’s current loan facilities are detailed in note 4.2 to the financial
statements. Leverage on net debt at the year end equates to 2.4x underlying
EBITDA (2017: 2.4x).
Underlying EBITDA
Exceptional items
Working capital and other movements
Tax paid
Net cash inflow from operating activities
Capital expenditure – existing estate
Capital expenditure – new business development
Grants received
Other investing activities
Proceeds from share capital
Interest paid, net of interest received and settlement of interest rate swaps
Dividends paid
Other
Net cash inflow/(outflow) before refinancing and repayment of borrowings
Refinancing and repayment of borrowings (net)
Net cash (outflow)/inflow for the year
2018
£m
494
(4)
6
(46)
450
(149)
(183)
14
–
6
(44)
(76)
–
18
(220)
(202)
2017
£m
474
–
3
(64)
413
(159)
(177)
–
(12)
8
(45)
(74)
4
(42)
132
90
Financing, tax and dividends
Finance costs
Net finance costs of £38 million were incurred in 2018 (2017: £52 million). The
decrease was due in part to the benefit of closing certain derivative positions
as part of the refinancing which took place during the period, together with the
benefit of foreign exchange movements. The refinancing is explained in more
detail below.
Taxation
The tax charge of £55 million represents an effective tax rate of 19.0% of
underlying profit before tax. This has fallen from 22.9% in 2017, primarily due
to the impact of changes in tax legislation in the USA. Excluding prior year
adjustments, which related primarily to these legislative changes, our effective
tax rate would have been 23.5%.
Significant factors which may impact the Group’s future effective tax rate
include the USA tax reforms, the ability to continue with our current internal
financing arrangements and changes to local or international tax laws.
The international corporate tax environment is becoming ever more complex.
We have seen rapid change in the USA and Europe and international bodies
such as the Organisation for Economic Cooperation and Development
(OECD) have had a significant impact on tax policy. In particular, the
interpretation of tax law, or uncertainties in the application of tax law,
increases the potential for challenges by relevant tax authorities and could lead
to additional tax exposures.
More specifically there is an European Commission (EC) investigation into
the UK’s Controlled Foreign Company rules, where the preliminary finding of
the EC is that this legislation constitutes unlawful State Aid (see note 5.4 to the
financial statements). Like many other UK-based international groups, should
there be a final determination against the UK this may adversely affect
the Group.
Further detail on taxation is provided in note 2.4 to the financial statements.
Dividends
In September 2018 we paid an interim dividend of 2.5 pence per share and the
Board is recommending a final dividend of 5.5 pence per share. This equates to
a full year dividend of 8.0 pence per share and represents growth of 8.1% from
2017. This equates to a payout ratio of 35% of adjusted earnings per share.
When making proposals for the payment of dividends, the Directors consider
the resources available to the Company and its subsidiaries. Specifically, they
have taken account of the Company’s significant distributable profits (see
note vii to the Company financial statements on pages 153 to 154), as well as
the liquidity of the Group.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONSTRATEGIC REPORT 32
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F I N A N C I A L A N D O P E R A T I N G R E V I E W
Net assets
Property, plant and equipment increased by £252 million, primarily reflecting
the capital additions referred to previously, offset by depreciation charges,
together with the retranslation of those assets at different foreign exchange
rates. Further analysis of the working capital movements of £12 million are
provided in note 3.4 to the financial statements.
The increase in reported net debt is primarily due to the impact of foreign
exchange movements on non Sterling borrowings and finance leases.
Further details are provided in the consolidated statement of financial position
on page 102 and the notes to the financial statements on pages 105 to 147.
Return on investment
Reflecting Merlin’s disciplined approach to the use of capital, a variety of
measures are used in assessing financial performance and in appraising
individual projects.
The Board considers Return on Capital Employed (ROCE) to be an important
metric for appraising the Group’s financial performance and uses it in the
remuneration of senior executives. The profit measure used in calculating
ROCE is based on underlying operating profit after tax. The capital employed
element of the calculation is based on average net operating assets which
include all net assets other than deferred tax, derivative financial assets and
liabilities, and net debt.
ROCE in 2018 was 8.9%, which is above our estimated weighted average cost
of capital. The significant investment in attractions or accommodation which
have yet to open, including new LEGOLAND parks, or into attractions which
have yet to mature, such as the new Midway brands or existing brands opening
in new markets, has been a major contributor to the reduction in ROCE in
recent years.
Property, plant and equipment
Goodwill and intangible assets
Investments and other non-current receivables
Working capital
Net debt
Corporate and deferred tax
Employee benefits
Other liabilities
Net assets
2018
£m
2,344
1,028
75
(181)
(1,190)
(190)
(6)
(136)
1,744
2017
£m
2,092
1,018
70
(169)
(1,160)
(175)
(6)
(103)
1,567
Due to the long gestation period of a number of our capital projects, and
Merlin’s aim to create value over the long term, Internal Rate of Return is
employed as the primary criteria for the appraisal of individual projects.
This is supplemented by shorter term measures such as an assessment of
payback period.
Productivity Agenda
Merlin is changing as we evolve our business model and the way we work, and
also in response to the significant cost pressures affecting the business. Our
global Productivity Agenda programme has therefore gathered pace in 2018.
Firstly, we have made progress mobilising the project team in developing our
new cloud based finance system that will be rolled out across the business
from the second half of 2019. This ‘back office’ investment, which includes
better use of technology and automation, will support changes in how the
finance teams support the business in the coming years. Secondly, under the
heading of ‘model evolution’ we have launched initiatives seeking to simplify
and streamline the operations of our smaller Midway attractions and applying
lean continuous improvement principles in our parks. We have also exited
certain non-core smaller Midway attractions.
These activities are partly enabled through capital investment, but also through
incurring certain one-off operating costs. Because these costs do not form part
of the underlying trading of the Group, they are reported within exceptional
items, which totalled £4 million in 2018.
As this programme accelerates, we expect to incur total costs of
approximately £35 million over the periods 2018 through 2021. We anticipate
that these initiatives will generate up to £35 million of annualised savings
by 2022.
Summary
In 2018, as well as reporting a solid trading performance, we have made
progress in a number of areas. We are investing in our people, how we work,
and in our diverse portfolio of assets. Together, these initiatives will all show
returns in the future.
Anne-Francoise Nesmes
Chief Financial Officer
27 February 2019
How we report our results
Financial KPIs and Alternative Performance Measures (APMs) – we adopt certain APMs that in our view help present our trading performance in the most
helpful and meaningful way, and that we use consistently each year. These can be summarised as follows:
• We refer to EBITDA as it is a profit measure we use internally to measure the performance of our attractions. It is the KPI that we feel most appropriately
captures the ongoing ability of our attractions to generate operating cash flows.
• We refer to ‘underlying’ results, which remove the impact of any exceptional items and provide a more direct comparison of trading performance. Details
of exceptional items are provided in note 2.2 to the financial statements.
• We refer to operating free cash flow, which is underlying EBITDA less existing estate capital expenditure and which is then available to contribute to
capital reinvestment to support further growth, service the Group’s debt facilities, settle our tax obligations and provide a return to our shareholders. We
therefore also refer to operating free cash flow conversion, which calculates operating free cash flow as a percentage of underlying EBITDA, thereby
providing insight as to our cash conversion performance.
• To provide a more direct comparison of trading performance in the existing estate, we refer to ‘like for like’ performance. This represents growth between
two years at constant currency and accounting standards, including all businesses owned and operated before the start of the earlier year (2017 in this
Annual Report).
• To provide insight into the Group’s overall performance, including the impact of our new business development programme, we refer to ‘organic growth’.
This represents growth from like for like businesses and new business development at constant currency and accounting standards and excludes growth
from acquisitions.
• In 2018 these adjusted measures mean that the growth in revenue is calculated as if IFRS 15 had not been implemented, so adopting consistent accounting
with 2017. IFRS 15 has had a negligible impact on profit and therefore profit metrics would be unchanged. In our 2019 reporting, both years will reflect the
impact of IFRS 15.
Period under review – in most years we report on a ‘52 week’ period. In certain years an additional week is included to ensure that the statutory financial
year end date stays in line with the end of December. All balance sheet, and therefore cash flow, information is reported as at the statutory year end date.
Reference to financial statements – further information regarding the Group’s segmental analysis; geographical revenues and assets; and certain operating
costs are provided in note 2.1 to the financial statements on pages 109 to 111. Those areas requiring significant judgement in the preparation of the financial
statements are summarised on page 106.
Our financial performance measures are defined in the Glossary on pages 156 to 157. Where relevant they are clearly set out within the consolidated Group
financial statements as shown on pages 100 to 147. Details regarding ROCE are set out within the ‘Other financial information’ section on page 158. The five
year financial record on page 155 contains further information.
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34
35
P R I N C I P A L R I S K S
RISKS AND
UNCERTAINTIES
Internal control and risk management
The Board is responsible for maintaining effective
internal control and risk management systems. It
keeps them under constant review through its
regular monitoring of its sub-committees and
executive management. These activities are
supported by ‘The Merlin Way’, our corporate
values. It is the Board’s aim that these values
should drive good behaviours and actions by
all employees.
Internal control framework
The creation of an effective internal control
framework has been delegated to executive
management by the Board to ensure:
• proper financial records are maintained;
• the Group’s assets are safeguarded;
• compliance with laws, regulations, policies
and procedures including those relating to
health and safety matters; and
• effective and efficient operation of
business processes.
The internal control framework is designed to
manage, rather than eliminate, the risk of failure
to achieve the Group’s objectives and can only
provide reasonable, but not absolute, assurance
against material misstatement or loss.
INTERNAL CONTROL FR AMEWORK
FRAMEWORK ELEMENT
MONITORING PROCESS
Management structure
• Defined reporting lines, accountabilities,
authority levels and duty segregation.
• Principal operating units and functions are
led by Executive Committee members.
• Regular visits to attractions.
• Reporting by internal and external assurance
providers to confirm operation of authority
delegation and duty segregation.
• Leadership teams at each attraction
• Regular review and update of authority levels
and function.
and responsibilities.
Strategic planning, risk management and business performance monitoring
• Annually updated five year strategic plan.
• Business objectives and performance
measures set annually together with
budgets and forecasts.
• Regular business performance reviews.
• Pipeline for new attractions reviewed regularly
to ensure developments are on schedule, new
ideas fit with our brand portfolio and expected
commercial returns are acceptable.
• Reporting and discussion of principal risks
that could prevent strategic plan objectives
being achieved, together with associated
mitigation plans.
• Reporting by executive management at
every Board meeting on business
performance, commercial risks and
opportunities.
• Board review and approval for major
projects.
Policies and procedures
• Policies and procedures in place to
• Compliance reporting by internal and
manage operational, performance and
compliance obligations.
external assurance providers.
• Monitoring to ensure these remain
appropriate as the business grows and
external factors, legislation or regulatory
requirements change.
Internal controls
The most notable internal controls are in the
following areas:
• Operational – to ensure safe, effective and
efficient attraction operation.
• Regular reporting of operational
performance metrics to the Board.
• Health, safety and security – to ensure compliance
• Regular reporting by assurance providers on
with regulatory and legislative requirements.
• Information technology – to ensure a stable
infrastructure platform exists.
• Financial – to support prevention and detection of
financial reporting misstatement or fraud, and
ensuring that day-to-day transactions are accurate.
• Business continuity planning – including escalation
procedures and crisis management protocols that
enable attractions to operate on the occurrence
of adverse events.
the operation of internal controls.
• Reporting by profit protection professionals
to support management in addressing fraud
and theft risks.
• Regular deep dive reviews on treasury,
taxation and IT, with ad-hoc matters covered
as necessary.
• Self-certification by management of
compliance and control issues.
• Whistleblowing policy and independently
operated employee hotline.
Risk appetite
The Group’s risk appetite falls into two distinct
categories:
Compliance risk – the requirement to comply
with legislative or regulatory requirements in all
territories where the Group operates. It includes,
but is not limited to, ride safety, accounting
practices, fraud and bribery, as well as ensuring
compliance with the Group’s values and ethical
principles. In these areas the Board is risk averse
and does not countenance any breaches in
compliance obligations.
Commercial risk – commercial risks are taken to
maximise profitable growth and sustainable
returns, without compromising the health, safety
and security of guests, employees, contractors,
animals or other visitors. They must be aligned with
the Group’s policies on sustainability and the
environment. The Group manages these
commercial risks through an appropriate analysis of
threats and opportunities together with structured
review processes, independent expert opinions
and decision making authority levels. Factors such
as the scale of possible commercial upside, the
potential market size, the quantum of downside
risk and timescales involved may all be relevant to
commercial risk decisions.
Quantitative and qualitative measures ensure
effective governance of the Group’s risk appetite.
Quantitative measures include defined financial
and non-financial targets such as EBITDA,
operating profit, ROCE and customer satisfaction
scores. Qualitative measures consider items such
as reputational impact and compliance with laws
and regulations.
Risk management framework
The risk management framework sets out the
Group’s relevant risk management responsibilities
together with the oversight, monitoring, reporting
and management processes that support those
responsibilities. The key elements are described in
the table alongside.
RISK MANAGEMENT FR AMEWORK
TOP DOWN
Oversight, identification, assessment and mitigation at corporate level
RESPONSIBILITIES
OVERSIGHT – THE BOARD
PROCESSES
• Overall responsibility for risk management and
internal control systems.
• Monitors risks against Group strategy.
• Receives regular updates from the Committees
• Sets strategic objectives and defines risk
noted below.
appetite.
• Provides tone and direction for risk
management processes.
• Annual reporting confirms risk management
policy and compliance with procedures.
MONITORING AND REPORTING – REGULAR UPDATES TO THE BOARD
Health, Safety and Security (HSS)
Committee(1)
Oversight and guidance on management of HSS
risks. Responsible for ensuring compliance with
legislation or industry standards in safeguarding
guests, employees, visitors and contractors.
Audit Committee(1)
Oversight and guidance on financial process risk.
Responsible for assessing the effectiveness of the
Group’s overall approach to risk management
and internal control.
Commercial and Strategic Risk
Management (CSRM) Committee(2)
Oversight and guidance on management of
commercial and strategic risk. Responsible
for the treatment of animals in our care.
• Ongoing review of principal risks and
groupwide risk assessment process.
• Ongoing assessment of whether material
changes in the external landscape or recent
trading trends require alternative approaches
to monitoring and managing risk.
• Members of the various risk committees
regularly receive deep dive updates on topics
of significant risk to the organisation, such as
treasury, taxation, IT security, EU GDPR, the
‘consumer of the future’ and cost inflation in
new business developments.
• Regular reports on assurance programmes
covering financial processes and health, safety
and security controls across the Group.
OPERATING GROUP AND FUNCTIONAL EXECUTIVE MANAGEMENT
• Delivery of strategic direction.
• Identification of significant risks and mitigation
plans for inclusion in the Group risk register.
• Monitoring of significant risk and adequacy
of mitigating actions at attraction and
functional level.
ATTRACTIONS AND FUNCTIONS
• Ongoing reviews of operational risk assessment.
• Quarterly updates provided to the Board to
provide insight into risk management process.
• Execution of strategy.
• Identification of significant risk and mitigating
measures for inclusion in local risk registers.
• Reviews of operational risk assessment of
• Peer review by the senior leadership team
of risk registers to ensure completeness and
accuracy prior to submission to the Operating
Group and executive management teams.
mitigating actions.
BOTTOM UP
Identification, assessment and mitigation at attraction and function level
Notes:
(1) Sub-committee of the Board. See pages 60 to 65 for details of Committee membership and the frequency of meetings.
(2) Delegated responsibility from the Executive Committee. This Committee is chaired by the CFO and meets four times a year, with membership
drawn from the Executive Committee.
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P R I N C I P A L R I S K S
RISKS AND
UNCERTAINTIES C O N T I N U E D
Brexit
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.
Although the Group is headquartered in the UK, the majority of our
customers are in other countries and account for most of our revenue and
cash flow. Our operational activities are generally incorporated and licensed in
the jurisdiction in which they operate, enabling them to adapt to a wide range
of local market influences. As such, our ability to provide services to our
customers in the countries in which we operate, inside or outside the EU, is
unlikely to be significantly affected by Brexit.
To ensure the Group remains in a position to react to the outcome from the
negotiation process, a cross-functional team, led by the Group CFO, has
identified a number of areas in which Brexit might affect the Group’s
operations. If there is no agreement between the UK and the EU, we believe
that the following matters could directly affect our operations:
Effectiveness of risk management and internal control systems
Based on its review of risk management systems, both throughout the year and
annually, the Board is satisfied that the risk management and internal control
systems in place remain effective and confirms that:
• there is an ongoing process for identifying, assessing, managing and
monitoring the Group’s principal risks;
• management’s assessment of the principal risks is considered to be
appropriate and those risks that have the potential to impact liquidity have
been considered in the assessment of the Group’s viability;
• the principal risks and internal control processes have been in place and
considered by management and the Board throughout the year and up to
the date of approval of the Annual Report and Accounts; and
• no significant failings or weaknesses in internal control processes have
been identified.
The Group’s risk management and internal control process in relation to
financial process risk has been documented within the risk management and
internal control section of the Audit Committee Report on pages 72 to 73.
Structural issues – longer term impacts where resolution will require bilateral
or multilateral governmental agreement. The areas of current focus relate to
resolving issues that will arise as a result of:
• tax and tariff relief being lost from not being within the EU tax and trade
treaty umbrella; and
• immigration restrictions limiting access to non-UK staff currently needed to
operate the UK attraction estate.
Plans for 2019-20
The process of designing and implementing new finance systems has started,
acting as the focal point for driving standardisation of business processes and
the automation of transactional activities. This project, combined with the
ongoing roll out of common HR processes and systems, will help improve
consistency and strengthen our internal control framework across
the business.
Transitory issues – short term impacts as a consequence of administrative,
process or market changes, which will unwind over a number of months after
exiting the EU. The principal areas where these transitory issues can occur are:
• delays in the movement of goods and products that disrupt retail, food and
beverage and ride operations, when either sourced directly or through
third party providers in the supply chain; and
• restrictions on the actual availability of goods and products that disrupt
retail, food and beverage and ride operations, when either sourced directly
or through third party providers in the supply chain.
There are also a number of potential consequences of Brexit that are being
considered as both a risk and an opportunity. The areas currently being
considered relate to:
• extreme movements in foreign exchange rates impacting visitation and
underlying costs; and
• UK and European citizens staying at home as a consequence of anticipated
travel friction in the early months following a disorderly exit.
The final matter being considered relates to the impact on future performance
if the Brexit process has a significant impact on the macro-economic climate in
which we operate, in turn impacting the performance of our major European
attractions including those in the UK.
In consideration of the matters noted above, a number of exercises have been
undertaken to identify hot spots, perform analysis of particular contractual
arrangements that could be threatened or become more expensive, assess
increasing costs of duty, and analyse alternative supply options and the volume
and location of inventory holdings across the estate.
PRINC IPAL RISKS AND HE AT MAP
Management has identified the principal risks as set out on pages 38 to 40. The risk committees consider both gross and residual risk. Gross risk reflects the
exposure before mitigation and is used to compare to the previous year as to whether significant risks are stable, increasing or decreasing.
37
Type
KPI(1)
Viability(2)
Responsibility
Appetite driver
Gross trend
Risk
Safety
1
HSS CS
K
Security
2
HSS CS
Innovation, brand
3
development and
customer satisfaction
People availability
4
and expertise
CS
CS
K
K
Competition and Intellectual
5
CS
Property (IP)
External threats to
6
city centres
Availability and delivery of
7
new sites and attractions
Animal welfare
8
IT robustness, technological
9
developments, cyber
security including GDPR
Anti-bribery
10
and corruption
Liquidity/cash flow risk
11
Foreign exchange
12
translation risk
Gross risk trend
CS
CS
CS
CS
FP
FP
FP
V
V
V
HSS Committee
Compliance
HSS Committee
Compliance
CSRM Committee / Operating
Group Managing Directors
Commercial
CSRM Committee /
HR Director
CSRM Committee /
Chief Development Officer
Commercial
Commercial
CSRM Committee / Operating
Group Managing Directors
Commercial
CSRM Committee /
Chief Development Officer
CSRM Committee /
Divisional Director, CWE
CSRM Committee /
Chief Digital Marketing and
Information Officer
Audit Committee /
General Counsel
Audit Committee /
Chief Financial Officer
Audit Committee /
Chief Financial Officer
Commercial
Compliance
Commercial
Compliance
Compliance
Commercial
Commercial
Increasing
risk
Decreasing
risk
Stable
Notes:
(1) Health and safety, customer satisfaction and employee engagement are Merlin’s non-financial key performance indicators.
(2) Risk that was considered for the viability assessment as detailed on page 41.
Risk type
HSS
CS
FP
Health, safety and security risk
Commercial and strategic risk
Financial process risk
The heat map sets out the residual risk once the impact, likelihood and
effectiveness of existing controls have been taken into account. Risks are
assessed with reference to safety, financial, commercial and reputational
impacts on the business.
The only change in the risk trends in 2018 is the security risk moving from
increasing to stable. This reflects the fact that during 2018 there was no
increased terrorist activity in the locations where the Group operates.
High
11
5
8
3
2
7
1
9
10
6
4
t
c
a
p
m
i
l
a
i
t
n
e
t
o
P
Increasing risk
Decreasing risk
Stable risk
12
Low
Low
Likelihood/Frequency
High
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P R I N C I P A L R I S K S
RISKS AND
UNCERTAINTIES C O N T I N U E D
High growth
Strong brands
High return
Global portfolio
39
Description
How risks are managed
Risk
Description
How risks are managed
Risk
1 Safety
Serious incidents leading to guests, staff members
or contractors being harmed as a result of:
• a failure to follow safety management systems
when operating rides;
• inadequate maintenance and management of
buildings, infrastructure and vegetation; or
• substandard build quality, asset degradation,
• Regular performance reviews.
• Proactive ownership of HSS risks by line management.
• Competent operational and engineering staff monitor
and inspect facilities in accordance with a planned
programme, backed up by professional HSS teams.
• Annual risk register and action planning processes by
each attraction.
fire, flood, storm or utility failure.
• Regular internal and independent external auditing
2 Security
Reduction in guest confidence to visit the Group’s
attractions as a result of sabotage or a terrorist attack
on a ride or attraction leading to a guest or staff
member or animal in our care being harmed.
and review regimes.
• Contractor selection, approval and monitoring by
in-house qualified project managers.
• Board Committee established with specific mandate for
this risk area.
• Detailed security protocols before guests or employees
access an attraction (e.g. bag searches).
• Regular infrastructure reviews to reduce the
opportunity for physical threats to guests, staff
or animals.
• Extensive use of CCTV.
• Regularly tested major incident management plans.
• Current events vigilantly monitored to identify
emerging risks.
• Co-operation with local and national security forces.
• Appropriate insurance cover.
• Board Committee established with specific mandate for
this risk area.
3 Innovation, brand development
and customer satisfaction
4 People availability and expertise
Our growth potential could be impacted if guests:
• consider our offerings are outdated, no longer
relevant or enjoyable; or
• Customer feedback collected at every location and
analysed against challenging satisfaction targets.
Actions then taken accordingly.
• provide negative social media comments that
• Ongoing investment in our attractions to continually
adversely influence the likelihood of a customer
to visit an attraction.
refresh the customer experience.
• Engagement with the public and on social media to
take any requisite action.
The increasing cost and challenge of attracting
and retaining appropriately experienced and
well-motivated customer service orientated
staff could impact:
• guest satisfaction; or
• the successful delivery of planned future expansion.
• Driving greater productivity to ensure more motivated,
better rewarded employees.
• Personal development plans across the business to
encourage long term employment stability.
• Proactively managed succession planning processes
embedded across the Group.
• Annual employee survey to monitor employee
engagement and identify opportunities to develop
HR policies and processes.
5 Competition and Intellectual
Property (IP)
• Competition – for leisure time; from new or existing
providers of location based entertainment; and
for IP around which compelling propositions
are created.
• Withdrawal of permission to use third party IP
content where contractual obligations are not met
or partner relationships are not managed effectively.
• Diversification of the portfolio.
• Ongoing investment to ensure continued appeal
to visitors.
• Competitor research and monitoring.
• Dedicated in-house creative team to deliver new
and innovative compelling propositions and IP.
• Proactive management of IP partnerships.
6 Commercial impact of external
threats to city centres leading
to displacement of tourists
7 Availability and delivery of new
sites and attractions
8 Animal welfare
• Personal security concerns that flow from terrorist
activity result in falling visitation to a location in
which the Group operates, with displacement
of both international and domestic tourists.
• Exchange rate volatility can have a positive or
adverse impact on inbound tourism. If exchange
rates work against a country in which the Group
generates significant revenue this can adversely
impact visitation.
• Increased geographical hedging as a result of further
global diversification.
• Ability to direct marketing and promotional activity
towards domestic or international audiences depending
on tourism trends.
• Ability to promote access to a wide portfolio of
attractions using annual pass or cluster ticketing.
The ability of the Group to grow in line with strategic
objectives could be inhibited by the lack of:
• economically viable sites to locate Midway
attractions and LEGOLAND parks; and
• timely approval of planning consent required
for building new rides and attractions.
• Experienced site search and business development
teams, working several years in advance to maintain
a strong pipeline of opportunities.
• Sites regularly update development masterplans and
work closely on fostering links with local communities
and planning authorities.
• The New Openings team provides dedicated resources
to support the Group’s roll out strategy.
Incidents or staff behaviours leading to animals in our
care being harmed as a result of:
• a failure to follow prescribed welfare protocols; or
• inadequate maintenance and management of
• External zoo licence audits.
• An internal ethics committee and the SEA LIFE
Conservation, Welfare and Engagement team monitor
the treatment of animals.
buildings, infrastructure and vegetation.
• A comprehensive range of policies, standards,
procedures and guidelines.
• Training programmes for all staff who interact
with animals.
• Planned preventative maintenance programmes to
ensure buildings, infrastructure and vegetation remain
suitable for displaying the animals in our care.
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P R I N C I P A L R I S K S
RISKS AND
UNCERTAINTIES C O N T I N U E D
Risk
Description
How risks are managed
9 IT robustness, technological
developments, cyber security
including GDPR
The Group operates various IT systems and
applications, the obsolescence or failure of which could
impede trading or the ability to operate an attraction.
10 Anti-bribery and corruption
11 Liquidity/cash flow risk
Without the technical developments necessary to
meet consumer or business expectations, the Group
may fail to deliver the growth required by the
business strategy.
Failure to put in place adequate preventative measures,
if attacked, could lead to data loss or inability to use the
IT systems for a prolonged period or loss of personal
data resulting in a GDPR compliance investigation.
While Merlin’s business model is lower risk as the
majority of transactions are of low value and typically
from individual customers, a number of the territories
in which Merlin is operating and proposing to enter
have a greater historic propensity for incidents of
bribery and corruption.
Any such incident could lead to criminal or civil
prosecution, fines and cause reputational damage
to the Group.
A lack of liquidity could inhibit the ability of the Group
to grow in line with the strategic objectives if:
• insufficient cash is generated during peak trading
periods to cover fixed costs, interest and tax
payments and capital investments (including
strategic acquisitions, the roll out of Midway
attractions, the development of new LEGOLAND
parks and new accommodation offerings); and
• changes in the global credit market impact the
Group’s long term ability to meet current
growth targets.
• Strategic focus to ensure the long term stability of
operating systems and data security, whilst keeping pace
with changing consumer IT expectations.
• Increasing resilience and stability of IT infrastructure and
security through an expanded use of secured hosting
partners and penetration testing regimes.
• Further security measures to mitigate the increasing
threat of cyber security risk.
• A number of data protection policies are in place to
protect the privacy rights of individuals in accordance
with relevant data protection legislation.
• Independent assessment of compliance arrangements.
• A well-embedded corporate culture in which fraud and
bribery at any level are not tolerated.
• Global fraud and bribery training programmes and a
fraud policy sign-off for all staff.
• Effective financial and contractual controls with regard
to procurement activities.
• Internal audit monitors purchasing processes on a
rotational basis.
• A separate profit protection team monitors for theft
or other criminal activity across the Group and ensures
best practice for protection is shared between sites.
• A whistleblowing policy is in place together with an
independently operated employee hotline.
• A committed £600 million multi-currency revolving
credit facility assists with liquidity and seasonal cash flow
requirements.
• Review of weekly cash flow forecasts covering a period
of 12 weeks assists planning for short term liquidity.
• Strategic plans cover at least four future years and are
reviewed regularly to ensure sufficient financial
headroom exists and to meet the covenant tests set out
in the Group’s banking facilities.
• Merlin maintains strong relationships with a number of
lenders and keeps the debt markets under review in
order to ensure that funding can be obtained at the
right time and at the right price to ensure the availability
of funds to meet strategic growth plans.
12 Foreign exchange translation risk
Merlin generates its main profits in Sterling, Euros
and US Dollars and has long term debt in Euros and
US Dollars.
• The Group presents constant currency figures where
appropriate to show underlying results excluding the
impact of translation differences.
Merlin reports its results in Sterling and is therefore
subject to translation risk from exchange rate
fluctuations when reporting its consolidated results.
• Treasury policies in place and reviewed annually with
regular reviews of currency exposures.
• Broad match of borrowings in the currencies of
underlying profits.
• Currency exposures hedged where appropriate.
41
The results take into account the controls implemented by the Group as well
as the availability and likely effectiveness of specific mitigating actions that could
be taken to avoid or reduce the impact or occurrence of the identified
underlying risks.
The diversification of the Group’s attractions helps minimise the risk of serious
business interruption for many of its risks, for example, extreme weather
conditions or changing economic and political environments. Additionally, a
significant portion of planned spending on both the existing estate and for new
business development is discretionary in nature, which gives the Group
flexibility to manage cash flows. This ability to flex the cost base and rephase
or delay capital investment provides some protection to our viability in the face
of macro events or uncertainty not in the Group’s control.
Access to financing
During the year the Group refinanced a significant portion of its long term
debt, issuing $400 million US Dollar denominated 5.75% senior notes due
June 2026 and increasing its revolving multi-currency credit facility from
£300 million to £600 million with the repayment date extended to April 2023.
The proceeds and surplus cash were used to repay the £250 million of Sterling
and $540 million of US Dollar denominated term loans due to mature in
March 2020. The remainder of the Group’s facilities are a bond in the form of
€700 million seven year notes with a coupon rate of 2.75% to mature in March
2022. Taking into account Merlin’s profitability and financial position, it is
anticipated that the Group will be able to refinance these facilities. The Group
will undertake a process to extend or replace all facilities well in advance of the
expiry date and therefore the Group does not consider there to be any
material impact on the viability assessment.
Viability Statement
In accordance with provision C.2.2 of the UK Corporate Governance Code
2016, the Directors have assessed the viability of the Group over a future four
year period, taking into account the Group’s current position and the potential
impact of the principal risks documented on pages 37 to 40 of the Annual
Report. Based on this assessment, the Directors confirm that they have a
reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the period until
December 2022.
Review period
The Group has a well-established portfolio of attractions that have
demonstrated their longevity and ability to evolve over time. Additionally, the
Group is expanding its portfolio with existing and new brands as well as
expanding into new markets. Our proven profitability, ability to generate
operating cash flows, and access to long term funding give us confidence as to
the Group’s long term prospects.
The Group’s strategic planning process occurs annually on a rolling basis, in the
middle of the year, covering the current year plus four further years. It is then
reviewed as necessary to take into account the Group’s latest view of
market conditions.
The strategic plan considers all elements of the Group’s growth strategy. It
focuses on:
• capital investment in the existing estate, where the review period matches
or is in excess of pre-determined capital investment cycles;
• new business development including the roll out of Midway attractions;
• the development of committed new LEGOLAND parks; and
• the expansion of our accommodation portfolio.
The Group also considers strategic acquisition opportunities and other
uncommitted potential major capital projects within the plan period to assess
the availability of appropriate funding. Accordingly, the Directors have
determined that a four year period to December 2022 is an appropriate
period over which to provide the Group’s Viability Statement.
Risk assessment
The Board also carried out a robust assessment of the principal risks facing the
Group, including those that would threaten its growth drivers, future
performance, solvency or liquidity, as well as the Group’s approach to risk
management as set out in this Strategic Report. The outputs from these
reviews were then used to perform liquidity and debt covenant headroom
analysis, including a downside sensitivity review based on principal risks.
While the review has considered all the principal risks identified by the Group,
severe but plausible events were focused on for enhanced stress testing.
Examples include:
• ride safety incidents; and
• security related incidents including acts of terrorism and/or the impact of
the threat of terrorism on consumer behaviours.
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P E O P L E
TEAM MERLIN
43
W W TK – our employee
sur vey
We recognise the contribution our people make to our success
We understand the importance of recognition and encourage local attractions
to ensure they are recognising their teams appropriately. Our STAR
recognition programme continues to be our global programme for recognising
behaviour and performance that truly embody our values. This year almost
140,000 STARs were sent across the globe, contributing to more than
800,000 STARs that have been sent since the scheme was launched seven
years ago.
We also innovate in this area. In 2018 the LEGOLAND Florida Resort
launched ‘You Earned It’, a platform resort employees can use to recognise
colleagues for performance and behaviour linked to our Merlin values by
sending them points which can be redeemed for customised rewards. There is
a ‘real-time’ activity feed enabling colleagues to amplify anyone’s post by adding
a ‘High-5’, as well as ‘Behaviour Bonuses’ which are for specific challenges or
goals, either for the whole attraction or at department level. LEGOLAND
Florida saw an increase in a number of recognition based questions in the 2018
‘Wizard Wants to Know’ survey with comments from employees such as “You
Earned It has so far been an awesome incentive tool”, “You Earned It…makes
me feel the company cares about creating a fun environment” and
“You Earned It has helped create a most positive working environment”.
WE KNOW THAT THE MORE ENGAGED OU R E M PLOYEES
ARE , THE B E T TER OU R GU ESTS’ E XPERIENCE WILL B E .
THAT’ S WHY E M PLOYEE ENGAGE MENT CONTIN U ES TO
B E A KE Y ARE A OF FOCU S , AND WHY WE’ RE SO PROU D
THAT OU R ENGAGE MENT LE VEL S CONTIN U E TO B E
S IGNIFIC ANTLY AHE AD OF GLOBAL B ENCHMARKS .
We value our people – employee engagement
Employee engagement continues to be a key focus area for Merlin. Our annual
employee survey, ‘The Wizard Wants to Know’ (WWTK), is the perfect
opportunity for Team Merlin to tell us how we’re doing, how they are feeling
and what they need to feel more engaged and happy at work. Our latest
results confirm that our levels of employee engagement remain significantly
above the global benchmarks. We’re very proud of this, especially the 95%
response rate, with overall engagement remaining at 86%.
We constantly want to improve though and each team has created their own
action plan focusing on improving the areas that are most important to them.
Additionally, each of our businesses has a ‘Your Voice Counts’ (YVC) forum
for discussing local issues which would benefit the attraction. With the
introduction of the ‘Employee Voice’ as part of the 2018 UK Corporate
Governance requirements, from 2019 these local forums will now have the
opportunity to discuss important topics with a member of the Board on an
annual basis with the establishment of the ‘UK Your Voice Counts’ information
sharing meeting.
RESPON SE R ATE
95%
94%
96%
“ I ENJOY WORKING HERE”
“ I AM ENCOUR AGED
TO MINIMISE RISKS AND
EN SURE A SAFE WORKING
ENVIRONMENT FOR
COLLE AGUES AND
CUSTOMERS”
95%
“ I AM CLE AR ABOUT
WHAT I AM E XPECTED
TO ACHIEVE IN MY JOB”
86%
ENGAGEMENT INDE X
We embrace diversity and inclusivity
Offering an inclusive working environment, where
difference is valued, is a crucial part of our strategy, so
we are committed to ensuring that diverse groups are
fully and properly represented at all levels of our
organisation. We strive to ensure we have the best
people for every role, regardless of gender, race,
disability, sexual orientation, or any other factor.
At Board level we are achieving a good level of
diversity. A recent report by Hampton-Alexander
ranked us seventh out of FTSE 250 companies for
Board gender diversity, with 44% of our Board
members being women. Our Board members are also
made up of a number of nationalities, reflecting our
geographical spread, and bring a range of experience
over industry sectors.
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We’ve also made progress this year at the Executive Committee level with
three of our 12 Executive Committee members now being women.
Of our management positions (General Managers up to and including the
Executive Committee) 157 (37%) are female and 268 (63%) are male. This is
an increase from 2017 when we had 137 (34%) women. We have once again
increased the percentage of female permanent employees by 2% to 50%
(2018: 4,532, 2017: 4,182). Although improvements have been made, we want
to increase the percentage of female staff in all areas and at all levels.
Gender pay gap
During the year Merlin completed its first gender pay gap report for UK
employees, under the new UK gender pay gap reporting rules. This identifies
differences in pay between men and women. For the latest available reporting
period to 5 April 2017, Merlin’s mean gender pay gap (calculated as the
difference between the average hourly pay of men and women as a percentage
of the average hourly pay of men) was 16.55%. The median gender pay gap,
(the difference between the hourly pay of an employee in the middle of the
range of male wages and an employee in the middle of the range of female
wages), was 2.60%. Both figures were better than the UK average. The key
reasons behind our gender pay gap are:
• lower numbers of female representation in senior, higher paid roles;
• relatively large populations of employees in traditionally male-dominated
roles, for example, engineering staff and electricians; and
• a large proportion of females taking up roles with greater flexibility in
working hours, such as housekeepers.
We are proud of the inclusive environment we create for all the people who
work at Merlin and are actively encouraging and promoting more females into
senior roles. This has included Board level sponsorship of Merlin’s women
leadership programme ‘Women@Merlin’. Where possible, we encourage
greater female participation in occupations such as engineering where there
are proportionally fewer female employees, and host a number of initiatives to
educate and inspire career progression within Merlin among female staff.
Managing inclusively
During the year, we introduced a new development programme for managers
called ‘Managing Inclusively’, designed to recognise biases, understand their
effect on employees and provide direction on how to deal with bias in the
workplace. Managers across the UK, USA, Dubai and Europe attended, and
we plan to extend this within our Asia Pacific sites in 2019. We have seen
positive responses to the question ‘I can be myself at Merlin’ asked as part of
‘The Wizard Wants to Know’ survey, which increased from 78% in 2017 to
82% in 2018.
A great example of our efforts in this area comes from our Midway attractions
in Australia and New Zealand. Our employees there are proud to work where
diversity and equality are recognised and embraced, so they celebrate this for a
specific week each year in March. Employees take part in a number of initiatives
such as International Women’s Day and international food fairs to acknowledge
and celebrate the contributions different groups make to the workplace and
society more broadly. In some years the week culminates in Merlin entering a
float in the annual ‘Sydney Gay and Lesbian Mardi Gras Parade’ where the
teams raise awareness and funds for Merlin’s Magic Wand and Positive Kids
Camp Goodtime, a charity which supports children whose lives have been
affected by HIV.
We inspire careers
We are extremely proud to have many success
stories which demonstrate how we are
working towards being a truly global employer.
The depth and breadth of roles within our
attractions, our creative teams and our central
functions give many opportunities for
our employees.
Kathy Bagshaw
Following a number of positions in
entertainments and operations before moving
on to operational leadership roles across both
the UK and USA, Kathy, our recently appointed
Group Product Excellence leader, reports
directly to the CEO. She is based in California,
illustrating the cross-functional, cross-border
journey you can undertake in our organisation.
Sandra Hazel
The Group Head of our ‘Being a Force for
Good’ responsibility initiatives reports directly
to our Group HR Director, having started her
career on the Merlin graduate programme
before gaining experience in operational roles.
45
We develop potential
Our New Openings division is now structured
across multiple continents, supporting the business
wherever it is required – illustrating that for the
right talent, regional and global careers don’t have
to be restricted by where you live.
Developing our people has always been a real
focus to ensure we deliver memorable experiences
for our guests and support our growth ambitions.
Encouraging individuals to take ownership of their
own development is a critical part of their career
journey. Our role is to provide the direction, the
tools and the opportunities to learn and grow as
they build their Merlin careers.
At a Group level, the focus in 2018 has been on
enhancing development in two key areas. In
operations, our programmes are targeted towards
the General Managers of the future with a series of
global, interactive webinars, projects and activities
which focus on the key areas of a high performing
General Manager. Our ‘Marketing the Magic the
Merlin Way’ programme continues to support our
marketing community through understanding the
specific capabilities needed for success. We have
now engaged general management and other
groups with this programme, to further expand
our marketing capability across the organisation.
We have also introduced two functional
development programmes in two key
commercial areas:
• ‘Finance for Non Finance Managers’ – a virtual
programme to focus on improving the financial
understanding of our current and future
leaders.
• ‘Project Management’ – uses a virtual platform
to focus on improving a core capability required
in our ever-changing and evolving organisation.
These online programmes show the direction for
future career development at Merlin, enabling the
delivery of more effective, real-time learning over
the coming years.
Accelerate Graduate programme
We are really proud of our Accelerate Graduate
programme which has been a source of great
talent for Merlin over the last 13 years that it has
been running. The focus in 2018 was on developing
the latest intake’s skills in their current work
streams, which has had great success, seeing our
graduates fast track their career across Merlin and
in many instances taking up placements within
some of our new brands. The current intake will
rotate into their final placement in March 2019
before securing permanent placements later in
the year. Accelerate alumni go from strength
to strength with many of them now in
general management and marketing
management positions.
We share ownership
Merlin is strongly committed to ensuring our
employees have an active interest in the Company
by having the opportunity to buy shares. We
therefore provide multiple opportunities to access
employee share schemes. Of our permanent
employees, 32% participate in at least one of our
Sharesave plans, with many contributing to more
than one. We are extremely proud of this uptake.
During 2018 we also made more than 500 share
awards to colleagues at executive, senior and
middle management levels under our long term
incentive plans. This included 76 exceptional
awards recognising outstanding contributions to
the business.
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47
Promoting wellbeing
Following its launch in 2017 our ‘BeWell’ programme is now embedded within
every region of our business. We believe the success of the programme is
evident from the positive responses in our staff survey to the question ‘Merlin
does a good job of promoting health and wellbeing with employees’ where the
score was 72%. During 2018 we conducted a global campaign for employees
to volunteer to be an ambassador for wellbeing at their attractions. As a result,
157 ‘Wellbeing Warriors’ have been appointed who all work towards
maintaining and nurturing a healthy and happy workforce.
As part of their local ‘BeWell’ programme, our London attractions have been
working with Mind, the UK’s national mental health awareness charity, to
facilitate mental health awareness training programmes for their management
team. This was followed by sessions to discuss more complex mental health
issues and how best to manage these in the workplace. The Midway London
team has since developed its own ‘Mental Health Awareness’ programme to
raise awareness of mental health issues for line managers responsible for large
operational teams. It has given them more confidence to deal with situations
that often are not managed or managed poorly due to lack of knowledge
and understanding.
Midway London was also the first division to train individuals across its
attractions to be ‘Mental Health First Aiders’. Eight selected managers are now
qualified in mental health first aid in the workplace, gaining specialised skills in
dealing with mental health issues within their teams. This initiative has proven
our commitment to understanding and supporting those with mental health
conditions, ensuring that we have trained, qualified employees who can
proactively deal with any issues that may arise and manage them appropriately
and sensitively.
‘Love Your Work. Work Your Magic’
We love what we do, no matter where we work in Merlin. More than that,
each and every one of us has the opportunity to use our personal set of skills
to make brilliant things happen and deliver memorable experiences for our
guests the world over. We thought it was time to share this with the outside
world to help us to attract, recruit and retain the very best talent, so we have
developed a new employer brand and value proposition that embodies who
we are and what it’s like to work at Merlin.
To inform this process we spent time talking to our employees around the
globe to find out what matters to them in their daily working lives and
concluded that the following key propositions are common to Merlin people
around the world:
• That ‘Fun Comes First’ at Merlin
• That most days give them a ‘Guess What I Did Today?’ moment
• That they can ‘Make Magic Their Way’
• And that as a Merlin team we are on ‘The Ride of Our Lives’
The new ‘Love Your Work. Work Your Magic’ employer brand really
showcases our employees and their experiences, while our new global
‘Merlin Careers’ website provides access for prospective employees to apply
for any one of our roles worldwide.
The People Portal
In 2018 we started the implementation of the first modules of a new global
cloud based HR system, known internally as ‘The People Portal’. Once fully
implemented, this will deliver a single, comprehensive HR system supporting all
Merlin businesses globally and in local languages, increasing the speed and
quality of HR delivery and at the same time reducing costs compared to legacy
systems. In 2018 the recruitment, core HR and learning modules were made
available to employees across Europe and North America. In 2019 we will
complete the global implementation by implementing these modules across
Asia Pacific as well as extending functionality globally to include performance,
talent and compensation.
The People Portal is driving standardisation of our HR processes, reducing
HR administrative costs, and driving efficiencies in recruitment and talent
management across the organisation. The learning management capabilities
provide a platform to introduce new methods of training and increase the
visibility of our compliance, with mandatory training for certain roles in areas
such as health and safety. The solution also provides many benefits to our
employees, enabling interaction through personal mobile devices, delivered in
all local languages.
Natalie Bickford
Looking to the future
Natalie Bickford, our Group HR Director, is anticipating an exciting
few years ahead for Team Merlin and our people’s role in delivering
memorable experiences for our guests.
To deliver memorable experiences for
our guests, we plan to hone in on the
people agenda in order to:
• deliver structured and exciting career
progression;
• drive productivity;
• develop robust succession and
workforce planning;
• provide an inclusive environment
where every employee has the
opportunity to be heard and to
contribute; and
• communicate transparent and
motivational rewards.
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R E S P O N S I B L E B U S I N E S S
ACTING RESPONSIBLY,
TAKING CARE
MERLIN ’ S COMMITMENT AND STRONG SOCIAL CON SCIENCE
DRIVES OU R APPROACH TO BU S INES S RES PON S IB ILIT Y AND ‘ B EING
A FORCE FOR GOOD’. THI S I S REFLECTED IN HOW WE TRE AT AND
C ARE ABOUT OU R VI S ITORS , OU R PEOPLE , OU R SU PPLIERS , OU R
PL ANE T, THE ANIMAL S WE LOOK AF TER AND THE COMM U NITIES
IN WHICH WE OPER ATE .
Turning the London Eye green for Green GB Week 2018
Governance
Merlin has robust governance standards and practices that extend throughout
the business. This starts at the top with an experienced Board that is
structured in line with best practice and supported by appropriately rigorous
Board Committees. The reports on the activities of these Committees in the
year can be found on pages 66 to 89.
This approach then extends to how we run the business. For example, in the
critical area of health and safety, the core mission to maintain the safety and
wellbeing of our guests, employees and contractors is supported by a series of
robust strategic initiatives and the regular monitoring of certain key
performance indicators. More details on how we approach health and safety
can be found on pages 50 to 51.
Non-financial reporting
We set out below our approach to the five specific areas required under the
non-financial reporting requirements set out in the Companies Act. Further
information can also be found on Merlin’s website and the websites of our
partner charities.
Environmental
We recognise that our attractions have an impact upon the environment.
Merlin engages in a number of activities in this area under the oversight of the
Executive Committee and Chief Executive Officer, as well as partnering with
the SEA LIFE Trust charity. The Group’s environmental policy is published on
our website and the ‘We care about our planet’ section on pages 52 to 53
contains more information. This includes our greenhouse gas reporting, where
we target annual reductions in our carbon intensity of 2%.
Employees
Our worldwide team of skilled employees is one of the key elements of our
long term business model. We constantly keep them up to date with the
business through the ‘My Merlin’ intranet, a quarterly groupwide newsletter
‘The Wizard’, as well as using TV screens and noticeboards in staff rooms and
other areas. Further details of how we engage with and develop our
employees, together with employee and gender diversity statistics can be
found in the People section on pages 42 to 47. This includes the results of our
employee engagement survey and our employee engagement score, a key
non-financial performance indicator.
Beach clean arranged by SEA LIFE Porto
We make no differentiation between able bodied persons and persons with
disability in terms of recruitment, training and career progression, and will
make every effort to continue the employment and training of those persons
who become disabled while employed by the Group.
For details of how we manage the risks of people availability and their
expertise, see page 38.
Social matters
Our strong social conscience informs how the Group operates, including with
regard to both the people and creatures connected to our business. This is
exemplified by areas such as our ethical animal husbandry activities, our work
with children faced with the challenges of serious illness, disability and adversity,
and how we approach visitor accessibility. More details can be found on pages
52 to 57.
For details of how we manage the risks regarding animal welfare, see page 39.
We also have a responsibility to the workers in our supply chain and seek to
ensure our products are made in an appropriate environment and the
products we source are produced in accordance with international laws and
legislation. More details on this area are available on our website.
Human rights
Merlin has implemented a Human Rights Policy, guided by the International
Labour Organisation Declaration on Fundamental Principles and Rights at
Work together with the OECD Guidelines for Multinational Enterprises.
This policy and Merlin’s Modern Slavery and Human Trafficking Statement
can be found on Merlin’s website.
Anti-corruption and anti-bribery matters
Merlin’s approach regarding the management of anti-bribery and corruption
risks is set out on page 40. Merlin has a zero tolerance approach in this
area, with regular reports on whistleblowing being provided to the
Audit Committee.
We’re delighted to break new ground in
marine animal welfare with the creation
of the world’s first sanctuary for beluga
whales. This is a pioneering solution to
how the aquarium industry can reshape
the futures of whales and dolphins
in captivity.
James Burleigh
Divisional Director,
Conservation Welfare and Engagement
(CWE)
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R E S P O N S I B L E B U S I N E S S
WE KEEP PEOPLE
SAFE AND SECURE
MERLIN I S DEDIC ATED TO DELIVERING
B EST IN CL AS S HE ALTH , SAFE T Y AND
SECU RIT Y (H S S) STANDARDS THAT
ARE CLE ARLY U NDERSTOOD AND
IM PLE MENTED ACROS S THE GROU P.
Mission and strategic initiatives
Our mission sets out the Company’s philosophy with regard to ensuring the
safety and wellbeing of our guests, employees and contractors. To support this
mission, the Company has also set out its core HSS strategic initiatives and
how these must direct and focus all efforts in a manner that is both systematic
and progressive.
What we do
Safety leadership walks – on-site walks, both in visitor areas and ‘back of
house’, by senior leaders in the business where dedicated time is spent talking
with staff about HSS matters and understanding what more can be done.
Training – rigorous training and instruction are fundamental to Merlin’s
approach to HSS across the business, with mandatory new starter training for
all employees and safety leadership training for managers.
Risk assessments – Feasibility Risk Assessments and Operational and Use Risk
Assessments now provide a more structured methodology for risk
identification, elimination or control for new rides and hotels.
Fire safety – proactive fire engineering surveys of our hotels have helped
ensure that we continue to uphold the highest of physical and procedural
controls at all of our hotels.
Food safety – we adopt the best practice system of Hazard Analysis and
Critical Control Points (HACCP). We ensure traceability and assurance over
food produce sources and support our guests in their choice of products
based on their specific dietary and allergy requirements.
Maintenance – robust maintenance systems and procedures comprise daily,
weekly, monthly and annual maintenance programmes across Merlin’s rides,
buildings, facilities and estates.
Ride inspections – thorough inspections conducted at least annually by
independent inspection bodies on each ride complement our internal
maintenance and inspection regimes.
Construction – best in class standards are maintained across all Merlin’s global
construction projects. The new Bear Grylls Adventure attraction in the UK
along with new hotels at LEGOLAND Japan and LEGOLAND California are
examples of safe projects achieved through rigorous HSS standards.
Auditing – our ‘Triple Lock’ audit programme was further enhanced in 2018
with a new software system that allows for integrated reporting.
How we monitor HSS performance
HSS performance, including near-miss and incident reporting, is regularly
reviewed by each attraction, each Operating Group’s senior leadership team
and the HSS Committee, with best practice learning shared throughout the
HSS management community. All attractions undergo three types of routine
health and safety reviews (annual self-audits, independent internal audits and
periodic independent external audits), in addition to pre-opening assessments
and tactical ad-hoc audits. A comprehensive food safety audit programme is
also undertaken by third party specialists.
We have two types of performance metric that we report on below:
• Leading indicators – these monitor the activities we undertake as part
of our HSS governance and monitoring processes. Our approach includes
arrangements by attractions for near-miss/unsafe condition reporting,
trend analysis and corrective action management.
• Lagging indicators – these capture incident rates for both guests
and employees.
Leading indicators
Safety Inspection Certificates – Rides(1)
Safe Operating Procedures – Rides(2)
Food Safety Audits(3)
Safety Culture Survey Results(4)
HSS Committee Meetings(5)
Lagging indicators
Medical Treatment Case Rate (Guests)(6)
Medical Treatment Case Rate (Employees)(6)
100%
100%
95%
87%
100%
0.03
0.07
(1) Safety Inspection Certificates are issued annually by independent ride examiners following the thorough
inspection and testing of every theme park ride in Merlin. This % score indicates the percentage of rides
that have Safety Inspection Certificates issued.
(2) Each theme park ride in operation in Merlin must have Safe Operating Procedures in place covering the
ongoing use of the ride. These procedures must state what the necessary risk controls are for each ride.
This % score indicates the percentage of rides that have Safe Operating Procedures in place.
(3) Merlin commissions an independent specialist to audit attractions for compliance with its Food Safety
Manual. This % score represents the average compliance score. Where opportunities for improvement to
local practices are identified, these are discussed with local management and plans implemented to
address them.
(4) Merlin’s annual ‘The Wizard Wants to Know’ employee survey features a series of questions relating to
health and safety and this % score represents the overall safety engagement score.
(5) Through the HSS Committee the Board provides strategic direction and performance scrutiny of HSS
matters within the business. Additionally, each Operating Group has its own HSS Steering Committee.
These forums are intended to meet quarterly and this % score indicates compliance with this expectation.
We note that the December HSS Committee meeting for the LEGOLAND Parks Operating Group was
rescheduled to early January 2019 for logistical reasons.
(6) A Medical Treatment Case (MTC) is defined as an injury which requires external medical treatment
(i.e. ambulance attendance to the site or hospital visit directly from the site). The rates referenced are the
number of MTCs relative to either 10,000 guest visitations or 10,000 employee hours worked.
Our strategic initiatives comprise the following six core aspects:
Leadership and Engagement
Requiring our leaders to exhibit visible, proactive and unwavering
leadership towards HSS, supported by our people who are fully
engaged with this shared responsibility.
Competency and Culture
Fostering a positive, proactive and fair safety culture, with competent
and talented people focused on the effective management of HSS risks.
Assessment and Control of Risk
Identifying, understanding and controlling HSS risks effectively so that
the greatest effort and resource is placed on our most material risks,
whether existing or emerging.
Standards and Procedures
Developing and rigorously implementing clear and suitable standards
and procedures for safe design, construction, maintenance and
operation of assets and equipment.
Assets and Equipment
Managing our assets and equipment to ensure they are fit for purpose
throughout their life-cycle such that no unacceptable or uncontrolled
HSS risk is created.
Monitoring and Assurance
Assessing and critically reviewing our performance, in a balanced and
objective manner, in order to understand, improve and sustain our
HSS performance.
To help communicate these to our key internal and external
stakeholders, the Company has published a new informative brochure
called ‘Protecting the Magic – a Guide to Health, Safety and Security at
Merlin Entertainments’. This document is available via our corporate
website and the ‘Protectingthemagic.com’ website.
Additional HSS news items and features are also published throughout
the year on the Company’s ‘Backstage’ website.
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R E S P O N S I B L E B U S I N E S S
WE CARE ABOUT OUR
PL ANET
WE RECOGNI SE THAT OU R OPER ATION S IM PACT
U PON THE ENVIRONMENT AND THAT EFFECTIVE
MANAGE MENT, IN LINE WITH OU R STR ATEGIC
BU S INES S GOAL S , I S ES SENTIAL FOR SU STAINAB LE
BU S INES S SUCCES S . WE ARE COMMIT TED TO
MINIMI SE THE POTENTIALLY HARMFU L EFFECTS
OF SUCH ACTIVIT Y.
Table notes:
• Scope 1 refers to direct
emissions (natural gas, LPG,
heating oil, refrigerants,
diesel, petrol).
• Scope 2 refers to indirect
emissions (purchased
electricity, purchased heat
and steam).
• Scope 2 market based include
GOs for Heide Park and
REGOs for our
UK operations.
• Our annual carbon reduction
target is measured based on
market based emissions.
Report boundaries
Financial control – all facilities under the Group’s
direct financial control have been included.
Consistency with
financial statements
Methodology
This report covers the 12 month period from
1 December 2017 to 30 November 2018 in
comparison to our financial year of January to
December 2018.
The WRI / WBCSD Greenhouse Gas Protocol:
A Corporate Accounting and Reporting
Standard (Revised Edition) applying emissions
factors from IEA CO2 emissions from fuel
combustion 2018 edition and emissions factors
from DEFRA (2018).
Intensity ratio
Emissions per £1 million of revenue
SEA LIFE Porto volunteers removing litter from the beach
Scope 1
22,768 tonnes of CO2 equivalent
(2017: 25,560 tonnes)
Scope 2
(Localised based)
109,923 tonnes of CO2 equivalent
(2017: 111,911 tonnes)
Scope 2
(Market based)
102,691 tonnes of CO2 equivalent
(2017: 104,672 tonnes)
Group gross emissions
125,459 tonnes of CO2 equivalent
(2017: 130,232 tonnes)
Intensity baseline
(revenue)
Emissions intensity
£1,688 million
(2017: £1,594 million)
74 tonnes of CO2 equivalent per £1 million of
revenue (2017: 82 tonnes)
were lower compared to 2017 due to a reduction
in the use of coal for energy generation. This
contributes 5.6% to the reported reduction. Our
underlying carbon emission intensity reduction was
therefore 4.7%, ahead of our annual target which is
to reduce our carbon emission intensity by 2.0%
year on year.
Commitment to plastics reduction
As a responsible business and an advocate for
marine conservation, Merlin is committed to
working towards removing the use of single-use
plastics, and 2018 has seen a number of initiatives
in this area.
Unique Coca-Cola Great Britain reverse vending machines
In the summer of 2018 we partnered with
Coca-Cola Great Britain to encourage more
recycling through state of the art vending machines.
Unlike traditional vending machines that dispense
drinks, the unique machines rewarded those who
deposited their empty plastic bottles with a 50%
off entry voucher to 30 of our attractions. The
scheme followed, and reinforced, research by
Coca-Cola Great Britain which revealed that 64%
of British people would recycle more if they were
instantly rewarded for doing so.
It is estimated that 26 million tonnes of plastic
pollution ends up in the oceans each year and
beach cleans help to prevent harmful materials
from posing a danger to marine life, entangling and
poisoning creatures that live on or near the beach.
The year saw one of our biggest beach cleans with
over 350 volunteers collecting 280 kilogrammes of
rubbish in their annual event at SEA LIFE Porto.
Every year SEA LIFE aquariums across the globe
host beach cleans to clear up litter and help
prevent ocean pollution in their local area.
Finally, by the end of the year we had ceased the
use of plastic straws within all our owned
attractions as part of a number of initiatives to
reduce plastics from the business. We will focus
even more effort in the coming years on our
single-use plastics policy and actively seek out
environmentally responsible businesses throughout
our supply chain.
Strategy and governance
The Executive Committee is responsible for setting strategy, policy, principles
and guidance for attractions. Ultimate responsibility for our sustainability
strategy rests with the Chief Executive Officer, supported by management, to
ensure that strategic policy is implemented and that our sites’ sustainability
objectives align to our corporate sustainability objectives. Each attraction has a
sustainability champion who is responsible for the delivery of our sustainability
objectives at a local level. More details can be found on the sustainability page
on our website.
Compliance and environmental management
We participate in the UK Carbon Reduction Commitment (CRC) energy
efficiency scheme and other applicable environmental regulations globally.
Specific budgets are made available each year to test and implement
environmentally focused initiatives.
Climate change
The Group has identified the following issues related to climate change, which
are set out below together with Merlin’s approach in the relevant area.
• Energy use – the risk that using fossil fuel energy contributes to climate
change. Merlin is investing in on-site zero to low carbon technologies such
as installing solar photovoltaic and combined heat and power assets.
• Energy price – the risk of fluctuation in the global energy price. Merlin is
investing in systems to reduce the amount of energy we use, for example at
Madame Tussauds London where a new building management system
monitors carbon dioxide levels around the attraction and adjusts energy
usage accordingly.
• Weather – the risk of distortion in weather patterns. Merlin operates a
balance of both outdoor theme park resorts and Midway attractions which
are generally indoors.
• Waste, recycling and the use of landfill – Merlin is diverting waste from
landfill where possible through recycling and generating energy from waste.
For example, our four largest UK theme parks recycle and recover all their
waste for energy generation.
‘We Care about our Planet’ annual event
Merlin teams all over the world participated in our annual ‘We Care about our
Planet’ event to support Merlin’s commitment to sustainability. A wide range of
activities were undertaken by our global teams including beach cleans,
collecting plastics and other waste, staff cycling and walking to work and
around our attractions to raise awareness.
Greenhouse gas (GHG) reporting
The Company is required to report each year on
its carbon dioxide emissions, which are set out in
the table above. The reported emissions intensity
is affected by the impact of foreign exchange
movements on the revenue figure that forms the
intensity baseline. This has reduced the reported
9.0% intensity reduction by 1.3% and accordingly
the reduction on a constant currency basis would
be 10.3%. Carbon emission factors used in 2018
Staff cycling at
Gardaland Resort
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Picture above: Little White and Little Grey
Picture right: Preparations for the journey
Picture below: Klettsvik Bay, Heimaey Island, Iceland
54
R E S P O N S I B L E B U S I N E S S
WE CARE ABOUT ANIMAL
CONSERVATION AND
WELFARE
WE OPER ATE TO WORLD CL AS S WELFARE
STANDARDS THROUGH OU R ANIMAL C ARE
NE T WORK AND SU PPORT THE WORK OF
THE SE A LIFE TRU ST IN ITS MI S S ION TO
PROTECT MARINE LIFE AND HAB ITATS
ACROS S THE WORLD.
SEA LIFE Conservation, Welfare and Engagement
The newly named SEA LIFE Conservation, Welfare and Engagement team will
continue to help SEA LIFE to focus on delivering world class animal welfare
throughout our animal care network, where we look after around 160,000
animals, as well as developing new exciting guest experiences which will inspire
future generations to care for our oceans and all marine life. The team will
ensure that inspiring conservation is at the heart of all our projects and new
guest developments. They will also communicate all the great conservation
work SEA LIFE undertakes and supports around the world including the
activities of our pioneering marine conservation partner charity, the
SEA LIFE Trust.
SEA LIFE Trust
2018 saw a real step change in the SEA LIFE Trust’s mission to protect marine
life and habitats across the world.
Through the ‘Team Turtle’ campaign, millions of SEA LIFE visitors have had the
opportunity to learn about the threat plastic pollution poses to these amazing
animals and how they can make simple changes in their own life to help protect
sea turtles from this. In March, the Trust took on its first marine animal
sanctuary – the Cornish Seal Sanctuary in the UK. This sanctuary rescues,
rehabilitates and releases sick or injured seal pups every year with over 80
being helped by our expert team over the most recent pup season.
In June, the Trust announced the construction of its second sanctuary and a
world first. The SEA LIFE Trust Beluga Whale Sanctuary in Iceland will provide
a new, more natural home for two beluga whales currently housed in an
aquarium in China. The funds required to build the sanctuary were in the main
part donated to the Trust by Merlin and the sanctuary will be ready to
welcome its first residents during 2019. It is hoped that more belugas currently
housed in aquariums across the world will join the first two over the coming
years – providing a brighter future in a more natural home for these
amazing animals.
Find out more www.sealifetrust.org
WILD LIFE
Chessington World of Adventures Resort in the UK, WILD LIFE Sydney Zoo
and WILD LIFE Hamilton Island in Australia all maintained their long-standing
commitment to animal breeding or managed species programmes.
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56
R E S P O N S I B L E B U S I N E S S
WE CARE ABOUT PEOPLE
WE HARNES S THE ENTH U S IAS M OF OU R
E M PLOYEES TO DE MON STR ATE AND
REINFORCE OU R CORE ‘ MERLIN WAY ’
VALU ES , ES PECIALLY HOW ‘ WE C ARE’.
Merlin’s Magic Wand
In 2018 our partner children’s charity Merlin’s Magic Wand (MMW) celebrated
its tenth birthday, with Merlin teams across the world getting involved in
birthday themed Fun Festival activities. MMW continues to enable children
faced with the challenges of serious illness, disability and adversity to
experience the magic of Merlin.
Since the charity began we have provided days out to over 600,000 children
and their families (over 100,000 in 2018), launched 46 Magic Spaces projects
globally, and taken the magic of Merlin ‘on tour’ to children in hospitals all over
the world.
Find out more www.merlinsmagicwand.org
Accessibility
In addition to our commitments to employees with disabilities, we are focused
on improving the accessibility of our attractions. At Merlin we care about
creating memorable experiences for all of our guests including the many guests
with disabilities who choose to visit us each year. This includes making
necessary reasonable adjustments to our facilities to ensure guests with
different requirements can ‘experience the magic’. We understand our
obligations and we care about continuously improving accessibility. In order to
ensure that we continue to meet the needs of all of our guests, we are
committed to listening to feedback and reviewing our facilities and the way we
do things to make them better for everyone.
In 2018 we have remained active members of the ‘Members of Business
Disability Forum’, working closely with their expert team to drive continual
improvements and support for guests with disabilities.
This new play area has
removed barriers to play and
access that our children and
their families face every day.
We are so incredibly grateful
to your teams for making this
happen. We work with over
200 children and families each
year and are delighted that the
new play area will be a happy
and fun place for our children
and their siblings, friends and
wider community to enjoy year
after year.
Picture far right:
MMW Fun Festival at
LEGOLAND Billund Resort
Yorda Adventures
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57
Guests can now explore the Sensory Space in Heartlake City at
LEGOLAND Windsor Resort. The calming space has been specifically
designed for those with additional sensory needs, and is a permanent
feature for guests to enjoy. This is the first dedicated sensory facility of
its kind in our theme parks and is an open space full of interactive
sensory experiences, with vibrating bean bags, soft seating, interactive
projections, bubble tubes, infinity tunnels, tactile panels and soft lighting,
all designed to create a calm space to relax in for those who need it.
The feedback has been overwhelmingly positive:
Many autistic children love trips to theme parks
where they can have fun and socialise. But
unfamiliar places, especially popular attractions,
can increase their anxiety levels and overload
their senses. This is why we were delighted to
hear about LEGOLAND Windsor Resort’s
new sensory facilities. Supportive spaces like
these play an essential role in opening up the
world for autistic children and their families.
Spokesperson for the National Autistic
Society
My family appreciate having this space now
available and well placed too. Because we had
a nice cool 30 minutes in this area, my relaxed
kids could then manage another hour enjoying
LEGOLAND, where normally we’d have had
to consider heading home.
Visitor to LEGOLAND Windsor
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59
CORPOR ATE GOVERNANCE
STATEMENT
General Data Protection Regulation (GDPR)
GDPR came into force in May 2018, introducing a new data protection
framework across Europe, bringing new rights for individuals, extending the
responsibilities of data controllers and processors and enhancing the regime
for enforcement. GDPR applies to many areas of the Company’s business,
including every step of the guest journey. In 2018 the Board has overseen the
implementation of the Company’s compliance programme to address these
new requirements including the roll out of policies, procedures and related
staff training and, most importantly, the creation of a Company-wide culture of
awareness of privacy and data protection.
The Board will continue to monitor this programme actively in 2019 to ensure
it is fully embedded throughout the business.
Cyber security
I mentioned in last year’s report that cyber security was an emerging area of
risk and, once again in 2018, the Board carefully considered the potential
impact of this threat on Merlin. Early in 2018, PwC undertook an independent
review of the cyber security controls in place across the business and
presented an overall assessment of Merlin’s cyber security maturity levels to
the Audit Committee. The results of this review were reassuring and a number
of actions were agreed to further strengthen Merlin’s resilience as part of a
long term cyber security strategy.
Sir John Sunderland
Chairman
27 February 2019
Governance priorities in 2018
The key governance activities undertaken by the Board and its Committees
are explained in detail throughout this report. The Board focused on a number
of key governance priorities in 2018 and I thought it would assist to summarise
these below.
Board composition
Following Ken Hydon’s retirement from the Board last year, Andrew Fisher
OBE was appointed to the Board as a Non-executive Director in July 2018.
Andrew has led the successful growth of a number of technology-focused
enterprises over the past 20 years. Andrew brings with him a wealth of
experience in digital consumer and technology markets which will prove
invaluable as Merlin increasingly focuses resources and efforts in this area.
Revised UK Corporate Governance Code
In July 2018 the Financial Reporting Council issued a revised UK Corporate
Governance Code designed to reflect the changing business environment and
help UK companies achieve the highest standards of corporate governance.
The Code applies to accounting periods beginning on or after 1 January 2019.
The Company will therefore report on how it applies the principles set out in
the Code for the first time in the Annual Report and Accounts for 2019 (to be
published in 2020). During the year, the Board, with support from its advisers
where appropriate, has carefully considered the requirements of the revised
Code and determined how the Company’s governance arrangements will be
adapted to ensure they align with the new Code principles.
Culture
The Board recognises the importance of culture in ensuring Merlin’s long term
success. The Board plays an important role in establishing Merlin’s purpose,
values and strategy and satisfying itself that these are aligned with its culture.
During the year, the Board held a meeting, facilitated by Spencer Stuart, to
assess and monitor Merlin’s culture. Applying Spencer Stuart’s diagnostic
framework for defining corporate culture to Merlin as well the results of
the ‘Wizard Wants to Know’ employee engagement survey, Merlin’s culture
was described as results-oriented, with fun, customer-centricity and safety at
its core. The Board also discussed a number of areas to be explored to evolve
the culture further as the business matures and a follow up Board discussion
has been scheduled in 2019 to ensure progress is monitored.
The Board recognises the importance
of culture in ensuring Merlin’s long
term success and plays an important
role in establishing Merlin’s purpose,
values and strategy and satisfying itself
that these are aligned with its culture.
Dear Shareholder
I am pleased to introduce Merlin’s 2018 Corporate Governance Report.
Your Board continues to believe that effective corporate governance is the
foundation of a well-run company. It is committed to maintaining the highest
standards of governance throughout the Company in line with the core
principles set out in the UK Corporate Governance Code. The Board
recognises that a strong governance framework is fundamental to the
execution of Merlin’s strategic objectives, underpinned by a clear purpose
and well understood culture and values.
Merlin’s overriding purpose is to create truly memorable experiences for
visitors and value for shareholders. Our corporate governance framework is
designed to safeguard these. The Board is committed to ensuring that the
procedures, policies and practices of the business continue to be effective and
compliant with the Code. I am pleased to confirm that throughout 2018 we
complied with its provisions.
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61
DIVERSE AND EXPERIENCED
BOARD OF DIRECTORS
Nomination Committee
Health, Safety and Security Committee
Audit Committee
Remuneration Committee
* Committee Chair
Tenure – since IPO in November 2013
THE ME MB ERS OF THE BOARD DU RING THE YE AR AND AT
THE DATE OF THI S RE PORT ARE AS FOLLOWS:
Diversity
Female representation
44%
5
Nationalities
Skills:
Leadership, governance,
sales and marketing, finance,
international experience,
strategy execution, M&A,
process improvement,
private equity investment,
international consumer,
technology, growth strategy.
Industry experience:
Visitor attractions, food and
beverage, travel, tourism and
hospitality, pharmaceuticals,
telecommunications, media,
LEGO brand, North
American, Asia Pacific and
European markets, property,
consumer and e-commerce,
digital, technology.
Sir John Sunderland
Chairman
Nationality: British
Length of tenure
5 years 4 months
Age: 73
Nick Varney
Chief Executive Officer
Nationality: British
Length of tenure
5 years 4 months
Age: 56
Skills and experience
• Leadership
• Governance
• Food and beverage market
• Multi-sector experience
Sir John has over 40 years’ experience in business leadership and previously
held the roles of Chief Executive Officer of Cadbury Schweppes,
President of the Confederation of British Industry and a Director of the
Financial Reporting Council. He is an experienced Chairman and
Non-executive Director, having held numerous roles over many years in
a variety of sectors including financial services, alternative energy, gaming
and education.
Skills and experience
• Leadership
• Visitor attractions
• Marketing
• M&A
Nick has over 25 years’ experience in the visitor attractions industry.
With a background in marketing he led the management buy-out from
Vardon Attractions to form Merlin in 1999, taking the Company through its
successful 2013 Listing on the London Stock Exchange. He has overseen
Merlin’s rapid expansion ever since as Chief Executive Officer.
Current external
appointments
• Chancellor of Aston
University
• Adviser – CVC Capital
Partners
Current external
appointments
• Chairman of UK Hospitality
Anne-Francoise Nesmes
Chief Financial Officer
Nationality: French
Length of tenure
2 years 6 months
Age: 47
Skills and experience
• Finance
• Strategy execution
• M&A
• Process improvement
Anne-Francoise has over 25 years’ experience in finance gained in
multinational organisations, having previously held the role of Chief
Financial Officer at Dechra Pharmaceuticals PLC and a number of
senior finance roles at GlaxoSmithKline.
Current external
appointments
• Non-executive Director of
Compass Group plc
Charles Gurassa
Senior Independent
Non-executive Director
Skills and experience
• Travel and tourism industry
• Telecommunications
Nationality: British
Length of tenure
5 years 4 months
Age: 63
Charles has over 30 years’ experience in management roles and was
previously Chief Executive of Thomson Travel Group plc.
He is an experienced Non-executive Director, having held numerous roles
as Chairman of Virgin Mobile plc, LOVEFiLM, Phones4U and TUI Northern
Europe, Non-executive Chairman of Genesis Housing Association and
Non-executive Director at Whitbread plc.
Current external
appointments
• Chairman at Channel 4
• Chairman of Great Rail
Journeys
• Deputy Chairman of
easyJet plc
• Trustee of English Heritage
and the Migration Museum
Søren Thorup Sørensen
Non-executive Director
Nationality: Danish
Length of tenure
5 years 4 months
Age: 53
Fru Hazlitt
Non-executive Director
Nationality: British
Length of tenure
4 years 10 months
Age: 55
Skills and experience
• Finance
• M&A
• Governance
• Strategy
• European markets
Søren has over 25 years’ experience in finance and has held several senior
executive positions, most notably Partner, Chief Financial Officer of A.P.
Moller – Maersk Group and Managing Partner of KPMG Denmark.
Søren is an observer of the Audit, Remuneration and Nomination
Committees.
Skills and experience
• Sales and marketing
• Media
Current external
appointments
• Chief Executive Officer
of KIRKBI A/S
• Director of various KIRKBI
A/S subsidiaries
• Chairman of the Board of
Boston Holding A/S
• Non-executive Director of
Falck A/S
Current external
appointments
• Non-executive Director at
Channel 4
Fru has over 20 years’ experience within the media sector, having previously
been Managing Director, Commercial, Online and Interactive at ITV and
Chief Executive Officer at both GCap Media plc and Virgin Radio.
• Chair of Downe House
Foundation and Deputy Chair
of Downe House School
Rachel Chiang
Non-executive Director
Nationality: Chinese
Length of tenure
3 years 1 month
Age: 51
Skills and experience
• Private equity investment
• Leadership and entrepreneurship
• Property, entertainment, consumer and e-commerce sectors
• China and Asia Pacific markets
Rachel has over 25 years of private equity investment experience in Asia
with a focus on the property, retail and consumer markets. Rachel was
the founding member of the private equity division of the Pacific
Alliance Group.
Current external
appointments
• Director of Prospere Capital
Ltd
• Non-executive positions with
Sands China, Pacific Century
Premium Developments
(PCPD) and Goodbaby
International Holdings Ltd
Andrew Fisher
Non-executive Director
Nationality: British
Length of tenure
7 months
Age: 49
Skills and experience
• International consumer and technology sectors
• High growth digital businesses
• Strategy
• Business transformation
Andrew has over 20 years’ experience leading and growing a number of
technology-focused enterprises and was instrumental in developing and
executing a growth strategy to establish Shazam as one of the world’s
leading mobile consumer brands.
Current external
appointments
• Non-executive Director at
Marks and Spencer plc and
MoneySupermarket.com
Group plc
Trudy Rautio
Non-executive Director
Nationality: American
Skills and experience
• Travel and hospitality industry
• Finance
• North American market
Current external
appointments
• Director of Cargill Inc, The
Donaldson Company, Inc. and
Securian Holding Company
*
Length of tenure
3 years 4 months
Trudy was appointed Chair of
the Audit Committee upon
Ken Hydon’s retirement.
Age: 66
Trudy has over 40 years’ experience in finance, including more than 20
years in the hospitality and travel industry where she held several senior
executive positions (including Chief Executive Officer and Chief Financial
and Administrative Officer) with Carlson until her retirement in 2015.
Ken Hydon
Non-executive Director
Nationality: British
Length of tenure
4 years 6 months
Ken retired from the Board on
27 April 2018.
Age: 74
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63
CORPOR ATE GOVERNANCE
REPORT
THE BOARD
BOARD COM MIT TE ES
• Overseeing strategy, management and
approval of major policies
• Determining the capital structure
• Maintaining the system of internal
controls and risk management
• Approval of the annual capital
expenditure budget, major capital
projects and strategic transactions
• Effective engagement with shareholders
and other stakeholders
• Reviewing recommendations from
Committees on
– Board membership
– Board and senior management
remuneration
– Succession planning
– Diversity
– Financial reports
Nomination Committee
Assists the Board in discharging its responsibilities in relation to the composition of the Board
Find out more on pages 66 to 67
Health, Safety and Security Committee
Ensures that health, safety and security matters are managed effectively and proactively
Find out more on pages 68 to 69
Audit Committee
Assists the Board in discharging its responsibilities in relation to financial reporting controls,
risk management and external and internal audit
Find out more on pages 70 to 73
Remuneration Committee
Assists the Board in discharging its responsibilities in relation to remuneration
Find out more on pages 74 to 89
E XECUTIVE
COM MIT TEE
• Chaired by the Chief Executive Officer
• Responsible for day-to-day operations
and the development of strategic plans
for consideration by the Board
• Comprises the Chief Executive Officer
and senior management
NON - BOARD OPER ATIONAL COM MIT TE ES
Commercial and Strategic Risk Management Committee
Oversight and guidance on management of commercial and strategic risk
Development Board
Appraisal of significant capital expenditure and development projects
Number of meetings held
Sir John Sunderland
Nick Varney
Anne-Francoise Nesmes
Charles Gurassa
Ken Hydon(1)
Fru Hazlitt
Trudy Rautio
Rachel Chiang
Andrew Fisher(2)
Søren Thorup Sørensen
The Board
Nomination
Committee
Health, Safety and
Security
Committee
Audit Committee
Remuneration
Committee
7
7
7
7
7
3
7
7
7
3
7
2
2
N/A
N/A
2
1
2
1
N/A
N/A
N/A
4
4
4
4
4
N/A
4
N/A
4
N/A
N/A
5
N/A
N/A
N/A
5
2
N/A
5
5
1
N/A
3
3
N/A
N/A
3
1
3
3
N/A
2
N/A
(1) Ken Hydon attended each of the Board, Nomination Committee, Audit Committee and Remuneration Committee meetings prior to his retirement from the Board on 27 April 2018.
(2) Andrew Fisher, following his appointment on 1 July 2018, attended each of the Board and Remuneration Committee meetings and, due to prior commitments, one Audit Committee meeting only.
Board composition and meeting attendance
During the year Ken Hydon resigned from the Board on 27 April 2018.
Following Ken’s resignation, Trudy Rautio was appointed as Chair of the Audit
Committee and as a member of the Nomination Committee. Andrew Fisher
was appointed as a Non-executive Director on 1 July 2018 and on
appointment joined the Audit Committee and Remuneration Committee.
A full list of the Board and Committee Directors who served during the year
and their attendance is set out in the table on the previous page. It also shows
the number of meetings individual Directors could have attended and their
actual attendance. Directors are provided with all the papers and information
relevant to the meeting even if they are unable to attend and are encouraged
to discuss any issues directly with the Chairman and Executive Directors.
Board membership and the UK Corporate Governance Code
The Code recommends that a UK listed company’s Chairman be independent
on appointment. The Chairman was appointed to the Company in October
2013, prior to the Company’s initial public offering. The Board considers that
the Chairman was independent on appointment and remains so. The
Chairman’s role is to ensure good corporate governance.
The Code recommends that at least half the members of the Board of
Directors (excluding the Chairman) of a UK listed company should be
independent in character and judgement and free from relationships or
circumstances which are likely to affect, or could appear to affect, their
judgement. The Board has concluded that, for the purposes of the Code,
Charles Gurassa, Ken Hydon, Fru Hazlitt, Trudy Rautio, Rachel Chiang and
Andrew Fisher should be regarded as independent Non-executive Directors.
Although Charles Gurassa previously served on the board of Tragus Group
Limited (formerly a portfolio company of Blackstone, which was a shareholder
in the Company until March 2015), the other Directors have concluded that
this relationship did not have any effect on the independence of Charles
Gurassa. KIRKBI presently holds 29.64% of the issued share capital of the
Company and accordingly the Non-executive Director representing KIRKBI
(Søren Thorup Sørensen) is not regarded as independent for the purposes of
the Code. Accordingly, the Board considers that, throughout 2018, the
Company was in full compliance with the recommendation of the Code
concerning the balance of independent Non-executive Directors on
the Board.
How we run the Board
The Board oversees the management of the Group’s activities, including the
implementation of the Group’s commercial strategy and long term plans. In
addition, the Board provides leadership to Merlin, setting the key values by
which the Group operates. The Board has a formal schedule of matters
reserved for its approval which includes major expenditure, investments and
key policies. The schedule of reserved matters is reviewed regularly to ensure
it is kept up to date.
The majority of meetings of the Board and its Committees are held in London,
with the aim to hold one meeting each year at an operating location and one
other at Merlin’s head office in Poole. The Board meets a minimum of seven
times a year and has a well-established programme of meetings.
WHAT THE BOARD HAS DONE DU RING THE YE AR
The Board has overall responsibility for overseeing the management of the
Company. There is a schedule of matters reserved for the Board which
require formal Board approval. In 2018, the key activities of the Board
included the following:
Off-site meetings
One way in which the Board gains detailed understanding of the business is
by attending meetings at Merlin locations around the Group. In June, the
Board meeting was held in Shanghai and the November meeting was held
at Warwick Castle. During the year meetings of the Health, Safety and
Security Committee took place at THORPE PARK, the London Eye and
SEA LIFE London Aquarium.
Finance updates
At each meeting, the Board discussed the financial performance of the
Group including a review of the management accounts and full year
forecasts. The 2018 budget of the Company was approved by the Board in
January. The Board also approved and reviewed the 2017 Annual Report
and Accounts and half year results for 2018.
The Board also assesses long term liquidity needs and viability matters.
During 2018, a refinancing of the Group took place including the issue of
$400 million US Dollar denominated senior notes. Major financings are a
matter reserved for the Board so this project was reviewed in detail by the
Audit Committee and the Board during the year.
Productivity
Post-investment appraisals
Oversight of the Company’s Productivity Agenda was a key focus in 2018.
This included the review and approval of a number of transformational IT
projects including the upgrading of the Company’s finance and HR systems.
Twice in 2018 the Board received and discussed post-investment appraisals
on a number of recently completed capital projects. The purpose of these
reviews is to ensure that the learnings from past projects can be captured
and disseminated for the benefit of future investments.
Major new projects
Each year, the Board programme includes reviewing and approving
significant new rides and attractions. In 2018, this included the approval of
the LEGOLAND Korea project, numerous new Midway attractions
(including a number of new Peppa Pig World of Play formats), new rides
and attractions at our theme parks and new hotels at LEGOLAND Florida
Resort and Gardaland Resort, Italy.
Strategy
Each year the Board holds a full day strategy meeting which took place this
year at Warwick Castle in November. The meeting was facilitated by a
number of internal and external presentations and extensive pre-read
materials for the Board. The Strategic Report provides more information
on the Company’s strategy.
Technical updates
The Board received updates during the year from a number of functional
directors in areas such as tax, treasury, legal and investor relations.
Fair, balanced and understandable
As part of the Company’s commitment to maintaining high standards of
corporate governance, the Board has put in place a process to ensure that
the Annual Report and Accounts is presented in a way that is fair, balanced
and understandable. This process includes a review of all Board and
Committee meetings to identify matters for inclusion and a series of
specific reviews undertaken by a dedicated Disclosure Committee of
senior managers.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATIONGOVERNANCE
64
65
CORPOR ATE GOVERNANCE
REPORT C O N T I N U E D
The Company Secretary prepares the agenda for the Chairman’s approval, in
consultation with the Chief Executive Officer and the Chief Financial Officer.
Papers to be presented to the Board for review are prepared by the
appropriate member of the Executive Committee or other senior members
of staff. Board members usually receive Board papers seven days prior to
meetings in order to give them adequate time to study and consider
the documents.
The Chief Executive Officer and Chief Financial Officer attend all Board
meetings, and present the papers on operational and financial matters. At
every meeting, the Board considers the following standing agenda items:
• Chief Executive’s Report
• Financial Report (including budget and strategic plan once a year)
• Board Committee Reports
• Project approvals
• Risk
• General Counsel Report
In addition to the above, investor relations (quarterly) and post-investment
appraisals (half-yearly) are considered by the Board. Updates by each of the
Operating Group Managing Directors and heads of function are presented
once a year. The Board also holds a strategy day once a year. Between Board
meetings, Directors are provided with information on important
developments and issues such as:
• reports on safety and serious incidents; and
• important developments regarding projects or transactions.
Directors have the right to raise concerns at Board meetings and can ask for
those concerns to be recorded in the Board minutes. The advice and services
of the Company Secretary (whose appointment and removal is a matter
reserved for the Board) are also available to the Directors. The Group has also
established a procedure which enables, in relevant circumstances, Directors to
obtain independent professional advice at the Company’s expense.
Board evaluations
During the year, evaluations were undertaken of the effectiveness of the
Board, its Committees, the Chairman and individual Directors. As has been
the case each year since the IPO in 2013, these evaluations were externally
facilitated by Prism Cosec, which is independent of the Company. The
evaluations involved:
(i)
(ii) the compilation of reports on the Board and each of its Committees by
the completion of questionnaires by all Directors;
Prism Cosec;
Name of shareholder
KIRKBI Invest A/S
The Wellcome Trust
ValueAct Capital Management, L.P
Marathon Asset Management LLP
(iii) the presentation of the recommendations from these reports by Prism
Cosec to the Chairman and Company Secretary;
(iv) discussions between the Chairman and individual Directors;
(v) the discussion of the results of the evaluation by the full Board and each of
its Committees, and
(vi) the agreement of an action plan to address key findings.
The performance of the Chairman was evaluated by the Non-executive
Directors, led by the Senior Independent Non-executive Director.
The outcome of the evaluations was very positive. The Board was described as
strong, with a good mix of skills, experience and culture and with a collegiate,
supportive and collaborative approach whilst exhibiting an appropriate level of
constructive challenge during meetings. Whilst no major concerns were
identified, a number of areas were identified for further improvement,
including the following recommendations:
• the Board should hold a session in 2019 focused on customer needs and
emerging consumer trends; and
• the increased focus of the Board on strategy, risk and culture should be
maintained by regular dedicated sessions on the agenda on these topics.
In addition to the Board results, the outcomes of the individual Committee
evaluations were also positive and no major areas of concern were raised.
An action plan addressing those areas identified for improvement will
be implemented during the year. Further details can be found in the
Committee reports.
In 2018, the Board implemented an action plan to address the findings of the
Board evaluation review conducted in 2017. This plan included, amongst other
things, improvements to the format of the annual strategy day agenda and
follow up on resulting actions, preparing a formal training calendar for 2018
which included a session on corporate culture and increasing the number of
site visits by the Health, Safety and Security Committee. In addition to these
evaluations, the Audit Committee led formal reviews of the internal audit
function and external auditors and these concluded that both functions
remain effective.
Shareholders and share capital
Major shareholdings
As at 26 February 2019, the latest practicable date prior to the date of this
Annual Report and Accounts, the Company had been notified pursuant to
DTR5 of the following interests in the Company’s total voting rights as shown
in the table below.
Number of
ordinary shares
302,971,529
51,788,240
54,700,000
59,967,789
% of issued
share capital
Nature of holding
(Direct/Indirect)
29.64
5.07
5.35
5.87
Direct
Direct
Indirect
Indirect
A Relationship Agreement was entered into on 30 October 2013 with
KIRKBI and remains in force. Under this agreement, KIRKBI is entitled to
appoint one Director to the Board while KIRKBI (together with its respective
affiliates) holds at least 10% of the Company’s issued share capital. KIRKBI may
appoint an observer (with the right to attend and speak but not vote) to the
Board and each of the Audit Committee, Remuneration Committee and
Nomination Committee.
KIRKBI/LEGO relationships
A Licence and Co-operation Agreement (LCA), as amended and restated
from time to time, was entered into on 24 August 2005 with KIRKBI, which
sets out the rights granted to the Group to use the LEGO and LEGOLAND
brands in connection with the development, operation and promotion of the
Group’s present and future LEGOLAND businesses. It includes certain
requirements for the Group to develop LEGOLAND attractions, certain
operational requirements for those attractions, and the nature of royalties due
to KIRKBI for the use of the rights. The LCA includes rights for KIRKBI to
terminate the LCA on a change of control of Merlin, but only if this would
result in a Licensee (as defined in the LCA) being controlled by a LEGO
competitor or an inappropriate party. The LCA defines an inappropriate party
as any person or entity (other than a financial institution) where one-third of its
revenue is derived from the manufacture and sale of tobacco, armaments
and/or pornographic material.
S HARE HOLDER E NGAGE ME NT
The Company places considerable importance on communication with shareholders and has a dedicated investor relations team to facilitate the exchange
of information and feedback between shareholders and shareholder representative bodies and the Company.
Website and shareholder communications
Results and routine announcements
All our results and routine announcements are uploaded to the London
Stock Exchange (via the Regulatory News Service system) and our
corporate website.
Annual General Meeting
At our AGM, all shareholders have the opportunity to discuss and raise
questions concerning the performance, trading and development of Merlin
and to vote on the resolutions proposed.
The Company’s corporate website is regularly updated with news and
information which set out our strategy, operating model and performance
together with our plans for future growth. Our Annual Report and
Accounts and investor presentations are also available on the website.
Merlin’s 2019 financial calendar is set out on page 159.
Roadshows, shareholder meetings and feedback
The investor relations team manages a programme of regular meetings in
which existing and potential investors are provided with information on the
financial and trading position of the Group. Views of investors are shared
regularly with the Board, enabling the Non-executive Directors in
particular to appreciate and discuss the views of shareholders.
Consultation and engagement
During the year the Chairman and the Company Secretary met with a
number of our leading shareholders to encourage full and constructive
dialogue. The Senior Independent Non-executive Director was available to
meet with any major investors to discuss any concerns that could not be
resolved through normal channels. The Chief Executive Officer and Chief
Financial Officer also meet with analysts and hold conference calls after the
production of reports and participate in roadshows after preliminary and
half year results are announced.
STAKE HOLDER E NGAGE ME NT
In addition to the shareholder engagement activities described above, the Board recognises that effective engagement with all our other major
stakeholders is a key component of long term success. We balance the needs of these various stakeholders when making decisions and have engagement
processes in place with each.
Customers
Communities
Our businesses sit at the heart of communities around the world and our
teams support those communities in a wide variety of ways. As well as
many local initiatives, we harness the influence of our partner charity
Merlin’s Magic Wand to deliver memorable experiences to children with
serious illnesses or disabilities or who face other adversities. Our marine
conservation charity partner the SEA LIFE Trust helps protect our oceans
through campaigns, fundraising and the operation of sanctuaries.
Our customers around the world provide real-time feedback on their
experience at our attractions. This information, as well as external
indicators including Trip Advisor, is analysed and addressed by our Product
Excellence team. Improvement plans are implemented where appropriate
and discussed regularly by the Board.
Employees
We know that a happy and productive workforce will give our guests a day
to remember. Once again this year ‘The Wizard Wants to Know’ survey
reflects very high levels of employee engagement. We keep our employees
up to date on what is happening in Merlin through the ‘My Merlin’ intranet
and quarterly newsletter, ‘The Wizard’. As described on page 46, this year
we launched our employer brand proposition across the business
where we encourage all Merlin employees to ‘Love Your Work. Work
Your Magic’.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATIONGOVERNANCE
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NOMINATION COMMIT TEE
REPORT
Chairman
Sir John Sunderland
Membership
Charles Gurassa
Trudy Rautio
Fru Hazlitt
Responsibilities
The Nomination Committee assists the Board in discharging its
responsibilities in relation to the composition of the Board as set
out below:
• Reviewing the balance of skills, knowledge and experience on
the Board.
• Reviewing the size, structure and composition of the Board.
• Considering and making recommendations to the Board on
retirements, re-elections and appointments of additional and
replacement Directors and on membership of Committees.
• Considering succession planning for both Executive and
Non-executive Directors and the Chairman.
• Considering the time required for Directors to fulfil their roles.
• Developing a policy on diversity and reporting on progress thereon.
• Making appropriate recommendations to the Board on matters
within the remit of the Committee.
The Committee’s terms of reference are available on the
Company’s website.
Effectiveness review
An external effectiveness review of the Committee took place, based
on a questionnaire sent to Committee members, all other attendees
and the Board. It covered a broad range of matters including the
Committee’s scope; organisation and meetings; the quality of debate
at Committee meetings; and leadership. The results showed the
Committee to be effective, with further focus on succession planning to
be addressed in 2019.
WE CONTINUED OUR RE VIEW
OF BOARD AND COMMIT TEE
COMPOSITION AND DIVERSIT Y,
TR AINING AND DE VELOPMENT,
TOGETHER WITH SUCCESSION
PL ANNING FOR E XECUTIVE
MANAGEMENT.
Dear Shareholder
I am pleased to present the Nomination Committee’s report for the year
ended 29 December 2018.
The main purpose of the Nomination Committee is to ensure Merlin has the
right people in the right place at the right time across the Group. Not only is
this important to each operating division, it is also applicable to the Board itself
and its ability to deliver shareholder value and safeguard the interests of
other stakeholders.
Diversity
The Nomination Committee continues to develop and propose
recommendations to the Board regarding its policy on diversity. The Board
is committed to diversity in all its forms, in all aspects of its business and at
all levels. The Board highly values diversity and supports the appointment
of diverse candidates to roles at all levels within Merlin, including on the
Board itself.
The Committee received a report from management during the year
highlighting reassuring progress on gender diversity including the introduction
of female talent reviews and the identification of a larger pool of women
executives with the potential to progress into senior management roles. There
has also been a push on encouraging women into mentoring relationships and
a continued focus on gender-balanced shortlists and interview panels. In 2018,
a new inclusion council was established to provide leadership across all strands
of diversity and diversity KPIs have been introduced. There has been some
progress on the proportion of women in operational roles in Merlin although
there is still some way to go in this area.
It is important that the Board sets the tone for the rest of the Group on
matters of diversity and I am pleased to confirm that we have 44% female
representation on the Board, which exceeds the 2020 target for FTSE 350
companies approved by the UK Government in 2015. However, the
Nomination Committee’s remit is also to ensure that diversity is not only
gender focused but also addresses ethnicity, country of origin and disability.
Noting the requirements in the Hampton-Alexander and Parker reviews, the
Committee is committed to making further progress across all strands of
diversity and this will be a focus of its work in 2019.
The Nomination Committee continues to review the composition of the
Board and its Committees. In particular, it must satisfy itself that they benefit
from the right balance of skills, knowledge and experience to support and
challenge management. It is also important that Board members are sufficiently
independent, demonstrate perspective and understand the governance issues
which exist in the operation of a large international company. The Committee
determined in 2018 that the Board’s composition benefits from an appropriate
level of skills, international and gender diversity.
Succession planning
The Committee is also responsible for overseeing succession planning at Board
level as well as for the executive management team. Each of these areas was
reviewed by the Committee during 2018 and appropriate short and longer
term plans are in place to ensure continuity is maintained. The Committee also
oversees the pipeline of emerging talent within the Company to ensure we are
developing the next generation of managers to deliver our long term strategy.
Board training and development
The Board recognises that training and development is key to ensuring the
skillset of the Board remains current and to help achieve this, at least one
Board meeting each year is held at one of the Company’s attractions. In June
2018 we travelled to Shanghai, China. We were able to visit each of the
Company’s attractions in the city, including the construction site of the new
Shanghai Dungeon, and meet with local management. These visits provide the
Board with very useful insight into local issues and we are able to understand
and follow the customer journey first-hand. As part of the June Board meeting
we commissioned presentations from external consultants with significant
strategic experience of the Asian consumer market to provide us with their
thoughts on operating in China, consumer trends and the Chinese economy.
Selected topics for 2019 include social media strategy, diversity and the
potential impact of artificial intelligence on Merlin’s business.
Board changes
During the year, the Committee oversaw the search for a new Non-executive
Director. Following a rigorous search and interview process, Andrew Fisher
OBE was appointed as a Non-executive Director of the Company and as a
member of the Audit Committee and Remuneration Committee. The
Committee retained the services of Korn Ferry to assist with this appointment.
During 2018, following the retirement of Ken Hydon, Trudy Rautio became a
member of the Committee in his place and there were no other changes to
the composition of the Committee. The external effectiveness review
confirmed that the Committee remains effective.
Sir John Sunderland
Chairman of the Nomination Committee
27 February 2019
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69
HEALTH , SAFET Y AND
SECURIT Y COMMIT TEE
REPORT
Chairman
Sir John Sunderland
Membership
Charles Gurassa
Fru Hazlitt
Rachel Chiang
Nick Varney
Anne-Francoise Nesmes
Group HSS Director
Managing Director, RTP
Managing Director, Midway Attractions
Responsibilities
The Health, Safety and Security Committee reports to the Board,
operating under specific terms of reference. It has three areas of focus:
1. To oversee the Group’s policies and procedures for ensuring the
Health, Safety and Security (HSS) of guests, employees,
contractors and operating assets.
2. To monitor the Group’s processes for identifying and managing
risks.
3. To monitor the skills, effectiveness and levels of resource within the
Group’s HSS teams.
The Committee receives advice from HSS professionals and is updated
on industry best practice. Issues discussed at the HSS Committee are
shared with the Board.
The Committee’s terms of reference are available on the
Company’s website.
Effectiveness review
An external effectiveness review of the Committee took place towards
the end of 2018, based on a questionnaire sent to Committee
members, all other attendees and the Board. It covered a broad range
of matters including the Committee’s scope, organisation and meetings,
the quality of debate, outcomes and leadership. The results showed the
Committee to be effective, with incremental enhancements being
witnessed over the year. A small number of continuous improvement
areas were noted which will be addressed in 2019.
THE APPOINTMENT OF AN
INDE PE NDENT ADVI S ER WITH
PARTICU L AR E XPERIENCE OF
HE ALTH , SAFE T Y AND SECU RIT Y
IN HIGH - HA Z ARD INDU STRIES
HAS CONTRIBUTED FU RTHER
ADVICE AND SU PPORT TO
COMMIT TEE ME MB ERS , HELPING
TO STRENGTHEN THE LE VEL OF
OVERS IGHT AND CHALLENGE
THE COMMIT TEE PROVIDES .
Dear Shareholder
Merlin delivers millions of safe experiences to its guests every year,
underpinned by a passion to deliver industry leading health, safety and security
standards, a rigorous safety culture and complete commitment from
management and staff. The Health, Safety and Security (HSS) Committee
assists Merlin’s Board of Directors to govern the safe management of HSS risks
across the Group. This report describes the work of the Committee during
2018 and how it discharged its obligations.
Fiona Eastwood replaced Justin Platt as Managing Director of Resort Theme
Parks and accordingly took up membership of the Committee in the second
half of 2018. The Committee extends a warm welcome to Fiona and looks
forward to her contributions to the vitally important work of the Committee.
The Committee believes it is important to look outside of the sector to
understand how other leading organisations manage safety-critical and
high-hazard/low-frequency accident risks. During 2018 the Company has
drawn on the new partnerships it has fostered with a number of leading
organisations, most notably in the aviation and rail sectors. The Committee
was pleased to learn that one partnering organisation, from the rail sector in
Japan, sent a delegation to the UK in order to share and acquire best practice
with Company HSS representatives.
In 2018 the Committee encouraged the Company to continue its support to
the development of international standards that are applicable to the sector –
especially on ride safety. The Company’s membership of UK, EU and USA
technical committees has allowed Merlin to share with others in the
industry new internal standards that have been designed and deployed
within the Group.
The Committee was pleased to see the ongoing, positive and collaborative
interactions between the various jurisdictional regulatory/enforcement
agencies for HSS and Company representatives through the course of 2018. In
many cases, progressive new HSS standards or programmes can only be
designed, nurtured or deployed with the assistance of local agencies so
continued strong relationships remain imperative.
Where the Committee has learned of incidents in 2018 occurring elsewhere,
for instance involving fire safety, water quality or food safety, it has taken action
to ensure that any necessary learnings are reviewed for applicability and
enactment within the Company.
incident investigations and employee safety culture surveys. Progress against
such plans in 2018 was monitored by HSS professionals across the Company
and headline status updates were provided to the Committee.
As part of the Committee’s activities, members undertook familiarisation and
evaluation site visits to a range of attractions within the Group. During the
course of 2018, the Committee visited Chessington World of Adventures
Resort, the Shanghai cluster of attractions, the SEA LIFE London Aquarium
and the London Eye. Further information on these attraction visits can be
found below.
Sir John Sunderland
Chairman of the Health, Safety and Security Committee
27 February 2019
HSS governance
During 2018 the Committee undertook to receive detailed HSS reviews from
key Operating Group Managing Directors. Their briefings and reports, during
the course of the year, complemented the informative briefings that the
Committee routinely receives and critiques from the Group’s HSS Director.
Such was the value-add of these comprehensive appraisals they will now
become a routine feature of HSS Committee meetings going forward.
The Committee’s Independent Adviser undertook a range of site visits and
departmental meetings throughout the year in order to gain a fuller
understanding of safety risk control processes and measures in place and, on
behalf of the Committee, provided further scrutiny and counsel on how these
may be enhanced.
Through the course of 2018, the Committee was kept abreast of HSS
resourcing across the Group. The Committee was pleased with the level and
quality of HSS resourcing within the Company and remains committed to
ensuring this important support function remains effectively resourced as HSS
risks evolve.
Leadership walks
As part of the Committee’s activities, members undertook familiarisation and
evaluation site visits to a range of attractions within the Group. During the
course of 2018, the Committee visited Chessington World of Adventures
Resort, the Shanghai cluster of attractions, the SEA LIFE London Aquarium
and the London Eye.
During the visit to Chessington World of Adventures Resort, the Committee
was particularly keen to understand more about the Company’s project
management practices and safety risk control measures for the new
Tiger Rock attraction.
The Committee’s trip to the Shanghai cluster, as part of a broader Board
visit, allowed members to scrutinise the Company’s arrangements for
planned maintenance, fire safety, staff training and safety culture engagement
by employees.
The safety leadership visit the Committee undertook to the SEA LIFE London
Aquarium afforded the opportunity to witness the Company’s recent
investment in back-of-house facilities infrastructure and new safety measures
introduced to support the interaction between aquarist employees and
dangerous marine life.
During the Committee’s final site visit of 2018 to the London Eye, members
learnt more about the annualised maintenance and independent inspection
programmes for the structure, as well as the evacuation procedures and drills
in the event of a ride breakdown.
Risk profiling
Each year the Committee receives assurance that every attraction within the
Group has completed a detailed risk register which seeks to identify and assess
all significant HSS risks. Following the completion of these risk registers, the
Committee received further information on, and evaluation of, the Company’s
overall risk profile and how any notable risk trends have evolved year on year.
All attractions within the Group are subsequently required to prepare an
annual safety action plan. The contents of such plans are driven by the results
of each attraction’s risk register, safety inspections and audits, near-miss/
Trend analysis
During the year the Committee requested and received detailed analyses on
incident trends and organisational learnings across a broad range of topics and
risk areas. These quantitative and qualitative evaluations, typically incorporating
data going back six years, afforded the Committee the opportunity to assess
the efficacy of existing risk control measures and discuss what further
enhancements are planned for implementation in 2019 or beyond.
The Committee was also furnished with trend information pertaining to the
findings from the Group’s HSS audit programme. Where particular trends
were identified in 2018 the Committee was briefed on how the Company was
intending to provide inputs and initiatives to address any further enhancement
opportunities. Such annual focus topics feed into relevant attraction’s safety
action plans and are subject to further assessment during the in-year
audit regime.
New standards
During 2018 the Committee reviewed and supported the development and
roll out of progressive new HSS standards across a range of risk topics. New or
enhanced internal standards included those relating to rapids rides, workshop/
plantroom safety, swimming pools and water parks, attraction theming,
competency frameworks for ride engineers, diving and shark feeding, and
aquarium tank integrity inspections.
The Committee learnt of the various consultations, employee briefings and
training programmes that have been deployed to assist with the
implementation of these new HSS standards. Further, the Committee was
informed of how the Company’s audit programme has evolved to reflect these
new standards and associated requirements.
Security resilience
Thankfully the types of disturbing and challenging terrorist security incidents
that blighted 2017 in a number of markets in which the Company operates did
not manifest themselves again in 2018. The Company nevertheless has taken
action in 2018 to further enhance both our active and passive security
protocols in order to maintain the integrity of our physical boundaries and our
operations and assets within.
The Committee was pleased to support the Company’s sponsorship of the
Police Bravery Awards in the UK. The Company continues to work closely
with local police and governmental security agencies so the Company remains
grateful to law enforcement officers for their ongoing conduct on duty.
The Committee also supported the Company’s necessary but regrettable
need to obtain a Trespass Injunction at the UK’s High Court in London.
Following several instances of repeated and reckless trespass at some of the
Company’s properties, principally by so-called ‘Urban Climbers’, the Court
Order seeks to further deter unauthorised access. Breach of this injunction
may amount to contempt of court and can now lead to imprisonment, a fine or
seizure of assets.
Cultural engagement
Ensuring the Company maintains a positive, proactive and fair HSS culture is of
crucial importance to the Committee. During 2018 the Committee was
pleased to see new employee engagement and communication initiatives on
matters relating to HSS, including for instance the publication of the Company’s
HSS magazine called ‘The Shield’, a new series of line manager-led briefings
called the Safety Spells Toolkits, the ‘You Said/We Did’ follow-on process after
the annual employee survey and another successful Safety Week campaign.
New management guidance on how best to uphold a fair and positive safety
culture was also reviewed by the Committee during the year.
Performance monitoring
In 2018 the Committee regularly reviewed HSS performance, including
near-miss and incident reporting, with a particular focus on the Company’s
performance against the defined leading and lagging indicators. In addition, the
Committee examined information and data pertaining to incidents that
occurred both within the Company and across the wider sector. The
Company’s HSS performance information for 2018 is reported on page 51.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATIONGOVERNANCE
70
71
AUDIT COMMIT TEE
REPORT
Chairman
Trudy Rautio
Membership
Charles Gurassa
Rachel Chiang
Andrew Fisher
Responsibilities
The Audit Committee assists the Board in discharging its responsibilities
in relation to financial reporting, controls and external and internal
audits:
• Financial reporting, including considering the processes supporting
the assessment of the Group’s longer term solvency and liquidity
which underlie the Viability Statement.
• Risk management process and internal controls, including
whistleblowing and fraud.
• Internal audit.
• External audit.
The Committee’s terms of reference are available on the
Company’s website.
Effectiveness review
During the year an external effectiveness review of the Committee
took place. This was based on a questionnaire sent to Committee
members, all other attendees and the Board on a broad range of
matters including the Committee’s scope; organisation and meetings;
quality of debate and challenge; and leadership. The results showed the
Committee to be effective, with a small number of procedural
improvements that could be made which the Committee will address
in 2019.
OU R PRIMARY FOCU S
CONTIN U ES TO B E ON THE
INTEGRIT Y OF OU R FINANCIAL
RE PORTING , IN A PERIOD OF
CHANGE IN ACCOU NTING
STANDARDS . WE AL SO APPR AI SE
THE GROU P ’ S APPROACH TO
RI S K MANAGEMENT AND
INTERNAL CONTROL AS THE
GROU P IM PLE MENTS ITS NE W
FINANCIAL SYSTE M S .
Dear Shareholder
On behalf of the Board, I am presenting the Audit Committee (the
Committee) Report for the financial year ended 29 December 2018.
In this, my fourth year of service, I became Chair of the Committee following
Ken Hydon’s retirement, and was then pleased to welcome Andrew Fisher as
our new Committee member in July. Andrew’s experience in digital consumer
and technology markets adds to the breadth of skills the Committee holds.
The Committee’s primary area of focus continues to be on financial reporting
and the integrity of the Group’s financial statements. We have therefore spent
time reviewing two key significant focus areas. Firstly, in regard to asset
valuation and impairment, we reviewed management’s estimates of future
trading and the calculations performed, together with the disclosures in the
financial statements. Secondly, the Group implemented the new accounting
standard IFRS 15 ‘Revenue from contracts with customers’ in the year and we
therefore monitored the approach adopted by management, and approved
the Group’s new revenue accounting policy. The other major accounting area
we considered is the Group’s upcoming implementation of IFRS 16 ‘Leases’,
together with the transitional disclosures in the financial statements.
We considered the Group’s risk management environment and are satisfied
that the Company has appropriate systems and procedures to identify,
evaluate and manage material risks to the business. In making this assessment
the Committee considered the Group’s response to ongoing cyber risks as
well as its response to the new compliance requirements of GDPR. We also
considered risks when reviewing the Viability Statement, agreeing the stress
testing parameters together with the period over which the assessment was
made. The Group’s internal audit team continues to provide valuable assurance
on the operation of controls around the Group; the Committee agreed that
this work provides appropriate coverage around the Group’s operations and
we continued to review the quality of the work performed and
management’s responses.
Regarding external audit, we are satisfied with KPMG’s ongoing performance
and their approach to the audit. We are however concerned by the findings of
the recent FRC Audit Quality review of KPMG, and will continue to challenge
KPMG as to how they will continue to ensure a quality audit for Merlin going
forward. Merlin is required to retender the audit no later than for the 2023
financial year and the Committee is mindful that the next regular KPMG
partner rotation is after the 2019 audit.
During 2018 the Group’s Productivity Agenda initiatives gathered momentum
and the Committee received regular updates on the new finance system
project’s progress and its governance. This will be an increasing area of
Committee focus as this project develops.
I thank my fellow Committee members for their support this year, and I
welcome any comments or questions from shareholders.
Trudy Rautio
Chairman of the Audit Committee
27 February 2019
The role of the Audit Committee and its membership
The Committee’s responsibilities are as set out in its terms of reference,
available on the Company’s website and summarised below.
Financial reporting
• To monitor the integrity of the financial statements of the Company and
report to the Board on significant financial reporting issues and judgements.
• To consider whether the Company’s financial statements are ‘fair, balanced
and understandable’.
• To consider the processes supporting the assessments that underpin the
Viability Statement.
Risk management and internal control
• To review and report on the effectiveness of the Company’s internal
financial controls and the overall risk management framework.
• To review the Company’s arrangements for its employees to raise concerns
through its whistleblowing and fraud policies.
Internal and external audit
• To monitor and review the effectiveness of the Company’s internal audit
function.
• To propose and select the external auditors and then to oversee their
performance and independence.
Membership and meetings
Details of the Committee’s membership and meetings are outlined on pages
60 to 63. Of the current Committee members, Trudy Rautio and Andrew
Fisher both have recent and relevant financial experience. All of the
Committee members have relevant experience in relation to the sector or
markets the Group operates in and all bring a variety of commercial
experience. The CFO and other key members of management routinely
attend meetings, as do other members of senior management depending on
the matter under discussion. The Chairman and the CEO attended most of
the meetings in the year. Private meetings are routinely held with internal audit,
KPMG and on a rotational basis with the CFO, General Counsel and other
members of management as appropriate. The Committee also meets privately
after each meeting. Committee meetings usually take place ahead of Board
meetings with a summary of matters discussed provided to the Board at the
following meeting.
Financial reporting
Significant focus areas
1. The valuation of assets and impairment
The Committee is satisfied that no impairment is required and that the
presentation and disclosures in the financial statements are appropriate and
adequate. This follows detailed reviews of the basis of management’s
calculations and the findings of the external audit.
Merlin operates in geographically and politically diverse areas, and the
Group’s acquisitions have resulted in significant balances of goodwill and
intangible assets. In addition, the Group’s ongoing strategy includes
opening attractions under both existing and new brands, often in locations
that are new to the Group and therefore, to some degree, unproven.
While the Group has accumulated experience of opening many
attractions around the world, the performance of additional attractions,
particularly in new markets, can be difficult to predict.
As set out in note 3.3 to the financial statements, valuations are
performed based on forward looking discounted cash flow forecasts and
other market data which are inherently judgemental in nature.
Management’s detailed papers to the Committee set out the
methodology, judgements and estimations adopted to test the value of
assets, and the disclosures proposed for the Annual Report and Accounts.
The papers considered the valuation of goodwill at an Operating Group
level, individual brands and specific property, plant and equipment. For
each item, value in use and fair value calculations (using an appropriate
EBITDA multiple) were provided. Specific focus was given to Resort
Theme Parks Operating Group goodwill, where the risk is most significant.
For this asset, the Committee focused on how the value in use of assets is
calculated, which involves judgements and estimates concerning forecast
cash flows, discount rates, and long term growth rates that impact an
asset’s terminal value.
In reviewing these valuations we considered a range of potential future
trading outcomes, taking into account management’s growth forecasts
together with appropriate sensitivity analysis which reflects the risks
inherent in these forecasts.
2. Revenue
The Committee has considered the roll out of the accesso® admissions
system together with existing revenue recording systems. In both areas the
Committee considered the internal controls in place and concluded that they
remain effective.
Revenue is generated by high volumes of low value transactions in
numerous jurisdictions across the world. Although Merlin’s revenue
accounting policies require limited judgement compared to some other
sectors, the accuracy of financial reporting relies on robust internal
controls over cash reconciliations and accurate cut-off at the reporting
date in respect of advanced sales or payments in arrears by trade
customers. The Company continued its roll out of the accesso®
admissions system across the Group under the guidance of a senior
steering group. This group is chaired by the Group’s Chief Digital
Marketing and Information Officer, and includes the CFO and other
members of the Group’s senior finance team. The project roll out team
includes finance resource that is responsible for designing and
implementing appropriate financial processes and controls. The new
system is being used to transact an increasing proportion of the Group’s
admissions revenues – by the end of 2018 the project was substantially
complete. During the year the Committee received regular updates on
the progress of the project together with the identification and
subsequent resolution of issues that arose.
During the year IFRS 15 ‘Revenue from contracts with customers’ became
effective. The Committee reviewed the impact of this new standard and the
Group’s response. The Committee approved the updated revenue
accounting policy.
The Committee considered the impact of this new accounting standard in
the context of the Company’s primarily ‘cash-based’ business model and
the nature of the Company’s revenue transactions. We concluded that the
impact of IFRS 15 on the Group’s financial results was low. This conclusion
was reached following an assessment of management’s diagnostic review
of Merlin’s various revenue streams, together with the sales channels and
commercial relationships through which customers purchase access to
Merlin’s services and products. As noted on page 108 of the financial
statements, the most significant area of change has been where a third
party is involved, together with Merlin, in providing visitors to Merlin
attractions with admission tickets and/or accommodation, or commercial
offerings such as photos and games services once inside a Merlin
attraction. We reviewed how the impact of this change was recorded in
the Group’s accounting systems.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATIONGOVERNANCE
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AUDIT COMMIT TEE
REPORT C O N T I N U E D
Brexit
The Committee reviewed the work undertaken by management in assessing
the Group’s approach to the risks that exist as a result of Brexit. More details in
this area can be found in the Principal Risks section on page 36.
Going concern and viability review
In reviewing and approving the going concern and Viability Statements (see
pages 91 and 41 respectively), we focused especially on the appropriateness of
the key judgements, assumptions and estimates underlying the Company’s
plans together with a review of compliance with key financial covenants.
Merlin invests for the long term, with a portfolio of attractions that have
demonstrated their longevity and ability to evolve over time. The Group is
developing new brands and expanding into new markets and we are therefore
confident as to its long term prospects. For the viability assessment we then
considered the outlook period in the context of the Group’s business plan, its
planned capital investment cycles, new business development plans and
potential uncommitted capital projects and acquisitions. We concluded that
the four year outlook period adopted in our strategic planning processes
is appropriate.
We considered the key risks identified by the Group (as set out in the Principal
Risks section on pages 34 to 41) and any mitigating controls. This process
enabled the Committee to assess whether any material residual risks remained
that could pose a significant threat to the viability of the business as a whole.
The risks identified were those relating to safety incidents and the impact of
acts of terrorism or sabotage. The Committee then reviewed appropriate
sensitivity analyses in severe yet plausible scenarios that were performed to
assess the possible impact of these risks and the Group’s resilience to them
through controls and mitigating actions that could be taken.
New accounting standards
The Committee reviewed the impact and disclosures in the Annual Report of
new accounting standards. In addition to IFRS 15, the most significant of these
are as follows:
• IFRS 9 ‘Financial instruments’ became effective in 2018. The new standard
has not materially changed reported balances due to the nature and
quantum of the balances held by the Group.
• IFRS 16, the new standard on leasing, is effective from 2019. This will bring
on balance sheet substantially all of the Group’s property leases and will
have a significant impact on the Group’s financial procedures and reporting.
Accordingly, a specific transition project has been in progress since 2017.
Substantially all of Merlin’s lease commitments are in respect of property
and infrastructure at its attractions and the lease portfolio is of a relatively
‘high value, small volume’ nature. Merlin is therefore adopting the ‘fully
retrospective’ approach allowed by the standard, having performed the
more onerous historical analysis required by this transition approach. The
impact of this new standard is discussed more fully in the financial
statements on pages 139 to 141. During the year we received updates from
management on the project’s progress that included discussion of relevant
technical accounting areas and judgements, together with the processes by
which lease data would be captured, reviewed and accounted for under the
new rules. We also discussed these areas with KPMG.
Other matters
The Committee also reviewed other matters in relation to the Company’s
financial statements. In doing so we took into account recent developments in
corporate reporting and particular topical matters. The reviews covered:
• The half year and full year financial statements.
• Disclosures in the Annual Report and Accounts in relation to internal
control, the risk management process and the work of the Committee.
• The Group’s use and description of alternative performance measures
(APMs) and key performance indicators (KPIs) within its financial reporting.
This included the categorisation of transactions between underlying trading
and exceptional items.
• Approval of the refinancing plan and its subsequent accounting once the
refinancing had occurred.
• Those areas of the Group’s financial reporting considered to have required
most judgement or the use of estimates.
• The tax position of the Group, in particular the effective tax rate and the
recognition of deferred tax assets. This included an assessment of the
impact of legislative changes, including US tax reform.
• Key assumptions in relation to defined benefit pension schemes.
• The level of materiality used in the preparation of the financial statements.
• Technical updates, in particular in relation to the requirements of and
changes to the Code.
• The Audit Committee’s report in the context of the Code’s requirement for
‘fair, balanced and understandable’ reporting.
• Recoverability of the parent Company’s investment in and inter-group
receivable balances with subsidiaries.
Risk management and internal control
Oversight of the overall risk management process
Merlin separates its oversight of risk management into three risk areas: health,
safety and security; commercial and strategic; and financial process. The
internal control and risk management section on pages 34 to 36 provides more
information in this area. The Board has delegated oversight responsibility for
the overall risk management process to the Committee. During the year the
Committee therefore reviewed Merlin’s overall risk management framework.
At the end of the year the Company’s risk management structure and
processes, together with the methodology by which risk matters raised are
brought to the attention of the Board, were examined and it was concluded
that risks were being appropriately addressed. The Group’s risk management
structure and principal risks are shown on pages 34 to 41.
Management of financial process risk
The Board has delegated responsibility for financial process risk to the
Committee. Management remains responsible for establishing and maintaining
adequate internal controls that are designed to manage, rather than eliminate,
such risks. Management, the Audit Committee and the Board monitor the
outcomes of the three levels of risk management activity and assurance as set
out below.
• Level 1 – documented delegated authority limits and purchasing and sale
price approval levels in place across the Company.
• Level 2 – frequent and regular review processes of trading performance
together with detailed capital investment and strategic planning processes.
• Level 3 – self-assessment including self-certification by business unit
finance heads.
Whistleblowing systems and fraud/bribery mitigation
The Company has a good culture of encouraging its staff to report incidents of
poor practice. This is reinforced through the work of internal audit and local
profit protection teams, a summary of whose work is reviewed by the
Committee. The Committee also receives regular updates on whistleblowing,
including the quantity, source and nature of incidents reported and how
matters are resolved.
Internal audit
The Company’s internal audit function, which has dual reporting lines to both
the Chairman of the Audit Committee and the CFO, comprises in-house
auditors and is led by an appropriately qualified Group Internal Audit and Risk
Management Director. When necessary, external support is used in
specialist areas.
Internal audit reviews the Group’s risk management and internal controls,
following a risk based internal audit plan developed in conjunction with
management, and approved annually by the Committee. The Committee
approved the internal audit plan before the start of the year which included an
assessment of the risk approach taken in formulating audit priorities. Factors
such as size and location of business, history of audit findings, competence and
stability of local management, material changes to a business and relevance to
the Group’s strategy were factored into this assessment.
judgements and communication of the same with management and
the Committee.
• The quality of the formal report to shareholders.
• Their reputation and standing, including their independence and objectivity,
their internal quality procedures, and reports published by the FRC.
Audit quality
The quality of the external audit is a key topic the Committee discusses.
During the year the FRC published the results of its Audit Quality Review of
KPMG’s work. This report noted significant issues within a number of areas of
KPMG’s work across a sample of FTSE 350 companies. In that light, while we
are currently satisfied with KPMG’s Merlin audit, we are concerned by the
findings of the recent FRC report, and will continue to challenge KPMG as to
how they will continue to ensure a quality audit for Merlin going forward.
Appointment and governance
The Committee considered whether a retender during 2018 would be
appropriate as part of its annual recommendation on the appointment of the
external auditors. Having considered KPMG’s performance as set out above,
the Committee decided to recommend retaining KPMG for 2019.
During the year, audits were undertaken to obtain an appropriate level of
coverage across the business which we measure on a rolling two year basis. In
line with the plan approved by the Committee, internal audits conducted over
the last two years have been at operations representing approximately 80% of
the Group’s annual revenue streams. In addition to revenue generating
locations, work was performed over other areas including the site search and
project management activities in Merlin Magic Making, and the Group’s
management of property and leases.
In recommending the reappointment of external auditors at the AGM, the
Committee also takes into account EU guidance and the Competition and
Markets Authority (CMA) Order on mandatory audit tendering. Merlin will be
required to retender its audit no later than for the 2023 financial year and we
also note that the next regular KPMG partner rotation will take place after the
2019 audit. The Committee has therefore started to consider the factors that
would be taken into account in performing the tender process and ensuring
that there would be a good choice of audit firms to consider.
Internal audit results and management responses are then discussed and
challenged at each Committee meeting. The Committee reviews management
actions in response to significant findings and looks at the root cause of
consistent themes emerging across the Company. ‘Deep dive’ assessments are
performed where necessary and in 2018 these related to tax and treasury
matters, the accounting for project costs at new business development
locations, GDPR, and the shift to less cash-based operations. In 2018
PricewaterhouseCoopers (PwC) continued to be our provider of in-territory
support to Merlin’s internal audit function for certain overseas audits.
A review of the effectiveness of internal audit was undertaken during the year.
Members and attendees of the Audit Committee meetings, along with the
senior finance community of the Company, were questioned on a range of
subjects including the governance and organisation of the internal audit
function, their audit approach and the effectiveness of their reports and
conclusions. The results showed that the internal audit function is considered
to remain effective.
External audit
The Company’s external auditors are KPMG LLP, who review the control
environment and financial statements, assess and report on key areas of
judgement and estimates and provide ongoing advice and training on
technical matters.
Assessment of the performance of the external auditors
The Committee has evaluated the performance, independence and objectivity
of KPMG. This included an internally facilitated, questionnaire-based,
effectiveness assessment with feedback provided by Audit Committee
members, other attendees and senior finance personnel both at Merlin’s
attractions and at its head office. The survey covered KPMG’s mind-set and
culture, skills and knowledge, judgement and quality control of the audit. The
survey indicated satisfaction with the quality of the KPMG audit and the
Committee accepted KPMG’s responses to points raised in the survey. The
effectiveness of KPMG’s 2017 audit was assessed over the year by reference to
the following factors, in line with the FRC’s Practice Aid on Audit Quality:
• The performance of Hugh Green in his third year as Audit Partner, including
his understanding of our business and the impact on the Annual Report
and Accounts.
• The robustness and perceptiveness of KPMG’s handling of key accounting
and audit judgements.
• The quality of communication with the Committee, including the regular
reports on accounting and governance matters.
• The skills and experience of the wider audit team and their execution of the
audit, including the way they handled the key accounting and audit
Remuneration and independence of external auditors
Non-audit services are subject to market tenders or tests and are awarded to
the most appropriate provider. The external auditors may provide non-audit
services only when their skills and experience make them a competitive and
most appropriate supplier of these services. Non-audit services that are
awarded to the auditors are normally limited to assignments that are closely
related to the annual audit or regulatory reports where the work requires a
detailed understanding of the Group. In 2018 the more significant
matters were:
• The review of the Group’s half year published results.
• Assurance procedures required for the partial refinancing in the year.
• Other routine statutory services required under local regulatory legislation.
The external auditors may not provide a service which:
• Places them in a position to audit their own work.
• Impacts their independence by creating a shared interest.
• Results in the auditors developing close personal relationships with
Merlin employees.
• Results in the auditors functioning as a manager or employee of Merlin.
• Puts the auditors in the role of advocate for Merlin.
The Committee has adopted the guidance and related definitions from the
Department for Business, Energy and Industrial Strategy and determined that
‘non-audit fees’ should be no higher than 70% of ‘audit fees’ from 2019
onwards. We will continue to monitor this ratio. In 2018 fees for non-audit
services were £0.4 million (2017: £0.3 million), a ratio of 21% (2017: 19%). Details
of KPMG fees can be found in note 2.1 to the financial statements. All
non-audit services are approved by the Committee, although they have
granted the CFO authority to pre-approve the following non-audit services:
• Work which a third party requires to be carried out by the
Company’s auditors.
• Any other work up to a value of £50,000 where the external auditors are
best placed to undertake the work.
To ensure ongoing compliance with the FRC’s Ethical Standard and to ensure
that auditor objectivity and independence is not impaired, the Committee
regularly reviews reports on audit, audit-related and non-audit expenditure,
together with proposals of any material non-audit related assignments. The
Committee is satisfied that the overall levels of audit-related and non-audit
fees, and the nature of services provided, are not such that would compromise
the objectivity and independence of the external auditors.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATIONGOVERNANCE 74
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DIRECTORS’
REMUNER ATION REPORT
Chairman
Charles Gurassa
Membership
Sir John Sunderland
Trudy Rautio
Fru Hazlitt
Andrew Fisher
Responsibilities
The Remuneration Committee assists the Board in discharging
its responsibilities in relation to remuneration.
• Setting the Remuneration Policy for Executive Directors and
the Chairman.
• Reviewing and making recommendations to the Board on senior
management remuneration.
• Determining the individual remuneration and benefits package of
each of the Executive Directors.
• Determining the fees of the Chairman.
• Reviewing the design of share incentive plans for approval by
the Board.
• Ensuring appropriate reporting on remuneration matters in the
Annual Report and Accounts.
The Committee’s terms of reference are available on the
Company’s website.
Effectiveness review
During the year an external effectiveness review of the Committee took
place. This was based on a questionnaire sent to Committee members,
all other attendees and the Board on a broad range of matters including
the Committee’s scope; organisation and meetings; quality of debate
and challenge; and leadership. The results showed the Committee to
be effective.
WE CONTIN U ED TO RE VIE W
MERLIN ’ S RE M U NER ATION
POLICIES AND THE PRINCIPLES
THAT U NDERPIN THE M .
Dear Shareholder
This year’s Remuneration Report is split into three sections:
• Statement from the Chairman of the Remuneration Committee that
contains our remuneration principles and the key decisions reached by
the Committee.
• Overview of Directors’ Remuneration and extract of the Remuneration
Policy that contains details applying to Executive Directors.
• Annual Report on Remuneration that contains details of pay received by
Directors in 2018 and how we intend to implement our pay policy in 2019.
The Annual Report on Remuneration will be subject to an advisory vote at
the 2019 AGM.
Approach to remuneration and alignment to strategic objectives
A series of key principles underpin the Merlin remuneration structure. These
principles and a summary of our remuneration strategy, together with an
overview of the Remuneration Policy as it applies to the Executive Director
remuneration framework, are set out on pages 76 to 79. In addition, we
highlight how the Policy links to our strategy and summarise the key financial
information that impacts on remuneration. I hope that you will find this useful.
A full copy of the Remuneration Policy is available on our website.
Our approach remains consistent with prior years, reflecting our focus on
investing for the long term. Our performance measures for the annual bonus
are underlying operating profit (80% weighting) and key personal objectives
(20% weighting) which ensures alignment with short term performance, and
under the Performance Share Plan (PSP) a combination of EPS growth
(40% weighting), ROCE (40% weighting) and long term strategic objectives
(20% weighting) to ensure alignment over the long term.
Performance and reward outcomes in 2018
Overall, the Group reported revenue of £1,688 million and underlying
operating profit of £327 million for the year. Midway London, Midway
Attractions’ largest division, returned to growth in the second half of the year
and Resort Theme Parks reported strong growth from successful product
investment and favourable weather. Within LEGOLAND Parks, there was a
broadly flat like for like performance but a significant expansion of our
accommodation portfolio drove growth from new business development.
Our performance resulted in Group operating profit exceeding the threshold
for payment under the bonus plan and a high level of achievement against the
individual targets set to support delivery of the Group’s strategy. This has
resulted in a bonus of 35.4% of maximum entitlement to the CEO and 36.1%
to the CFO.
The PSP awards granted in April 2016 will vest at 36.5% of maximum on
1 April 2019. This was as a result of delivering 8.8% p.a. compound EPS growth
across the three year performance period and an average ROCE of 9.4%.
Details of the performance achieved against the targets set for these awards
are set out on page 86 of this report.
Implementing the Policy in 2018 and 2019
At the start of 2018 the Committee reviewed the application of the 2017
Remuneration Policy in light of the Company’s evolving strategy. The conclusion
of the review was that while the application of Policy was generally aligned with
the Company’s key financial performance indicators, a better balance between
incentivising long term planning and decision making with the delivery against
financial targets could be achieved through introducing strategic targets in the
long term incentive plan. Accordingly the Committee introduced structured
strategic targets for 20% of the 2018 PSP awards. These strategic objectives
cover productivity, new business development and customer satisfaction in
support of delivering the strategy.
At the same time, the Committee reviewed the target ranges for the long term
financial targets taking into account the internal business planning perspective,
the market’s expectations for our performance and the wider economic context.
The financial targets for the 2018 PSP awards were therefore set as follows:
• EPS growth: 3% p.a. growth for threshold vesting (20% of maximum) rising
to full vesting for achieving EPS growth of 10% p.a.; and
• ROCE: 8% average for threshold vesting (25% of maximum) rising to full
vesting for achieving 10% average ROCE.
Additionally, the Committee considered the breadth of the Chief Financial
Officer’s role which also includes responsibility for implementing the
Company’s commercial agenda and concluded that she should be made a
2018 PSP award of 250% of salary with the additional 25% of salary being
subject to targets directly relating to improvements in the Company’s
commercial operations.
The above changes were the subject of extensive shareholder consultation
prior to implementation with the Company receiving over 97% support for its
2017 Directors’ Remuneration Report.
The changes made to our application of Policy in 2018 are considered to better
align the executive team with the current medium to long term priorities of the
Company and recognise the breadth of their individual roles. Further details of
the 2018 awards are provided on pages 83 to 84.
The Committee has continued to monitor the effectiveness of the Policy
throughout 2018 and does not propose any material changes for 2019. The
proposed pay structure for the Executive Directors for 2019 is outlined on
pages 80 to 81.
Key decisions made by the Committee in relation to 2019 include:
• The Committee considered the competitiveness of the Executive Directors’
salaries and performance of the Directors and concluded that an increase in
line with the wider UK Merlin workforce will be awarded in April 2019.
• The Committee has agreed the same basic structure to the 2019 central
bonus plan as 2018, with individual objectives for the Executive Directors
appropriately reflecting Company priorities.
• No payment for personal objectives will be made if less than 85% of
budgeted underlying operating profit is achieved.
• In line with the new Corporate Governance Code, the Committee will
undertake a discretionary review of proposed payouts to ensure that they
are commensurate with underlying performance.
• In light of the 2018 PSP award structure being considered to improve the
balance between incentivising long term planning and decision making with
the delivery against financial plans, the same general approach is to be
retained for the 2019 awards. In line with past practice, the Chief Executive
will be granted a 250% of salary award in 2019. With regards to the Chief
Financial Officer, in line with the approach adopted in 2018 detailed above,
since her role at Merlin continues to operate in 2019 with a broader range
of responsibilities than those more generally associated with a Group
Finance Director or Chief Financial Officer role, she will continue to receive
a 250% of salary award.
• The performance targets to apply to the 2019 awards will operate on a
similar basis to those set for the 2018 awards (i.e. performance will be
assessed based 40% on EPS growth, 40% on ROCE and 20% on strategic
targets). However, work in relation to the range of targets remains ongoing
in light of the uncertainties created by the UK leaving the European Union,
expected changes to US and European tax rates in the next three year
period and changes to accounting standards (i.e. changes in accounting for
leases under IFRS 16). Overall, the range of targets to be set will be similarly
challenging to those set for the awards granted in 2018 allowing for current
commercial circumstances and outlook. The range of targets set will be the
subject of discussions with our major shareholders and the leading
shareholder advisory bodies prior to the grant of the awards at which
time the targets will be disclosed (i.e. in the market announcement of
the awards).
Committee activities during the year
Upon Ken Hydon’s retirement during the year, Andrew Fisher joined
the Remuneration Committee. Alongside his wealth of experience in
digital consumer and technology he brings first-hand experience of PLC
Remuneration Committee responsibilities.
During the year the Committee explored alternative mechanisms for engaging
more directly with employees, in line with ensuring that the ‘employee voice’ is
considered at Board level. As a result we are introducing a trial in 2019 which
builds on our successful ‘Your Voice Counts’ forums in the UK. This will allow a
Board Director to engage in person with employee representatives from our
UK business. We will evaluate this trial later in the year to inform any future
developments in terms of scope and geographic coverage.
Corporate governance developments
The publication of the 2018 UK Corporate Governance Code in July has
introduced a number of matters which the Committee will consider in the
coming months. In particular, this will include the enhancements to the remit of
the Committee together with consideration of enhanced policy and reporting
requirements. Since our current Remuneration Policy remains appropriate the
Committee does not propose any changes in 2019. A full review of the
Remuneration Policy will be undertaken in 2019 and subject to shareholder
approval in 2020.
Shareholder engagement
In 2018 we undertook extensive consultation on the introduction of strategic
objectives as part of the 2018 PSP award and recognising the Chief Financial
Officer’s increased responsibilities. This provided valuable input from our
major shareholders. We will continue that dialogue as we develop our new
policy proposals for approval in 2020.
I hope you will find this report to be clear and helpful in understanding our
remuneration practices and that you will be supportive of the resolution
relating to remuneration at the AGM. As ever, the Committee welcomes any
questions or comments from shareholders.
Charles Gurassa
Chairman of the Remuneration Committee
27 February 2019
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATIONGOVERNANCE
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DIRECTORS’
REMUNER ATION REPORT C O N T I N U E D
KE Y PRINCIPLES AND RE M U NER ATION STR ATEGY
HOW OUR REMUNER ATION POLICIES SUPPORT OUR STR ATEGY
Remuneration principles
A series of key principles underpin the Merlin remuneration structure:
payments should be based on results and performance; pay should be
consistent with best practice and aligned to the long term success of the
Company; and widespread share ownership should be encouraged.
Performance orientated
• Rewarding performance is a core part of our ethos. About 90% of our
permanent employees participate in a bonus plan and over 400
employees receive regular share awards or share option grants.
• To reinforce the link between performance and pay, most employees are
rewarded for the performance of their particular attraction. Only the
senior executives (the Executive Committee and their direct reports) and
employees of central functions are rewarded for the performance of the
overall Group.
• For senior executives, including the Executive Directors, performance
related pay, based on stretching short term and longer term targets, forms
a significant part of their potential pay packages.
Aligned to the long term success of the Company
Our pay structure encourages strong alignment between the interests of our
senior executives and the interests of our shareholders.
• Senior executives receive regular awards of shares under the Performance
Share Plan (PSP) which from 2018 are subject to the achievement of
challenging EPS, ROCE and strategic performance targets. EPS and ROCE
are key performance indicators aligned to the Company’s strategic
priorities and the creation of value to shareholders. Strategic performance
targets are linked to improvements in our productivity, new business
development and customer satisfaction, which are central to our current
strategic plan.
• The business continues to see many global opportunities for the successful
deployment of capital and these measures are designed to ensure that this is
done in the most effective manner to generate sustainable long term returns.
• For senior executives, there is greater emphasis on rewards for delivery of
longer term performance targets than short term performance targets.
• Members of the Executive Committee are required to build up and retain
a significant holding of Merlin shares.
Consistent with best practice
• Salaries are intended to be set at competitive, but not excessive,
Widespread share ownership
• Widespread share ownership is an integral part of Merlin’s culture.
levels compared to peers and other companies of an equivalent size
and complexity.
We operate All Employee Share Plans that enable all of our permanent
employees to purchase a stake in our Company.
• There is potential for market competitive levels of total pay but only if
• These plans supplement the discretionary share plans for senior
stretching business targets are delivered.
• For our employees, we have a high degree of simplicity in our pay model.
executives (Deferred Bonus Plan and PSP) and the Company Share
Option Plan (CSOP) for middle management.
Delivering growth
Planned investments,
Synergies, Strategic acquisitions
Driving innovation
Destination resorts,
New Midways, New LLPs
Culture
The Merlin Way,
Being a Force for Good
Long term
shareholder return
Bonus
(Underlying operating profit)
LTIP
(EPS, ROCE,
Strategic objectives)
Underpin
(Health and safety, Remuneration
Committee discretion)
Other
(Shareholding requirements)
VARIABLE PAY REFLECTING PERFORMANCE
Annual Bonus(1)
Metric
Target
Actual
Outcome
Underlying operating profit
£333 million
£327 million
36.1% of maximum
Personal objective achievement
• CEO
• CFO
35.4% of maximum
36.1% of maximum
OVERVIE W OF E XECUTIVE DIRECTOR RE M U NER ATION FR AME WORK
PSP (2016 award)(2)
Targets (min x%, max y%)
Actual (2016-2018)
Outcome
Base salary and benefits
Annual bonus
Based on achievement of:
• Underlying operating profit
• Personal objectives
Performance Share Plan
• Adjusted EPS three year CAGR (40%)
• Average ROCE (40%)
• Strategic objectives (20%)
• Salaries set at competitive levels to attract and retain high calibre candidates
• Benefits include life, income protection and medical insurance and a car allowance
• Retirement benefit contribution of 25% of salary
• Provides incentive to achieve annual goals with alignment to the strategic priorities
• Maximum bonus is 150% of salary for the CEO and 135% for the CFO (150% is maximum permitted)
• On target bonus is 75% of salary for the CEO and 67.5% for the CFO
• Two-thirds of the bonus is payable in cash and one-third is deferred for three years in shares
• No payment for personal objectives if less than 85% of budgeted underlying operating profit achieved
• Supports the long term strategy to drive destination resort positioning and innovation to continue the
profitable roll out of Midway attractions and new brand developments
• Awards of up to 250% of salary to CEO and CFO (maximum permitted award is 350% of salary)
• Performance ranges for EPS and ROCE take account of market consensus at time of grant
• Strategic objectives reflect key drivers of performance
• Awards have a three year performance period
Shareholding guidelines
• 200% of salary for CEO and CFO, targeted to be achieved over five years
Malus and clawback
• The Remuneration Committee has wide-ranging discretion to adjust annual bonus and long term
incentive plan (LTIP) outcomes to override formulaic outcomes
• Health and safety underpins and malus and clawback mechanisms are in place
Policy review
• No policy changes have been made in 2018 or are proposed for 2019
• The Policy will be reviewed for 2020 and be subject to shareholder vote at the 2020 AGM
Adjusted EPS growth
7% to 14% CAGR over 3 years
8.8%
Adjusted post tax ROCE
9% to 13% average ROCE over 3 years
9.4%
(1) Organic growth
(2) Reported growth
36.5% of the awards made
in 2016 will vest based on
the combination of EPS and
ROCE performance
RE M U NER ATION POLICY SCE NARIOS AND ACTUAL OUTCOME FOR 2018
£000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
3,192
48%
28%
24%
1,493
27%
22%
51%
1,978
38%
23%
39%
763
100%
LTIPs Annual bonus Fixed pay
1,271
39%
21%
40%
505
100%
2,038
49%
26%
25%
934
25%
21%
54%
Minimum
Target
Maximum
Actual
Minimum
Target
Maximum
Actual
Chief Executive Officer
CEO
Chief Financial Officer
CFO
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATIONGOVERNANCE
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DIRECTORS’
REMUNER ATION REPORT CONTINUED
SU M MARY OF KE Y RE M U NER ATION POLICIES FOR THE E XECUTIVE DIRECTORS
Operation
Maximum opportunity
Performance conditions
Generally reviewed annually with any increase normally
taking effect from 1 April although the Committee may
award increases at other times of the year if it considers
it appropriate.
No absolute maximum has been set for Executive
Director base salaries. Current Executive Director
salaries are set out in the Annual Report on
Remuneration section of this Remuneration Report.
Base salary
To appropriately
recognise responsibilities
and attract and retain
talent by ensuring salaries
are market competitive.
The review takes into consideration a number of factors,
including (but not limited to):
• The individual Director’s role, experience and
performance.
• Business performance.
• Market data for comparable roles in appropriate pay
comparators.
• Pay and conditions elsewhere in the Group.
Any annual increase in salaries is at the discretion of
the Committee taking into account the factors
stated in this table and the following principles:
• Salaries would typically be increased at a rate
consistent with the average salary increase
(in percentage of salary terms) for permanent
UK employees.
• Larger increases may be considered appropriate
in certain circumstances (including, but not
limited to, a change in an individual’s
responsibilities or in the scale of their role or in
the size and complexity of the Group).
• Larger increases may also be considered
appropriate if a Director has been initially
appointed to the Board at a lower than typical
salary.
There is no overall maximum as the level of benefits
depends on the annual cost of providing individual
items in the relevant local market and the individual’s
specific role.
Benefits
To provide market
competitive benefits.
Benefits are role specific and take into account local
market practice.
Benefits currently include a company car or car allowance,
phone costs, income protection insurance, an annual medical,
private medical insurance and life assurance of four times
annual salary. The Committee has discretion, in the event of
the appointment of a Director based overseas or in
appropriate circumstances, to add to or remove benefits
provided to Executive Directors.
Pension
To provide market
competitive retirement
benefits.
Annual bonus
To link reward to key
business targets for the
forthcoming year and to
individual contribution.
Also to provide
additional alignment with
shareholders’ interests
through the operation of
bonus deferral.
Current policy is for the Company to either contribute to
the Group Pension Plan and/or to provide a cash allowance
in lieu of pension.
Executive Directors receive a contribution of up to
25% of base salary to the Group Pension Plan and/or
as a cash allowance in lieu of pension.
The Executive Directors are participants in the central
bonus plan which is reviewed annually to ensure bonus
opportunity, performance measures and targets are
appropriate and supportive of the business strategy.
Two-thirds of an Executive Director’s annual bonus is
delivered in cash following the release of audited results
and the remaining third is deferred into an award over
Company shares under The Merlin Entertainments plc
Deferred Bonus Plan.
• Deferred awards are usually granted in the form of
conditional share awards or nil-cost options (and may also
be settled in cash).
• Deferred awards usually vest three years after award
although may vest early on leaving employment or on
a change of control (see full Policy).
• An additional payment (in the form of cash or shares) may
be made in respect of shares which vest under deferred
awards to reflect the value of dividends which would have
been paid on those shares during the vesting period (this
payment may assume that dividends had been reinvested
in Company shares on a cumulative basis).
• Bonus payments and deferred share awards will be subject
to withholding or clawback at the Remuneration
Committee’s discretion during the three year period
following the award of the bonus in exceptional
circumstances where the Committee finds that the
Executive Director has engaged in misconduct justifying
summary dismissal or there has been a material
misstatement of the financial accounts relating to the
relevant bonus year or any other error in calculation
which has led to an overpayment of bonus.
The Committee has wide-ranging discretion on the award
and vesting of bonuses. In particular, the Committee has
discretion to amend the payout should any formulaic output
not reflect the Committee’s assessment of overall business
performance, including health and safety issues.
The maximum award that can be made under the
central bonus plan is 150% of base salary.
Each year the Remuneration Committee
determines the maximum bonus opportunity for
individual Executive Directors within this limit.
The bonus is based on performance
assessed over one year using
appropriate financial, strategic and
individual performance measures.
The majority of the bonus will be
determined by measure(s) of Group
financial performance. The selected
measure(s) for the relevant financial
year are set out in the Annual
Report on Remuneration section
of this Remuneration Report.
A sliding scale of targets is set for
each Group financial measure with
payout at zero for threshold financial
performance increasing to 50% for
meeting expectations and 100%
for maximum performance.
The remainder of the bonus will be
based on financial, strategic or
operational measures appropriate to
the individual Director. The selected
measures for the relevant financial
year are set out in the Annual
Report on Remuneration section
of this Remuneration Report.
Any bonus payout is ultimately at the
discretion of the Committee.
Operation
Maximum opportunity
Performance conditions
The maximum annual award permitted under the
PSP is shares with a market value (as determined by
the Committee) of 350% of salary.
Each year the Remuneration Committee
determines the actual award level for individual
Executive Directors within this limit.
Performance Share
Plan (PSP)
To link reward to key
business targets for the
longer term and to retain
executives and the
creation of value for
shareholders by
rewarding long term
objectives.
Awards are usually granted annually under the PSP to
Executive Directors and other selected senior executives.
Individual award levels and performance conditions on which
vesting will be dependent are reviewed annually by the
Remuneration Committee.
Awards may be granted as conditional awards of shares,
nil-cost options or forfeitable share awards (or, if appropriate,
as cash-settled equivalents).
Awards normally vest at the end of a period of at least three
years following grant although may vest early on leaving
employment or on a change of control (see full Policy).
An additional payment (in the form of cash or shares) may be
made in respect of shares which vest under PSP awards to
reflect the value of dividends which would have been paid on
those shares during the vesting period (this payment may
assume that dividends had been reinvested in Company
shares on a cumulative basis).
PSP awards will be subject to potential withholding or
clawback during the five year period following the date of
award in exceptional circumstances of evidence coming to
light of misconduct justifying summary dismissal or of a
material misstatement of the financial accounts or an error
in the calculation of the extent of payment or vesting of
an incentive.
In the event of a material health and safety breach by the
Group during the period between grant and vesting of an
award, the Remuneration Committee may reduce the
number of shares which would otherwise vest as a result of
the EPS and ROCE performance conditions to ensure that
the vesting outcome is appropriate.
All Employee
Share Plan (UK
Sharesave Scheme)
To create staff alignment
with the Group and
promote a sense of
ownership.
Company Share
Option Plan (CSOP)
Executive Directors will
only receive CSOP
awards in exceptional
circumstances. Individuals
who are promoted to
the Board may have
outstanding awards
under this plan.
Tax-approved monthly savings scheme facilitating the
purchase of shares through share options at a discounted
exercise price by all eligible UK employees.
Monthly saving limit of £500 (or such other limit as
may be approved from time to time by HMRC)
under all savings contracts held by an individual.
Executive Directors are eligible to participate on the same
basis as other employees.
The CSOP permits grants of share options with an exercise
price of not less than the market value of a share (as
determined by the Committee) at the time of grant.
Options are usually exercisable between three and ten
years following grant although may have a different exercise
period on leaving employment or on a change of control
(see full Policy).
Options that are HMRC unapproved may, if appropriate,
be settled in cash or be net-settled.
Annual awards of options over shares worth up to
100% of salary at grant (or, if the Remuneration
Committee determines that special circumstances
exist, 200% of salary).
Vesting of PSP awards is usually
dependent on, but not limited to,
measures of Group earnings and
return on total investment with the
precise measures and weighting of
the measures determined by the
Committee ahead of each award.
These details are disclosed in the
Annual Report on Remuneration
section of this Remuneration
Report.
Performance will usually be
measured over a three year
performance period. For achieving a
‘threshold’ level of performance
against a performance measure, no
more than 25% of the portion of the
PSP award determined by that
measure will vest. Vesting then
increases on a sliding scale to 100%
for achieving a stretching maximum
performance target.
The Sharesave scheme is structured
in accordance with HMRC
requirements so has no
performance conditions but requires
participants to make regular savings
into a savings contract.
If CSOP awards were, in exceptional
circumstances, granted to an
Executive Director, they would be
subject to an appropriate
performance condition as
determined by the Committee.
An individual promoted to the Board
may have outstanding CSOP awards
(granted prior to their promotion)
that have no performance conditions
attached to them.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATIONGOVERNANCE 80
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DIRECTORS’
REMUNER ATION REPORT CONTINUED
ANN UAL RE PORT ON RE M U NER ATION
The Annual Report on Remuneration will be subject to an advisory shareholder vote at the 2019 Annual General Meeting.
U NAU DITED INFORMATION
Implementation of Remuneration Policy in 2019
This section provides an overview of how the Committee is proposing to implement our Remuneration Policy, as set out in the Policy Report, in 2019 for the
current Executive Directors.
Base salary
Salary details for the current Executive Directors are set out below.
Nick Varney (CEO)
Anne-Francoise Nesmes (CFO)
Salary from
1 April 2018
£609,432
£399,567
Salary from
1 April 2019
£621,620
£407,558
Annualised
% increase
2%
2%
The average salary increase for the Merlin UK workforce effective from 1 April 2019 is 2% and both the CEO and CFO will receive this increase, as noted in the
Chairman’s Statement.
Pension and benefits
As in 2018, the current Executive Directors will receive a Company pension contribution worth 25% of salary. Nick Varney will receive this contribution as a cash
allowance and Anne-Francoise Nesmes will receive a contribution to the Group Pension Plan of no more than the minimum annual allowance for pensions of
£10,000 and a cash allowance in respect of the balance. To the extent that a cash allowance is paid, this is reduced by the corresponding amount of employer
National Insurance contributions. They will also receive a standard package of other benefits consistent with those received in 2018.
Annual bonus
The structure of the annual bonus plan for 2019 remains broadly consistent with the 2018 plan. Key features are as follows:
• The maximum annual bonus potential will be 150% of salary for the CEO and 135% for the CFO.
• One-third of any bonus earned will be deferred into shares for three years under The Merlin Entertainments plc Deferred Bonus Plan.
• Bonus payments and deferred share awards will be subject to potential withholding or clawback during the three year period following the award of the bonus
in exceptional circumstances of evidence coming to light of misconduct justifying summary dismissal or of a material misstatement of the financial accounts or
an error in the calculation of the extent of payment or vesting of an incentive.
• The Committee’s discretion includes the ability to adjust bonus awards to ensure they reflect underlying business performance, including health and
safety issues.
The annual bonus for 2019 for Executive Directors will be determined as detailed below:
Measure (as a percentage of maximum bonus opportunity)
Underlying operating profit
Personal objectives
Total
CEO
80%
20%
100%
CFO
80%
20%
100%
Following a review of the structure of the plan, the Remuneration Committee has removed the previous dependency of personal objectives on the financial
performance in the year in order to better reflect the achievement of medium to longer term goals. The targets themselves, as they relate to the 2019 financial
year, are deemed to be commercially sensitive. However, retrospective disclosure of the targets and performance against them will be provided in next year’s
Directors’ Remuneration Report to the extent that they do not remain commercially sensitive at that time.
Performance Share Plan
Performance Share Plan (PSP) awards are granted over Merlin shares with the number of shares under award determined by reference to a percentage of base
salary. Vesting of the awards is conditional upon satisfaction of challenging three year performance conditions and is usually also conditional upon continued
employment until the awards vest. In addition, a health and safety underpin is attached to all PSP awards. This affords the Committee the ability to scale back or
cancel awards in the case of a major health and safety incident if it decides it is appropriate to do so.
A similar structure as operated for the 2018 awards is planned to operate for the 2019 awards (i.e. awards to Executive Directors at 250% of salary with
challenging EPS (40% weighting), ROCE (40% weighting) and strategic targets (20% weighting)). With regard to the strategic targets to apply to the Chief Financial
Officer’s award, it is anticipated that these will mirror the form and structure of the strategic targets to apply to wider participants for the 2019 awards as
opposed to including a specific element on her commercial role so that the team are similarly aligned to deliver the Company’s strategy and the overall approach
is simplified.
In light of factors detailed in the Chairman’s introductory statement on pages 74 to 75, work remains ongoing as to the range of financial targets to apply to the
2019 awards with the Committee’s intention being that the targets will remain similarly challenging to those set for the 2018 awards (see pages 83 to 84) allowing
for the current commercial outlook. The range of targets set and the operation of the strategic targets for the 2019 awards will be the subject of discussions with
our major shareholders and the leading shareholder advisory bodies prior to the grant of the awards at which time the targets will be disclosed (i.e. in the market
announcement of the awards). It is expected that full details of next year’s long term incentive awards will be included in the 2019 Directors’ Remuneration
Report prior to the grant of the awards.
Employee Share Plan
Invitations to UK employees (including Executive Directors) to participate in the Employee Sharesave Plan (UK Sharesave Plan) have been issued each year from
2014. Similar invitations were issued to relevant employees under the US Employee Stock Purchase Plan and the Overseas Sharesave Plan.
Invitations for the next award under each of these plans commence in March 2019.
Non-executive Director remuneration
The table below shows the current fee structure for Independent Non-executive Directors. Independent Non-executive Director fees are determined by the
full Board except for the fee for the Chairman of the Board, which is determined by the Remuneration Committee.
Fees as at January 2019
Basic fee for UK-based Non-executive Director
2019
£50,750
Basic fee for overseas-based Non-executive Director
£50,750 plus a travel allowance of £1,000 per Board meeting attended in person
Senior Independent Director additional fee
Audit Committee Chairman additional fee
Remuneration Committee Chairman additional fee
Chairman of the Board all-inclusive fee
£10,000
£11,000
£10,000
£253,750
Basic fees will be increased by 2% in April in line with the UK workforce.
There are no fees paid for membership of Board Committees nor to the shareholder representative Non-executive Director.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATIONGOVERNANCE
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DIRECTORS’
REMUNER ATION REPORT CONTINUED
AU DITED INFORMATION
The information provided in this section of the Directors’ Remuneration Report up until the ‘Unaudited information’ heading on page 87 is subject to audit.
Single total figure of remuneration in 2018
The following table sets out the total remuneration for Executive Directors and Non-executive Directors for 2018 with prior year comparatives for 2017.
Additional disclosures in respect of the single figure table
Annual bonus
Executive Directors are participants in the central bonus plan. The maximum annual bonus opportunity for the Executive Directors for 2018 was 150% of salary
for the CEO and 135% of salary for the CFO. One-third of any bonus earned is deferred into shares for three years under The Merlin Entertainments plc
Deferred Bonus Plan.
Other(5)
Pension(6)
Total
The maximum potential annual bonus that could be paid to Executive Directors in respect of 2018 performance was determined by underlying operating profit
performance with targets set by reference to the Group budget. 20% of that potential bonus was additionally subject to satisfaction of individual objectives.
Performance measures and targets applying to the 2018 annual bonus are set out below.
All figures shown in £000
Executive Directors
Nick Varney
Anne-Francoise Nesmes(9)
Non-executive Directors
Sir John Sunderland
Charles Gurassa
Ken Hydon(7)
Fru Hazlitt
Trudy Rautio
Rachel Chiang
Andrew Fisher(8)
Søren Thorup Sørensen
All figures shown in £000
Executive Directors
Nick Varney
Anne-Francoise Nesmes(9)
Non-executive Directors
Sir John Sunderland
Charles Gurassa
Ken Hydon
Fru Hazlitt
Trudy Rautio
Rachel Chiang
Søren Thorup Sørensen
Annual
bonus(3)
322
194
2018
Long term
incentives(4)
408
231
Salary and
fees(1)
Benefits(2)
607
398
253
71
21
51
58
51
25
–
22
18
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Salary and
fees(1)
Benefits(2)
Annual
bonus(3)
597
387
250
70
60
50
59
59
–
21
17
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2017
Long term
incentives(4)
164
–
–
–
–
–
–
–
–
–
4
–
–
–
–
–
–
–
–
134
89
–
–
–
–
–
–
–
–
1,493
934
253
71
21
51
58
51
25
–
Other(5)
Pension(6)
Total
–
–
–
–
–
–
–
–
–
131
85
–
–
–
–
–
–
–
913
489
250
70
60
50
59
59
–
Notes to the table – methodology:
(1) Salary and fees – this represents the cash paid or receivable in respect of the period. For Non-executive Directors based outside the UK this includes any travel allowance payable.
(2) Benefits – this represents the taxable value of all benefits paid or receivable in respect of the period. Executive Directors receive a company car or car allowance, phone costs, income protection insurance, an annual
medical, private medical insurance and life assurance of four times annual salary. The most significant of these benefits is the car allowance which was £14,000 for the CEO and £12,300 for the CFO.
(3) Annual bonus – this is the total annual bonus earned in respect of the period. Two-thirds of this bonus is paid in cash and the remaining third is deferred in shares for three years. Further details relating to the 2018 bonus
are disclosed below.
(4) Long term incentives – this column relates to the value of long term awards, the performance period for which ends in the year under review. The figure for 2017 has been updated to reflect the vesting of the award based
on the share price on the date of vesting (£3.4109). The long term incentive award granted in 2016 had a performance period that ended in 2018. The figure for 2018 reflects the vesting of the award based on the average
closing share price for the final quarter of 2018 (£3.3901). Further details are given in the ‘Outstanding awards under the PSP’ note on page 86.
(5) Other – this column relates to the value of the grant of options under the UK Sharesave Plan. The grant has been valued for the 2018 grant at 22.7% of the market value of shares under option which is the IFRS 2 valuation
for this award. At the date of grant the face value was £3.5387 and the exercise price was £2.8309, being a 20% discount under the UK Sharesave Plan rules.
(6) Pension – Executive Directors receive a Company contribution worth 25% of salary. Nick Varney receives this contribution as a cash allowance and Anne-Francoise Nesmes receives this as a contribution to the Group
Personal Pension Plan up to the annual allowance and, in respect of the balance, as a cash allowance. This figure represents the benefit received by the Directors in respect of the period.
(7) Ken Hydon retired on 27 April 2018 and the amount shown for 2018 reflects fees payable to that date.
(8) Andrew Fisher joined the Board on 1 July 2018. Fees shown in the table are from that date to 29 December 2018.
(9) Anne-Francoise Nesmes subscribed to the UK Sharesave Plan in April 2017 and then withdrew in 2018. As a result the data for 2017 has been restated. Anne-Francoise subsequently subscribed to the 2018 UK
Sharesave Plan.
Based on this performance the CEO earned a bonus of £322,000 and the CFO a bonus of £194,000, of which one-third will be deferred into shares for
three years.
Performance
measure
Underlying
operating profit
Proportion of bonus
determined by measure
Threshold
performance
80%
£313 million
(0% of bonus
payable)
Target
performance
£333 million
(40% of bonus
payable)
Maximum
performance
£353 million
(80% of bonus
payable)
Actual
performance
£327 million
% of maximum
bonus payable
28.9%
Individual objectives
20%(1)
Following the year end, the Committee assessed performance against the individual
objectives for each Director for 2018.
CEO: The CEO met the large majority of his personal objectives which comprised
development of the pipeline in support of the new business targets for new
LEGOLAND parks, accommodation and Midway openings (including targets for
LEGOLAND New York and Korea, new brands and existing estate), health and
safety, talent management (including succession planning) and visitor satisfaction.
CFO: The CFO met all of her personal objectives which comprised setting up the
Finance 21 project, agreeing plans to deliver sustainable savings and simplification,
introducing the new lease accounting standard, successfully delivering the refinancing
strategy, improving retail and food and beverage performance and strengthening
finance capabilities.
6.5%
7.2%
TOTAL
35.4% (CEO)
36.1% (CFO)
(1) For the 2018 bonus plan, the maximum annual bonus payout that could be received as a result of individual objectives is scaled back to the extent that the actual underlying operating profit falls short of the
maximum payout.
Scheme interests awarded during the financial year
Performance Share Plan awards
An award was granted under the PSP to selected senior executives, including Nick Varney and Anne-Francoise Nesmes, on 11 April 2018. These awards are
subject to the performance conditions described below and will vest on 12 April 2021.
At the date of the Remuneration Report in 2017 the structure of the award to the CFO was subject to review given the new strategic plan and her specific
responsibilities. Including the feedback from extensive consultation with key shareholders, the Committee concluded that the PSP award to the Chief Financial
Officer should be set at the same level as the Chief Executive Officer, at 250% of salary (increased from 225% of salary). The increased award level reflected the
enhanced role at Merlin of the Chief Financial Officer which includes operational responsibility for the commercial function. The targets applied to the enhanced
award (25% of salary) were set exclusively against her commercial responsibilities within the strategic element of the award.
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DIRECTORS’
REMUNER ATION REPORT CONTINUED
Type of award
Maximum number
of shares(1)
Face
value (£)
Face value
(% of base salary)
Threshold vesting
(% of award)
End of performance
period
Payments to past Directors
There were no payments to past Directors during 2018 that had not been previously disclosed.
Nick Varney
Performance shares
438,819
1,523,579
250%
Anne-Francoise
Nesmes
Performance shares
287,706
998,915
250%
For EPS element 8%
of award (max 40%)
For ROCE element 10%
of award (max 40%)
For strategic element 5%
of award (max 20%)(2)
26 December 2020
(1) The maximum number of shares that could be awarded has been calculated using the closing share price on 10 April 2018 of £3.4720 and is stated before the impact of reinvestment of the dividends paid since grant.
(2) The vesting schedule is structured such that achieving the threshold strategic performance requirement results in 25% of this part of the award vesting (12.5% in the case of the CFO). Vesting then increases on a stepped
basis subject to meeting the range of targets set. Full vesting requires all strategic targets to be met in full.
EPS performance condition (40% of award)
Below threshold
Threshold
Adjusted EPS growth
<3% p.a. cumulative growth
3% p.a. cumulative growth
% of award vesting
0%
8%
Between threshold and maximum
3% – 10% p.a. cumulative growth
8% to 40% on sliding scale
Maximum
10% p.a. cumulative growth
40%
Adjusted EPS growth will be calculated by comparing Adjusted EPS for the 2020 financial year with Adjusted EPS for the 2017 financial year.
ROCE performance condition (40% of award)
Below threshold
Threshold
Between threshold and maximum
Maximum
Average ROCE
<8%
8%
8% – 10%
10%
% of award vesting
0%
10%
10% to 40% on sliding scale
40%
Average ROCE will be calculated as an average of ROCE for the 2018, 2019 and 2020 financial years.
The 2018 targets were set to exclude the impact of LEGOLAND New York since this was not expected to open until spring 2020 and so to ensure a consistent
basis of testing underlying performance, the above targets will exclude its impact in terms of the forecast part year earnings and capital expenditure associated
with its development.
Strategic performance condition (20% of award)
• Productivity – a range of targets were set for improving productivity. The targets measure the benefits from business simplification projects and efficiency
improvements from investments in systems and processes.
• New business development – the targets were set for the delivery of new attractions and their subsequent performance. This includes new Midway
attractions, new accommodation and new LEGOLAND parks.
• Customer satisfaction – customers are at the heart of our business. We set customer satisfaction targets and measure performance based on
survey data.
• Commercial objectives (CFO only) – a range of targets including delivering margin improvement and range development in the key retail, food and
beverage, photos, games and procurement businesses.
For the Chief Executive Officer, the vesting schedule is structured such that achieving the threshold performance requirement results in 25% of this part of the
award vesting through to full vesting for meeting each of the targets in full. There is no ability to retest any element of the performance targets. With regard to the
Chief Financial Officer, the same structure detailed for the Chief Executive Officer will apply to 50% of her strategic targets (i.e. 10% of her total award) with the
balance subject to the targets relating to her commercial responsibilities. The same vesting profile also operates with respect to this part of her award (i.e. a sliding
scale from 25% vesting at the threshold performance level through to full vesting for meeting each target in full). There is no ability to retest any element of the
performance targets. The specific targets are considered commercially sensitive and will be disclosed in full, along with actual performance at the time of vesting,
in the 2020 Directors’ Remuneration Report.
Payments for loss of office
There were no payments for loss of office to Directors during 2018.
Statement of Directors’ shareholding and share interests
A shareholding guideline of 200% of base salary by the fifth anniversary of appointment applies to the Executive Directors. The CEO had a shareholding that
exceeded that guideline at 29 December 2018. The CFO joined in August 2016 and is in the process of building up her shareholding to meet the guideline by her
fifth anniversary.
Executive Directors are expected to achieve the shareholding guideline primarily by retaining at least 50% of any share awards that vest under the PSP and the
Deferred Bonus Plan (after selling sufficient shares to satisfy tax liabilities). Individuals are expected to be compliant with their shareholding guideline within five
years of that individual becoming subject to the guideline. The Committee reviews ongoing individual performance against the shareholding guideline at the end of
each financial year.
Current shareholding guidelines and the number of shares held by Directors are set out in the table below.
Number of shares
Interests in share incentive schemes,
awarded without performance conditions
at 29 December 2018
Interests in share
incentive schemes,
awarded subject to
performance conditions
at 29 December 2018(2)
Value of shareholding at
29 December 2018 as a
% of salary
(shareholding guideline
target)
Shares owned outright
at 29 December 2018
Sharesave
Deferred Bonus(1)
3,463% (200%)
6,680,697
Director
Nick Varney(3), (7)
Anne-Francoise Nesmes(3), (5)
8% (200%)
Sir John Sunderland(4)
Charles Gurassa
Ken Hydon(8)
Fru Hazlitt
Trudy Rautio(6)
Rachel Chiang
Andrew Fisher
Søren Thorup Sørensen
–
–
–
–
–
–
–
–
10,000
531,044
101,250
62,233
31,746
30,250
–
–
–
–
6,358
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
PSP
1,104,320
669,118
–
–
–
–
–
–
–
–
Notes to the table:
(1) In accordance with the Deferred Bonus Plan rules, the Committee has determined that an additional award of shares will be made in respect of shares which vest under Deferred Bonus Plan awards to reflect the value of
dividends which would have been paid on those shares during the deferral period (calculated on the assumption that dividends are reinvested in Company shares on a cumulative basis).
(2) Further details relating to the PSP grants are summarised in the table overleaf.
(3) For the purposes of determining Executive Director shareholdings, the individual’s salary and the share price as at 29 December 2018 has been used (£3.159).
(4) Of the total shares held by Sir John Sunderland, 1,644 shares are held by a connected person and 33,428 shares are held by trusts of which Sir John is a trustee and of which members of his family are beneficiaries.
(5) Of the total shares held by Anne-Francoise Nesmes, 5,500 are held by a connected person.
(6) Of the total shares held by Trudy Rautio, 19,000 shares are held by a trust of which Trudy Rautio is a trustee and of which members of her family are beneficiaries.
(7) Nick Varney exercised 2,780 options in the year under the UK Employee Sharesave Plan.
(8) Ken Hydon retired on 27 April 2018 and on that date he held 62,233 shares.
Between 29 December 2018 and the date of this report there were no changes in the shareholdings outlined in the above table.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATIONGOVERNANCE 86
87
DIRECTORS’
REMUNER ATION REPORT CONTINUED
Outstanding awards under the PSP
Date of grant
Date of vesting
number of shares
Maximum
Dividend
equivalent shares(1)
Performance
period
Performance
conditions
Nick Varney
1 April 2016
30 March 2017
11 April 2018
1 April 2019
30 March 2020
12 April 2021
Anne-Francoise
Nesmes
1 September 2016
30 March 2017
11 April 2018
2 September 2019
30 March 2020
12 April 2021
313,592
315,947
438,819
180,431
182,330
287,706
15,965
11,252
8,745
2016-2018
2017-2019
2018-2020
The structure of the EPS, ROCE and
strategic performance conditions for
the 2018 PSP is set out on
pages 83 to 84.
6,425
6,493
5,733
2016-2018
2017-2019
2018-2020
Full details of performance conditions for
other years appear in the Directors’
Remuneration Reports for the year in
which the grants were made.
(1) In accordance with the PSP rules, the Committee has determined that an additional award of shares will be made in respect of shares which vest under PSP awards to reflect the value of dividends which would have been
paid on those shares during the vesting period (calculated on the assumption that dividends are reinvested in Company shares on a cumulative basis). The figures in the table above relate to assumed reinvestment of the
dividends paid since grant.
As disclosed in the 2016 Annual Report and Accounts, the performance period for the 1 April 2016 awards was the three financial years to 29 December 2018.
The calculation of the performance conditions is as follows:
• Adjusted EPS growth – by comparing EPS for the financial year ending 29 December 2018 with EPS for the financial year ending 26 December 2015.
The Adjusted EPS for the financial year ended 26 December 2015 was 17.8 pence.
• Average ROCE – an average of ROCE for the three individual financial years ending 31 December 2016 (53 weeks), 30 December 2017 and 29 December 2018.
The compound annual growth rate of Adjusted EPS over the performance period was 8.8% and the average ROCE was 9.4%. The performance conditions set
out above yield a vesting of 36.5% of maximum.
U NAU DITED INFORMATION
The information provided in this section of the Directors’ Remuneration Report is not subject to audit.
Performance graph
The chart below compares the Total Shareholder Return performance of the Company over the period from Listing to 29 December 2018 to the performance
of the FTSE 350 Index. This index has been chosen because it is a recognised equity market index of which Merlin is a member. The base point in the chart for
Merlin equates to the Offer Price of 315 pence.
Merlin Entertainments
FTSE 350
e
c
i
r
P
r
e
f
f
O
e
h
t
t
a
d
e
t
s
e
v
n
i
0
0
1
£
f
o
l
e
u
a
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0
5
3
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S
T
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(
g
n
i
t
s
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a
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e
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t
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n
i
l
r
e
M
(
150
140
130
120
110
100
90
Listing
(13 November 2013)
2013 year end
(28 December 2013)
2014 year end
(27 December 2014)
2015 year end
(26 December 2015)
2016 year end
(31 December 2016)
2017 year end
(30 December 2017)
2018 year end
(29 December 2018)
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATIONGOVERNANCE
88
89
DIRECTORS’
REMUNER ATION REPORT CONTINUED
CEO remuneration table
The table below summarises the CEO single figure for total remuneration, annual bonus payouts and PSP vesting levels as a percentage of maximum opportunity
over this period.
Salary and benefits(2) £000
Pension £000
Bonus £000
Sub total £000
PSP Long Term Incentive Plan(3) £000
CEO single figure of remuneration £000
Annual bonus payout
(as a % of maximum opportunity)
PSP vesting outturn
(as a % of maximum opportunity)
(1) From Listing on 13 November 2013 to 28 December 2013.
(2) Includes value of options under UK Sharesave Plan.
(3) Relates to performance from 28 December 2013.
2013(1)
75
18
58
151
n/a
151
n/a (no maximum
limit applied
in 2013)
2014
596
127
859
1,582
–
1,582
100%
2015
605
128
–
733
–
733
0%
2016
604
128
–
732
1,296
2,028
2017
618
131
–
749
164
913
2018
629
134
322
1,085
408
1,493
0%
0%
35.4%
n/a (no award
vested in 2013)
n/a (no award
vested in 2014)
n/a (no award
vested in 2015)
46.5%
14.0%
36.5%
Percentage change in remuneration of the CEO
The table below indicates the change in the CEO’s remuneration between 2017 and 2018 and the change in average remuneration for other UK permanent
employees between 2017 and 2018. The Committee believes that the UK workforce is the most appropriate comparator for this analysis for the UK based CEO.
CEO
Average for all UK permanent employees
Salary
increase(1)
1.5%
1.5%
Benefits
increase(2)
3.9%
2.8%
Annual bonus
increase(3)
35.4%
36.1%
(1) Nick Varney received an increase of 2.25% in April 2017 and an increase of 1.5% in 2018. In accordance with her contract Anne-Francoise Nesmes received a first review of her salary in October 2017, reflecting a 2.25%
increase and an increase of 1.5% in 2018. Both of these increases were in line with the average increase for all UK permanent employees.
(2) The CEO’s benefits grew by 3.9% (£820), predominantly driven by increases in income protection and medical insurance premiums versus the previous year. The increase for the UK permanent population is 2.8%.
(3) No bonus was payable for 2017. For comparative purposes, the annual bonus % for the CEO is compared to the average for the participants in the central bonus plan.
Relative importance of the spend on pay
This table illustrates the total expenditure on pay for all of Merlin’s employees compared to distributions to shareholders by way of dividend and share buyback. In
order to provide context for these figures, underlying operating profit is also shown.
Employee costs
Distribution to shareholders
Underlying operating profit
2017
£m
420
74
323
2018
£m
448
76
327
Increase
6.7%
2.9%
1.3%
Consideration by the Directors of matters relating to Directors’ remuneration
The Committee has been chaired throughout the year by Charles Gurassa. The Committee has comprised the Chairman of the Board, the Chairman of the
Committee, Ken Hydon (part-year), Fru Hazlitt, Trudy Rautio and Andrew Fisher (part-year).
The Committee met three times during 2018. The CEO, CFO, Group HR Director, Group Compensation and Benefits Director, Søren Thorup Sørensen and
the Group General Counsel and Company Secretary (in his role as secretary to the Committee) were also present at some of these meetings by invitation.
The Committee is responsible for determining all aspects of Executive Director pay. It also monitors pay arrangements for other senior executives and oversees
the operation of all share plans. Full terms of reference of the Committee are available on our website.
Korn Ferry was appointed after a competitive tender by the Remuneration Committee on 7 November 2017 to replace Deloitte LLP. During 2018 Korn Ferry
was paid £158,630 in fees (charged on a time plus expenses basis). Korn Ferry is a member of the Remuneration Consultants Group and operates under its code
of conduct in relation to executive remuneration consulting in the UK. In addition to the remuneration advice provided to the Committee, a separate part of
Korn Ferry provided recruitment services to the Company. The Committee is comfortable that the advice provided to the Committee is independent.
Shareholder voting on the Remuneration Report
At the relevant Annual General Meetings, strong shareholder support was received for our resolutions on remuneration as summarised below.
Approval of the Policy Report (2017)
Approval of the Annual Report on Remuneration (2018)
Votes for
Votes against
Votes withheld
866.1 million
(95.8%)
791.9 million
(97.7%)
38.2 million
(4.2%)
18.7 million
(2.3%)
0.1 million
21.4 million
External Board appointments
Executive Directors are normally entitled to accept external appointments outside the Company with the consent of the Board. Any fees received may be
retained by the Director.
As at the date of this report, Nick Varney held no external appointments for which he received a fee.
Anne-Francoise Nesmes holds an external Non-executive Director appointment for which she received a fee of £42,500 in gross pay in 2018.
Annual General Meeting
The Annual Report on Remuneration section of this Remuneration Report will be submitted for an advisory shareholder vote at our Annual General Meeting to
be held on 3 May 2019.
On behalf of the Board
Charles Gurassa
Chairman of the Remuneration Committee
27 February 2019
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATIONGOVERNANCE 90
91
DIRECTORS’
REPORT
The Directors have pleasure in submitting their report and the audited
financial statements for the 52 week period ended 29 December 2018.
Comparative figures relate to the 52 weeks ended 30 December 2017.
In order to make our Annual Report and Accounts more accessible, we have
set out below where certain required disclosures can be found in other areas
of this Annual Report.
Strategic Report
Non-financial reporting
Information regarding Merlin’s approach to the five topics required by the
Companies Act is set out in the non-financial reporting statement on
pages 48 to 49. This includes information on how we engage with employees,
our approach to persons with disabilities, and mandatory greenhouse
gas reporting.
Other information
Other information is set out as follows:
• Business review and future developments – see pages 6 to 57.
• Research and development – details about Merlin Magic Making and New
Openings are located on pages 24 to 25.
Governance
Alignment with the UK Corporate Governance Code
The Code can be viewed on the website of the Financial Reporting Council
(www.frc.org.uk). The DTRs and the Listing Rules can be viewed on the
website of the Financial Conduct Authority (www.handbook.fca.org.uk).
More detail on the Board’s approach to governance and the Group’s alignment
with the five core principles in the Code can be found elsewhere in the Annual
Report as follows:
• Leadership – for how clear divisions of responsibilities are maintained at the
head of the Company see pages 58 to 65.
• Effectiveness – for how the Board ensures it remains effective see pages 62
to 65.
• Accountability – for how the Board presents a fair, balanced and
understandable assessment of Merlin’s position and prospects see pages 70
to 73.
• Remuneration – for more information on Directors’ remuneration and how
it is designed to promote the long term success of the Group see pages 74
to 89.
• Relations with shareholders – for how the Board maintains a dialogue with
its shareholders based on the mutual understanding of objectives see
page 65.
Other information
Other information is set out as follows:
• Corporate Governance Statement – see pages 58 to 59.
• Corporate Governance Report – see pages 62 to 65.
• Relationship agreements – details of the agreements with KIRKBI are on
page 65.
• Share capital, substantial holdings and related matters – see pages 64 to 65.
• Related parties – see page 65.
• Audit information – see page 73.
• Internal controls and risk management systems in relation to the
preparation of accounts – see pages 70 to 73.
Financial statements
The financial statements contain information in the following areas:
• Capitalised interest – see note 2.3.
• Financial instruments – see note 4.3.
• Financial risk management – see note 4.3.
Directors’ Report
The Directors’ Report itself contains the sections detailed below.
Share capital and related matters
The Articles of Association do not contain any restrictions on the transfer of
shares in the Company other than customary restrictions applicable where any
amount is unpaid on a share (all the issued share capital of the Company as of
the date of this Annual Report and Accounts is fully paid). Each ordinary share
in the capital of the Company ranks equally in all respects. No shareholder
holds shares carrying special rights relating to the control of the Company.
Amendment to the Company’s Articles of Association
The Company’s Articles of Association may only be amended by a special
resolution of its shareholders passed at a general meeting of its shareholders.
Appointment and removal of Directors
The Company is governed by its Articles of Association, the UK Corporate
Governance Code, the Companies Act and related legislation, with regard to
the appointment and replacement of Directors. Specific details relating to
KIRKBI and its rights to appoint Directors are set out in the Corporate
Governance Report on page 65.
Power of Directors in respect of share capital
The Directors may exercise all the powers of the Company (including, subject
to obtaining the required authority from the shareholders in general meeting,
the power to authorise the issue of new shares and the purchase of the
Company’s shares). During the year, in connection with the Company’s
employee share incentive plans, 2,500,000 ordinary shares of one pence each
were issued.
Directors’ indemnities and insurance
The Articles of Association of the Company permit it to indemnify the
Directors of the Company or any Group company against liabilities arising from
or in connection with the execution of their duties or powers to the extent
permitted by law. The Company has not given any specific indemnity in favour
of the Directors during the year but the Company has purchased Directors’
and Officers’ Liability Insurance, which provides cover for liabilities incurred by
Directors in the performance of their duties or powers. No amount was paid
under any Director’s indemnity or the Directors’ and Officers’ Liability
Insurance during the year other than the applicable insurance premiums.
Significant contracts
There were no contracts of significance during the year to which the Company,
or any of its subsidiary undertakings, is a party and in which a Director is or was
materially interested.
Contractual matters
Change of control
The Company does not have agreements with any Director or employee that
would provide compensation for loss of office or employment resulting from a
change of control.
Significant agreements to which the Company is a party that take effect, alter
or terminate upon a change of control of the Company following a takeover
bid are:
• The LCA, only in the circumstances described on page 65.
• A Multi-currency Facilities Agreement entered into by the Group dated
25 February 2015, as amended from time to time, which includes provisions
in relation to a change of control or the sale of all or substantially all of the
Group’s assets, the occurrence of which will, after a negotiation period, give
the lenders under the Agreement the right to accelerate outstanding loans
and terminate commitments. The outstanding senior unsecured facilities
comprise a £600 million revolving credit facility to mature in 2023.
• An Indenture dated as of 19 March 2015 in relation to an issue of
€700 million 2.75% fixed rate notes due in 2022 (the Euro notes) under
which, in the event of a change of control of the Company and a ratings
event, the holders of the Euro notes may have the right to require that those
notes be repurchased at 101% of their principal nominal amount plus any
accrued and unpaid interest.
Subsequent events
On 21 February 2019, the Company entered into an agreement to sell its
Australian ski resorts at Mount Hotham and Falls Creek to Vail Resorts Inc. for
a cash consideration of A$174 million, subject to certain adjustments related to
the timing of completion. These attractions form part of the Midway
Attractions Operating Group. In 2018 revenue and underlying EBITDA for the
two sites were £35 million and £11 million respectively.
Political donations
No political donations were made during the year.
Auditors
As recommended by the Audit Committee, a resolution for the re-
appointment of KPMG LLP as auditors to the Company will be proposed at
the 2019 Annual General Meeting. So far as the Directors are aware, there is
no relevant audit information of which the auditors are unaware. The
Directors have taken all reasonable steps to ascertain any relevant audit
information and ensure the auditors are aware of such information.
Approval of Annual Report
The Strategic Report, Corporate Governance Statement and Report and the
Directors’ Report were approved by the Board on 27 February 2019.
• An Indenture dated as of 9 May 2018 in relation to an issue of $400 million
For and on behalf of the Board
5.75% fixed rate notes due in 2026 (the US Dollar notes) under which, in the
event of a change of control of the Company and a ratings event, the
holders of the US Dollar notes may have the right to require that those
notes be repurchased at 101% of their principal nominal amount plus any
accrued and unpaid interest.
Further details on the Group’s banking facilities are shown in note 4.2 to the
financial statements.
Matthew Jowett
General Counsel and Company Secretary
27 February 2019
Merlin Entertainments plc
Registered number 08700412
Branches outside the UK
Merlin Entertainments plc has no branches outside the UK.
Dividend
An interim dividend of 2.5 pence per share was paid on 24 September 2018 to
shareholders on the Register on 17 August 2018. A final dividend for the year
ended 29 December 2018 of 5.5 pence per share will be recommended for
payment to shareholders. The final dividend will be proposed to shareholders
for approval at the next Annual General Meeting of the Company.
Going concern
The Directors consider that the Group has adequate financial resources to
continue operating for the next 12 months and that it is therefore appropriate
to adopt the going concern basis in preparing the financial statements. The
Directors have satisfied themselves that the Group is in a sound financial
position and that it has access to sufficient cash funds and borrowing facilities
and can reasonably expect those facilities to be available to meet the Group’s
foreseeable cash requirements.
The Viability Statement is set out in the Principal Risks section on page 41.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATIONGOVERNANCE
92
M E R L I N E N T E R T A I N M E N T S P L C
A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 8
M E R L I N E N T E R T A I N M E N T S P L C
93
G O V E R N A N C E
DIRECTORS’
RESPONSIBILITIES STATEMENT
INDEPENDENT AUDITOR’S
REPORT
To the Members of Merlin Entertainments plc
We confi rm that to the best of our knowledge:
• The fi nancial statements, prepared in accordance with the applicable set of
accounting standards, give a true and fair view of the assets, liabilities,
fi nancial position and profi t or loss of the Company and the undertakings
included in the consolidation taken as a whole.
• The Directors’ Report and the other sections of this report referred to
therein include a fair review of the development and performance of the
business and the position of the issuer and the undertakings included in the
consolidation taken as a whole, together with a description of the principal
risks and uncertainties that they face.
We consider the Annual Report and Accounts, taken as a whole, is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the Group’s position and performance, business model
and strategy.
Nick Varney
Chief Executive Offi cer
27 February 2019
Anne-Francoise Nesmes
Chief Financial Offi cer
27 February 2019
The Directors are responsible for preparing the Annual Report and the Group
and parent Company fi nancial statements in accordance with applicable law
and regulations.
Company law requires the Directors to prepare Group and parent Company
fi nancial statements for each fi nancial year. Under that law they are required to
prepare the Group fi nancial statements in accordance with International
Financial Reporting Standards as adopted by the European Union (IFRSs as
adopted by the EU) and applicable law and have elected to prepare the parent
Company fi nancial statements in accordance with UK accounting standards
including FRS 101 ‘Reduced Disclosure Framework’.
Under company law the Directors must not approve the fi nancial statements
unless they are satisfi ed that they give a true and fair view of the state of affairs
of the Group and parent Company and of their profi t or loss for that period. In
preparing each of the Group and parent Company fi nancial statements, the
Directors are required to:
• Select suitable accounting policies and then apply them consistently.
• Make judgements and estimates that are reasonable, relevant, reliable
and prudent.
• For the Group fi nancial statements, state whether they have been prepared
in accordance with IFRSs as adopted by the EU.
• For the parent Company fi nancial statements, state whether applicable
UK accounting standards have been followed, subject to any material
departures disclosed and explained in the parent Company
fi nancial statements.
• Assess the Group and parent Company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern.
• Use the going concern basis of accounting unless they either intend to
liquidate the Group or the parent Company or to cease operations, or have
no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records that
are suffi cient to show and explain the parent Company’s transactions and
disclose with reasonable accuracy at any time the fi nancial position of the
parent Company and enable them to ensure that its fi nancial statements
comply with the Companies Act 2006. They are responsible for such internal
control as they determine is necessary to enable the preparation of fi nancial
statements that are free from material misstatement, whether due to fraud or
error, and have general responsibility for taking such steps as are reasonably
open to them to safeguard the assets of the Group and to prevent and detect
fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, Directors’ Report, Directors’ Remuneration
Report and Corporate Governance Statement that comply with that law and
those regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and fi nancial information included on the Company’s website.
Legislation in the UK governing the preparation and dissemination of fi nancial
statements may differ from legislation in other jurisdictions.
1 Our opinion is unmodifi ed
We have audited the fi nancial statements of Merlin Entertainments plc (the
Company) for the 52 weeks ended 29 December 2018 which comprise the
consolidated income statement, consolidated statement of comprehensive
income, consolidated statement of fi nancial position, consolidated statement of
changes in equity, consolidated statement of cash fl ows, Company statement
of fi nancial position, Company statement of changes in equity and the related
notes, including the accounting policies in note 1.1.
Overview
Materiality:
Group fi nancial
statements as a whole
Coverage:
by full scope audit procedures
£14.3 million (2017: £14.5 million)
5.0% (2017: 5.4%) of
Group profi t before tax
86% (2017: 82%) of
total profi ts and losses(1)
Risks of material misstatement
vs 2017
In our opinion:
• the fi nancial statements give a true and fair view of the state of the Group’s
and of the parent Company’s affairs as at 29 December 2018 and of the
Group’s profi t for the year then ended;
• the Group fi nancial statements have been properly prepared in accordance
with International Financial Reporting Standards as adopted by the
European Union;
• the parent Company fi nancial statements have been properly prepared in
accordance with UK accounting standards, including FRS 101 Reduced
Disclosure Framework; and
• the fi nancial statements have been prepared in accordance with the
requirements of the Companies Act 2006 and, as regards the Group
fi nancial statements, Article 4 of the IAS Regulation.
Basis for opinion
We conducted our audit in accordance with International Standards on
Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities are
described below. We believe that the audit evidence we have obtained is a
suffi cient and appropriate basis for our opinion. Our audit opinion is consistent
with our report to the Audit Committee.
We were fi rst appointed as auditor by the Directors on 30 September 2013.
The period of total uninterrupted engagement is for the six fi nancial years
ended 29 December 2018. We have fulfi lled our ethical responsibilities under,
and we remain independent of the Group in accordance with, UK ethical
requirements including the FRC Ethical Standard as applied to listed public
interest entities. No non-audit services prohibited by that standard
were provided.
Risks
The impact of uncertainties due to
the UK exiting the European Union
on our audit
Carrying value of
Resort Theme Parks (RTP) goodwill
Visitor and accommodation
revenue recognition
Recoverability of parent Company’s
investment in and amounts owed by
Group undertakings
(1) Total profi ts and losses coverage is calculated by considering absolute profi ts and losses before tax,
after eliminating inter-group interest income and expense, foreign exchange movements on
inter-group loans, and inter-group dividends.
2 Key audit matters: our assessment of risks of material
misstatement
Key audit matters are those matters that, in our professional judgement, were
of most signifi cance in the audit of the fi nancial statements and include the
most signifi cant assessed risks of material misstatement (whether or not due to
fraud) identifi ed by us, including those which had the greatest effect on: the
overall audit strategy; the allocation of resources in the audit; and directing the
efforts of the engagement team. We summarise below the key audit matters in
arriving at our audit opinion above, together with our key audit procedures to
address those matters and, as required for public interest entities, our results
from those procedures. These matters were addressed, and our results are
based on procedures undertaken, in the context of, and solely for the purpose
of, our audit of the fi nancial statements as a whole, and in forming our opinion
thereon, and consequently are incidental to that opinion, and we do not
provide a separate opinion on these matters.
94
95
INDEPENDENT AUDITOR’S
REPORT C O N T I N U E D
To the Members of Merlin Entertainments plc
The impact of uncertainties due to the
UK exiting the European Union on our
audit
Refer to page 36 (Principal Risks), pages 70
to 73 (Audit Committee Report).
The risk
Our response
Unprecedented levels of uncertainty:
All audits assess and challenge the reasonableness
of estimates, in particular as described in Carrying
value of Resort Theme Parks goodwill and
Recoverability of the parent Company’s
investment in and amounts owed by Group
undertakings below, and related disclosures and
the appropriateness of the going concern basis of
preparation of the financial statements (see
below). All of these depend on assessments of the
future economic environment and the Group’s
future prospects and performance.
In addition, we are required to consider the other
information presented in the Annual Report
including the principal risks disclosure and the
Viability Statement and to consider the Directors’
statement that the Annual Report and Accounts
taken as a whole is fair, balanced and
understandable and provides the information
necessary for shareholders to assess the Group’s
position and performance, business model
and strategy.
Brexit is one of the most significant economic
events for the UK and at the date of this report its
effects are subject to unprecedented levels of
uncertainty of outcomes, with the full range of
possible effects unknown.
We developed a standardised firm-wide approach to the
consideration of the uncertainties arising from Brexit in
planning and performing our audits.
Our procedures included:
Our Brexit knowledge: we considered the Directors’
assessment of Brexit-related sources of risk for the Group’s
business and financial resources compared with our own
understanding of the risks. We considered the Directors’ plans
to take action to mitigate the risks;
Sensitivity analysis: when addressing Carrying value of
Resort Theme Parks goodwill and Recoverability of the parent
Company’s investment in and amounts owed by Group
undertakings and other areas that depend on forecasts, we
compared the Directors’ analysis to our assessment of the full
range of reasonably possible scenarios resulting from Brexit
uncertainty and, where forecast cash flows are required to be
discounted, considered adjustments to discount rates for the
level of remaining uncertainty; and
Assessing transparency: as well as assessing individual
disclosures as part of our procedures on Carrying value of
Resort Theme Parks goodwill and Recoverability of the parent
Company’s investment in and amounts owed by Group
undertakings we considered all of the Brexit-related disclosures
and disclosures in relation to going concern together, including
those in the Strategic Report, comparing the overall picture
against our understanding of the risks.
Our results
• As reported under Carrying value of Resort Theme Parks
goodwill and Recoverability of the parent Company’s
investment in and amounts owed by Group undertakings,
we found the resulting estimates and related disclosures of
Brexit and disclosures in relation to going concern to be
acceptable. However, no audit should be expected to
predict the unknowable factors or all possible future
implications for a company and this is particularly the case in
relation to Brexit.
Carrying value of Resort Theme
Parks (RTP) goodwill
£212 million (2017: £209 million)
Refer to pages 70 to 73 (Audit Committee
Report), page 121 (accounting policy) and
pages 122 to 123 (financial disclosures).
Risk vs 2017:
The risk
Forecast based valuation:
A history of business combinations results in
significant goodwill balances. The RTP Operating
Group is capital intensive and unlike the other
Operating Groups has not generated headroom
via growth from new site openings. As RTP has
been impaired in the past and has a small amount
of headroom, there is a risk that its goodwill will
not be supportable by its continuing operations.
The estimated recoverable amount is subjective
due to the inherent uncertainty involved in
forecasting future cash flows and determining the
most appropriate rate at which to discount them.
The effect of these matters is that, as part of our
risk assessment, we determined that the value in
use of Resort Theme Parks has a high degree of
estimation uncertainty, with a potential range of
reasonable outcomes greater than our materiality
for the financial statements as a whole, and
possibly many times that amount. The financial
statements (note 3.3) disclose the sensitivity
estimated by the Group.
Our response
Our procedures included:
Historical comparisons:
• assessing five years’ historical accuracy of the Group’s
forecasting and building comparable variations in forecasting
accuracy into our own models that were used to re-perform
the valuation;
• evaluating expected changes in site-level cash flows (from
activities such as new promotions and customer experience
improvements) and the planned cost base, in light of the past
results of similar activities carried out by the Group;
Benchmarking assumptions: benchmarking Group earnings
multiple and discount rates (including the underlying
assumptions used) against market data, including publicly
available analysts’ reports and peer comparison;
Sensitivity analysis: assessing the reasonableness of
management’s sensitivity analysis, including calculating the
impact of changes in key assumptions, performing breakeven
analysis of the earnings multiple, discount rates, forecast cash
flows, and modelling the cash flows of a base case scenario;
Comparing valuations: comparing the sum of the discounted
cash flows across the Group to the Group’s market
capitalisation to assess the reasonableness of the future cash
flows, discount rate and long term growth rate; and
Assessing transparency: assessing whether the Group’s
sensitivity disclosures regarding the impairment testing
adequately reflects the risks inherent in the valuation
of goodwill.
Our results
• We found the resulting estimate of the recoverable amount
of RTP goodwill to be acceptable (2017: acceptable).
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLC
96
97
INDEPENDENT AUDITOR’S
REPORT C O N T I N U E D
To the Members of Merlin Entertainments plc
Visitor and accommodation
revenue recognition
£1,617 million (2017: £1,529 million)
Refer to pages 70 to 73 (Audit Committee
Report), page 110 (accounting policy).
Risk vs 2017:
The risk
Risk of processing error:
Merlin’s revenue comes from a number of
different channels, locations and systems,
sometimes featuring manual processes to match
past purchases and deferred revenue to
redemptions, or to transfer data to the
finance systems.
Our response
Our procedures included:
Control design: at certain sites, where we anticipated being
able to rely on such systems, testing of the general IT control
environment of the systems used to record revenue and
evaluating controls over the revenue process including their
operating effectiveness;
The low value of individual transactions means
individual errors would be insignificant, however
the high volume of transactions mean systematic
failure could lead to difficulty in detecting errors
that, in aggregate, may have a material balance.
Control operation: testing the design, implementation and
operating effectiveness of manual controls supporting
revenue recognition, including reconciliations of till records
to cash banked and to revenue journal entries in the
accounting records;
Expectation vs outcome: forming an expectation for
revenue by analysing total cash received per bank statements
as adjusted for non-revenue transactions, sales taxes collected
and balance sheet movements and comparing this expectation
to revenue recognised; and
Tests of detail: agreeing a sample of revenue transactions to
bank statements or other supporting documentation. Testing
of deferred revenue balances through agreeing back to ticketing
system records and re-computing specific manual calculations.
The extent of this testing reflected the outcome of our
controls testing at each location.
Our results
• We found the revenue amounts recognised to be acceptable
(2017: acceptable).
Our procedures included:
Tests of detail: for the investment and amounts owed by
Group undertakings where the carrying amount exceeded the
net asset value, comparing the carrying amount of the
investment and amounts owed by Group undertakings with
the expected value of the business based on the Group’s
market capitalisation as adjusted by monetary assets and
liabilities held by the parent Company.
Our results
• We found the Group’s assessment of the recoverability of
the investment in and amounts owed by Group
undertakings to be acceptable (2017: acceptable).
Recoverability of the parent
Company’s investment in and amounts
owed by Group undertakings
Investments in subsidiary £3,137 million
(2017: £3,129 million), amounts owed by
Group undertakings £4 million current,
£1,260 million non-current (2017: £3 million
current, £1,449 million non-current)
Refer to pages 70 to 73 (Audit Committee
Report) and pages 150 to 154 (accounting
policy and financial disclosures).
Low risk, high value:
The carrying amount of the parent Company’s
investment in and amounts owed by Group
undertakings represents 99.9% (2017: 99.8%) of
the parent Company’s total assets. Their
recoverability does not lead to a high risk of
significant misstatement, nor is it subject to
significant judgement. However, due to their
materiality in the context of the parent Company
financial statements, this is considered to be the
area that has had the greatest effect on our overall
parent Company audit.
Risk vs 2017:
3 Our application of materiality and an overview of the scope of
our audit
Materiality for the Group financial statements as a whole was set at
£14,300,000 (2017: £14,500,000), determined with reference to a benchmark
of Group profit before tax, of which it represents 5.0% (2017: 5.4%).
Materiality for the parent Company financial statements as a whole was set at
£4,500,000 (2017: £4,500,000), determined with reference to component
materiality. This is lower than the materiality we would otherwise have
determined by reference to total assets, and represents 0.1% of the parent
Company’s total assets (2017: 0.1%).
We agreed to report to the Audit Committee any corrected or uncorrected
identified misstatements affecting profit exceeding £715,000 (2017: £725,000)
or otherwise exceeding £2,000,000 (2017: £2,000,000), in addition to other
identified misstatements that warranted reporting on qualitative grounds.
This also includes procedures on finance costs and assets established on
consolidation; the total of these balances were audited at Group level. Full
scope audits for Group reporting purposes were performed at 33 components
in the following countries: Australia, China (including Hong Kong), Denmark,
Germany, Italy, Japan, Thailand, UK and USA. The components for which we
performed specified risk-focused audit procedures or analysis at an aggregated
Group level were not individually significant but were included in the scope of
our Group reporting work to provide further coverage. We select these
components on a rotational basis, setting a financial threshold on each of the
Group profit before tax, Group revenue and Group property, plant and
equipment and using our assessment of risk to select a sample of sites from
those that meet at least one of these thresholds.
The components within the scope of our work accounted for the percentages
illustrated opposite.
The remaining 9% of total Group profit before tax, 17% of Group revenue and
16% of Group property, plant and equipment is represented by a large number
of smaller reporting components, none of which individually represented more
than 0.8% of any of the total profits or losses that made up Group profit
before tax, total Group revenue or total Group property, plant and
equipment. For these residual components, we performed analysis at an
aggregated Group level to re-examine our assessment that there were no
significant risks of material misstatement within these.
Profit before tax
£285 million (2017: £271 million)
Profit before tax
Group materiality
Group materiality
£14.3 million
(2017: £14.5 million)
£14.3 million
Whole financial
statements materiality
(2017: £14.5 million)
£4.5 million
Range of materiality
at components
(£0.5 million to £4.5 million)
(2017: £0.5 million to £4.5 million)
£0.7 million
Misstatements reported to the
Audit Committee
(2017: £0.7 million)
Revenue
Total profits and losses
17%
14%
11%
9%
83%
(2017: 86%)
9%
11%
5%
7%
91%
(2017: 89%)
75%
74%
82%
86%
Property, plant and equipment
The Group team instructed component auditors as to the significant areas to
be covered, including the relevant risks detailed above and the information to
be reported back. The Group team approved each component materiality,
which ranged from £500,000 to £4,500,000, having regard to the mix of size
and risk profile of the Group across the components. The Group audit team
carried out audits for Group reporting purposes of the financial information of
components covering 19% (2017: 33%) of the total profits and losses that made
up Group profit before tax, including the audit of the parent Company. The
Group audit team also undertook all audit procedures of certain total Group
account balances as mentioned above, covering a further 4% (2017: 4%) of total
profits and losses that made up Group profit before tax.
Key:
16%
16%
9%
9%
84%
(2017: 84%)
75%
75%
Full scope for Group audit purposes 2018
Specified risk-focused procedures 2018
Full scope for Group audit purposes 2017
Specified risk-focused procedures 2017
Analysis at an aggregated Group level
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLC 98
99
INDEPENDENT AUDITOR’S
REPORT C O N T I N U E D
To the Members of Merlin Entertainments plc
The Group team visited one (2017: two) overseas component location in
California (2017: Germany and Japan) to assess the audit risk and strategy.
Additionally we performed inspection of the work covering the key audit
matters at all component audit teams performing audits for Group reporting
purposes. Teleconference meetings were held with all component auditors. At
these meetings, the Group audit team provided further input to audit risk and
strategy, and the findings reported to the Group team were discussed in more
detail, and any further work required by the Group team was then performed
by the component auditor.
4 We have nothing to report on going concern
The Directors have prepared the financial statements on the going concern
basis as they do not intend to liquidate the Company or the Group or to cease
their operations, and as they have concluded that the Company’s and the
Group’s financial position means that this is realistic. They have also concluded
that there are no material uncertainties that could have cast significant doubt
over their ability to continue as a going concern for at least a year from the
date of approval of the financial statements (‘the going concern period’).
Our responsibility is to conclude on the appropriateness of the Directors’
conclusions and, had there been a material uncertainty related to going
concern, to make reference to that in this audit report. However, as we cannot
predict all future events or conditions and as subsequent events may result in
outcomes that are inconsistent with judgements that were reasonable at the
time they were made, the absence of reference to a material uncertainty in this
auditor’s report is not a guarantee that the Group and the Company will
continue in operation.
In our evaluation of the Directors’ conclusions, we considered the inherent
risks to the Group’s and Company’s business model and analysed how those
risks might affect the Group’s and Company’s financial resources or ability to
continue operations over the going concern period. The risks that we
considered most likely to adversely affect the Group’s and Company’s available
financial resources over this period were:
• ride safety incidents;
• acts of terrorism and/or the impact of the threat of terrorism on
consumer behaviours.
As these were risks that could potentially cast significant doubt on the Group’s
and the Company’s ability to continue as a going concern, we considered
sensitivities over the level of available financial resources indicated by the
Group’s financial forecasts taking account of reasonably possible (but not
unrealistic) adverse effects that could arise from these risks individually and
collectively and evaluated the achievability of the actions the Directors
consider they would take to improve the position should the risks materialise.
We also considered less predictable but realistic second order impacts, such as
the impact of Brexit and the erosion of customer or supplier confidence or a
broad economic downturn, which could result in a rapid reduction of available
financial resources.
Based on this work, we are required to report to you if we have concluded
that the use of the going concern basis of accounting is inappropriate or there is
an undisclosed material uncertainty that may cast significant doubt over the
use of that basis for a period of at least a year from the date of approval of the
financial statements.
We have nothing to report in these respects, and we did not identify going
concern as a key audit matter.
5 We have nothing to report on the other information in the
Annual Report and Accounts
The Directors are responsible for the other information presented in the
Annual Report together with the financial statements. Our opinion on the
financial statements does not cover the other information and, accordingly, we
do not express an audit opinion or, except as explicitly stated below, any form
of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider
whether, based on our financial statements audit work, the information therein
is materially misstated or inconsistent with the financial statements or our audit
knowledge. Based solely on that work we have not identified material
misstatements in the other information.
Strategic Report and Directors’ Report
Based solely on our work on the other information:
• we have not identified material misstatements in the Strategic Report and
the Directors’ Report;
• in our opinion, the information given in those reports for the financial year is
consistent with the financial statements; and
• in our opinion, those reports have been prepared in accordance with the
Companies Act 2006.
Directors’ Remuneration Report
In our opinion, the part of the Directors’ Remuneration Report to be audited
has been properly prepared in accordance with the Companies Act 2006.
Disclosures of principal risks and longer term viability
Based on the knowledge we acquired during our financial statements audit, we
have nothing material to add or draw attention to in relation to:
• the Directors’ confirmation within page 41 that they have carried out a
robust assessment of the principal risks facing the Group, including those
that would threaten its business model, future performance, solvency
and liquidity;
• the Principal Risks disclosures describing these risks and explaining how they
are being managed and mitigated; and
• the Directors’ explanation in the Viability Statement of how they have
assessed the prospects of the Group, over what period they have done so
and why they considered that period to be appropriate, and their statement
as to whether they have a reasonable expectation that the Group will be
able to continue in operation and meet its liabilities as they fall due over the
period of their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
Under the Listing Rules we are required to review the Viability Statement. We
have nothing to report in this respect.
Our work is limited to assessing these matters in the context of only the
knowledge acquired during our financial statements audit. As we cannot
predict all future events or conditions and as subsequent events may result in
outcomes that are inconsistent with judgements that were reasonable at the
time they were made, the absence of anything to report on these statements is
not a guarantee as to the Group’s and Company’s longer term viability.
Corporate governance disclosures
We are required to report to you if:
• we have identified material inconsistencies between the knowledge we
acquired during our financial statements audit and the Directors’ statement
that they consider that the Annual Report and financial statements taken as
a whole is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group’s position and performance,
business model and strategy; or
• the section of the Annual Report describing the work of the Audit
Committee does not appropriately address matters communicated by us to
the Audit Committee.
We are required to report to you if the Corporate Governance Statement
does not properly disclose a departure from the 11 provisions of the UK
Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in these respects.
6 We have nothing to report on the other matters on which we
are required to report by exception
Under the Companies Act 2006, we are required to report to you if, in our
opinion:
• adequate accounting records have not been kept by the parent Company,
or returns adequate for our audit have not been received from branches not
visited by us; or
• the parent Company financial statements and the part of the Directors’
Remuneration Report to be audited are not in agreement with the
accounting records and returns; or
• certain disclosures of Directors’ remuneration specified by law are not
made; or
• we have not received all the information and explanations we require for
our audit.
We have nothing to report in these respects.
7 Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 92, the Directors
are responsible for: the preparation of the financial statements including being
satisfied that they give a true and fair view; such internal control as they
determine is necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error; assessing
the Group’s and parent Company’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern; and using the going
concern basis of accounting unless they either intend to liquidate the Group or
the parent Company or to cease operations, or have no realistic alternative
but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to
fraud, other irregularities (see below), or error, and to issue our opinion in an
auditor’s report. Reasonable assurance is a high level of assurance, but does
not guarantee that an audit conducted in accordance with ISAs (UK) will
always detect a material misstatement when it exists. Misstatements can arise
from fraud, other irregularities or error and are considered material if,
individually or in aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of the financial statements.
Irregularities – ability to detect
We identified areas of laws and regulations that could reasonably be expected
to have a material effect on the financial statements from our sector
experience and through discussion with the Directors and other management
(as required by auditing standards) and discussed with the Directors and other
management the policies and procedures regarding compliance with laws and
regulations. We communicated identified laws and regulations throughout our
team and remained alert to any indications of non-compliance throughout the
audit. This included communication from the Group to component audit
teams of relevant laws and regulations identified at Group level.
The potential effect of these laws and regulations on the financial statements
varies considerably. Firstly, the Group is subject to laws and regulations that
directly affect the financial statements including financial reporting legislation
(including related companies legislation), distributable profits legislation and
taxation legislation and we assessed the extent of compliance with these laws
and regulations as part of our procedures on the related financial statement
items. Secondly, the Group is subject to many other laws and regulations
where the consequences of non-compliance could have a material effect on
amounts or disclosures in the financial statements, for instance through the
imposition of fines or litigation. We identified the following area as that most
likely to have such an effect: health and safety, recognising the nature of the
Group’s activities. Auditing standards limit the required audit procedures to
identify non-compliance with these laws and regulations to enquiry of the
Directors and other management and inspection of regulatory and legal
correspondence, if any. These limited procedures did not identify actual or
suspected non-compliance.
Owing to the inherent limitations of an audit, there is an unavoidable risk that
we may not have detected some material misstatements in the financial
statements, even though we have properly planned and performed our audit
in accordance with auditing standards. For example, the further removed
non-compliance with laws and regulations (irregularities) is from the events
and transactions reflected in the financial statements, the less likely the
inherently limited procedures required by auditing standards would identify it.
In addition, as with any audit, there remains a higher risk of non-detection of
irregularities arising from fraud, as these may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal controls.
We are not responsible for preventing non-compliance and cannot be
expected to detect non-compliance with all laws and regulations.
8 The purpose of our audit work and to whom we owe
our responsibilities
This report is made solely to the Company’s members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit
work has been undertaken so that we might state to the Company’s members
those matters we are required to state to them in an auditor’s report and for
no other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company and the Company’s
members, as a body, for our audit work, for this report, or for the opinions we
have formed.
Hugh Green
(Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
Gateway House, Tollgate,
Chandlers Ford, Southampton
SO53 3TG
A fuller description of our responsibilities is provided on the FRC’s website at
www.frc.org.uk/auditorsresponsibilities.
27 February 2019
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLC
100
P R I M A R Y S T A T E M E N T S
CONSOLIDATED INCOME
STATEMENT
CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
For the 52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
For the 52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
Revenue
Cost of sales
Gross profit
Staff expenses
Marketing
Rent
Other operating expenses
EBITDA(1)
Depreciation and amortisation
Operating profit
Finance income
Finance costs
Profit before tax
Taxation
Profit for the year(2)
Earnings per share
Basic earnings per share (p)
Diluted earnings per share (p)
Dividend per share(3) (p)
Underlying
trading
£m
1,688
(298)
1,390
(448)
(84)
(105)
(259)
494
(167)
327
10
(48)
289
(55)
234
2018
Exceptional
items(4)
£m
–
–
–
–
–
–
(4)
(4)
–
(4)
–
–
(4)
–
(4)
Note
2.1
2.1
2.1
2.1
3.1, 3.2
2.3
2.3
2.4
2.5
2.5
4.5
2017
Total
£m
1,594
(255)
1,339
(420)
(85)
(104)
(256)
474
(151)
323
3
(55)
271
(62)
209
20.5
20.5
7.4
Total
£m
1,688
(298)
1,390
(448)
(84)
(105)
(263)
490
(167)
323
10
(48)
285
(55)
230
22.5
22.5
8.0
Profit for the year
Other comprehensive income
Items that cannot be reclassified to the consolidated income statement
Defined benefit plan remeasurement gains and losses
Items that may be reclassified to the consolidated income statement
Exchange differences on the retranslation of net assets of foreign operations
Exchange differences relating to the net investment in foreign operations
Cash flow hedges – effective portion of changes in fair value
Income tax on items relating to components of other comprehensive income
Other comprehensive income for the year net of income tax
Total comprehensive income for the year
Total comprehensive income attributable to:
Owners of the Company
Non-controlling interest
Total comprehensive income for the year
Note
5.2
2.4
2018
£m
230
(1)
(1)
14
(5)
1
–
10
9
239
238
1
239
(1) EBITDA – this is defined as profit before finance income and costs, taxation, depreciation and amortisation and is after taking account of attributable profit after tax of joint ventures.
(2) Profit for the year for 2018 and 2017 is wholly attributable to the owners of the Company.
(3) Dividend per share represents the interim paid and final proposed dividend for the year.
(4) Details of exceptional items are provided in note 2.2.
101
2017
£m
209
2
2
3
(15)
4
(1)
(9)
(7)
202
202
–
202
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATION 102
P R I M A R Y S T A T E M E N T S
CONSOLIDATED STATEMENT
OF FINANCIAL POSITION
At 29 December 2018 (2017: 30 December 2017)
CONSOLIDATED STATEMENT
OF CHANGES IN EQUIT Y
For the 52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
At 1 January 2017
Profit for the year
Other comprehensive income for the year net of
income tax
Total comprehensive income for the year
Shares issued
Equity dividends
Equity-settled share-based payments
At 30 December 2017
Profit for the year
Other comprehensive income for the year net of
income tax
Total comprehensive income for the year
Shares issued
Equity dividends
Equity-settled share-based payments
At 29 December 2018
Share
capital
£m
Share
premium
£m
Translation
reserve
£m
Hedging
reserve
£m
Retained
earnings
£m
Note
Total
parent
equity
£m
Non-
controlling
interest
£m
10
–
–
–
–
–
–
10
–
–
–
–
–
–
2
–
–
–
8
–
–
10
–
–
–
6
–
–
(5)
–
(13)
(13)
–
–
–
(18)
–
8
8
–
–
–
10
16
(10)
(3)
–
1,420
1,424
209
209
4
4
–
–
–
1
–
1
1
–
–
–
2
2
211
–
(74)
3
(7)
202
8
(74)
3
1,560
1,563
230
230
(1)
229
–
(76)
8
8
238
6
(76)
8
1,721
1,739
4.5
4.6
4.5
4.5
4.6
4.5
4
–
–
–
–
–
–
4
–
1
1
–
–
–
5
Non-current assets
Property, plant and equipment
Goodwill and intangible assets
Investments
Other receivables
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Derivative financial assets
Cash and cash equivalents
Total assets
Current liabilities
Interest-bearing loans and borrowings
Finance leases
Derivative financial liabilities
Trade and other payables
Tax payable
Provisions
Non-current liabilities
Interest-bearing loans and borrowings
Finance leases
Other payables
Provisions
Employee benefits
Deferred tax liabilities
Total liabilities
Net assets
Issued capital and reserves attributable to owners of the Company
Non-controlling interest
Total equity
The financial statements were approved by the Board of Directors on 27 February 2019 and were signed on its behalf by:
Nick Varney
Chief Executive Officer
Anne-Francoise Nesmes
Chief Financial Officer
Note
2018
£m
2017
£m
3.1
3.2
5.1
3.4
2.4
3.4
3.4
4.1
4.2
4.4
3.4
3.5
4.2
4.4
3.4
3.5
5.2
2.4
2,344
1,028
61
14
35
2,092
1,018
59
11
33
3,482
3,213
47
125
3
110
285
37
100
5
309
451
3,767
3,664
8
1
4
353
43
7
416
1,092
199
47
81
6
182
1,607
2,023
1,744
1,739
5
7
1
3
306
37
5
359
1,271
190
28
72
6
171
1,738
2,097
1,567
1,563
4
4.5
1,744
1,567
103
Total
equity
£m
1,428
209
(7)
202
8
(74)
3
1,567
230
9
239
6
(76)
8
1,744
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATION 104
P R I M A R Y S T A T E M E N T S
CONSOLIDATED STATEMENT
OF CASH FLOWS
N O T E S T O T H E A C C O U N T S
SECTION 1
BASIS OF PREPAR ATION
105
For the 52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
Cash flows from operating activities
Profit for the year
Adjustments for:
Depreciation and amortisation
Finance income
Finance costs
Taxation
Profit on sale of property, plant and equipment
Working capital changes
Changes in provisions and other non-current liabilities
Tax paid
Net cash inflow from operating activities
Cash flows from investing activities
Interest received
Acquisition of investments
Purchase of property, plant and equipment
Disposal of property, plant and equipment
Grants received
Net cash outflow from investing activities
Cash flows from financing activities
Proceeds from issue of share capital
Equity dividends paid
Proceeds from borrowings
Repayment of borrowings
Capital repayments of finance leases
Interest paid
Financing costs
Settlement of interest rate swaps
Net cash (outflow)/inflow from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of movements in foreign exchange
Cash and cash equivalents at end of year
Note
2018
£m
2017
£m
230
209
3.1, 3.2
2.3
2.3
2.4
5.3
4.5
4.5
4.1
4.1
167
(10)
48
55
490
–
(22)
28
496
(46)
450
1
–
(332)
–
14
151
(3)
55
62
474
(3)
1
5
477
(64)
413
1
(12)
(336)
4
–
(317)
(343)
6
(76)
651
(863)
(2)
(50)
(6)
5
(335)
(202)
309
3
110
8
(74)
178
(43)
(1)
(46)
(2)
–
20
90
215
4
309
1.1 BASIS OF PREPARATION
Merlin Entertainments plc (the Company) is a public company limited by shares which is incorporated in the United Kingdom and its registered office is
Link House, 25 West Street, Poole, Dorset, BH15 1LD.
The consolidated financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as
adopted by the EU (Adopted IFRS) and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.
The Company continues to prepare its parent Company financial statements in accordance with Financial Reporting Standard 101 Reduced Disclosure
Framework (FRS 101).
This section sets out the Group’s accounting policies that relate to the financial statements as a whole. Where an accounting policy is specific to one note, the
policy is described in the note to which it relates. The accounting policies have, unless otherwise stated, been applied consistently to all periods presented in these
consolidated financial statements and have been applied consistently by all subsidiaries and joint ventures.
The Group prepares its annual consolidated financial statements on a 52 or 53 week basis. These consolidated financial statements have been prepared for the
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017). The consolidated financial statements are prepared on the historical cost basis
except for derivative financial instruments and certain investments which are measured at their fair value.
The consolidated financial statements are presented in Sterling.
All values are stated in £ million (£m) except where otherwise indicated.
Going concern
The Group reported a profit for the year of £230 million (2017: £209 million) and generated operating cash inflows of £450 million (2017: £413 million).
Following refinancing activities that completed in May 2018, the Group is now funded by senior unsecured notes due for repayment in 2022 and 2026 and a
multi-currency revolving credit facility maturing in April 2023. 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 4.2.
After reviewing the Group’s and Company’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. Accordingly, the Group continues to adopt the going concern basis in preparing its consolidated financial statements.
Basis of consolidation
The consolidated financial statements comprise the financial statements of Merlin Entertainments plc and its subsidiaries at the end of each reporting period and
include its share of its joint ventures’ results using the equity method.
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns through its involvement
with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the
consolidated financial statements from the date that control commences until the date that control ceases.
All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated.
Where subsidiaries enter into financial guarantee contracts to guarantee the indebtedness of other companies within the Group, these are considered to be
insurance arrangements and accounted for as such. In this respect, the subsidiary concerned treats the guarantee contract as a contingent liability until such time
as it becomes probable that it will be required to make a payment under the guarantee.
Foreign currency
Foreign currency transactions are translated using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from
the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are
recognised in the income statement, except when deferred in equity as qualifying net investment hedges.
The results and financial position of those Group companies that do not have a Sterling functional currency are translated into Sterling as follows:
• Assets and liabilities are translated at the closing rate at the end of the reporting period.
• Income and expenses are translated at average exchange rates during the period.
• All resulting exchange differences are recognised in equity in the translation reserve.
The reporting date foreign exchange rates by major currency are provided in note 4.3.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATION
106
107
SECTION 1
BASIS OF PREPAR ATION C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
1.1 BASIS OF PREPARATION (CONTINUED)
1.1 BASIS OF PREPARATION (CONTINUED)
Classification of financial instruments issued by the Group
Financial instruments are recognised on the statement of financial position when the Group becomes party to the contractual provisions of the instrument.
The accounting policy for each type of financial instrument is included within the relevant note.
Financial assets are initially measured at fair value, unless otherwise noted, and are subsequently measured at amortised cost, fair value through other
comprehensive income or fair value through profit or loss. A financial asset is derecognised when the contractual rights to the cash flows from the asset expire or
the Group transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity.
Financial liabilities are initially measured at fair value, plus, in the case of other financial liabilities, directly attributable transaction costs. Other financial liabilities,
primarily the Group’s interest-bearing loans and borrowings, are measured at amortised cost. Financial liabilities are measured at fair value through profit or loss
and are held on the statement of financial position at fair value. A financial liability is derecognised when the Group’s obligations are discharged, expire or are
cancelled. Finance payments associated with financial liabilities are dealt with as part of finance costs.
An equity instrument is any contract that has a residual interest in the assets of the Group after deducting all of its liabilities. Finance payments associated with
financial instruments that are classified in equity are dividends and are recorded directly in equity.
Where financial instruments consist of a combination of debt and equity, the Group will assess the substance of the arrangement in place and decide how to
attribute values to each taking into consideration the policy definitions above.
Judgements and estimates
The preparation of financial statements requires management to exercise judgement in applying the Group’s accounting policies. It also requires the use of
estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Judgements
Management considers the following areas to be the judgements that have the most significant effect on the amounts recognised in the financial statements. They
are explained in more detail in the related notes:
• Useful life of brands (note 3.2) – where brands have been recognised as part of an acquisition, they have been assessed as having indefinite useful lives and
management have considered that this judgement remains appropriate.
• Goodwill impairment reviews (note 3.3) – the level at which goodwill is initially allocated and thereafter monitored.
Estimates
Management considers the following area to involve a significant degree of estimation uncertainty:
• Valuation of Resort Theme Parks Operating Group (RTP) assets and impairment (note 3.3) – estimation of discounted cash flows when calculating the value in
use of assets.
Other non-significant areas that include a degree of estimation uncertainty are:
• Valuation of assets and impairment, excluding RTP (note 3.3) – estimation of discounted cash flows when calculating the value in use of assets.
• Taxation (note 2.4) – recognition of deferred tax balances and accounting for tax risks.
• Provisions (note 3.5) – estimated outflow to settle the obligation and, where relevant, the appropriate discount and inflation rates to apply.
• Interest-bearing loans and borrowings (note 4.2) – expected period of borrowings when calculating the effective interest rate on those borrowings.
• Share-based payment transactions (note 4.6) – estimation of future performance when estimating vesting rates on share schemes.
• Investments (note 5.1) – expected period of and eventual return on investments when calculating the fair value.
• Employee benefits (note 5.2) – assumed discount rate, inflation rate and mortality when valuing defined benefit liabilities.
While these areas do not present a significant risk resulting in a material adjustment, they are areas of focus for management.
Those areas that require significant judgements or include estimation uncertainty on adoption of IFRS 16 ‘Leases’ are set out in note 5.5.
New standards and interpretations
The standards that have been implemented in the year that have had the most significant impact are IFRS 9 ‘Financial instruments’ and IFRS 15 ‘Revenue from
contracts with customers’, as explained below. A full list of new accounting standards and interpretations that have been implemented in the year, including those
which have had no significant impact, can be found in note 5.5. It also includes those standards that will be implemented next year or in future years, including our
assessment of the potential impact of IFRS 16 ‘Leases’.
IFRS 9 ‘Financial instruments’
IFRS 9 has been adopted by the Group in 2018. The new standard replaces IAS 39 ‘Financial instruments: Recognition and measurement’ and sets out
requirements for recognising and measuring financial assets and financial liabilities. The new requirements of the standard have been applied retrospectively,
taking advantage of the exemption to not restate comparative information with respect to classification and measurement changes.
The impact of IFRS 9 has not seen material changes to the financial statements for the Group. Further details of each aspect of the new standard have been
provided below:
Classification and measurement
IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash
flow characteristics. Under IFRS 9 the number of classification categories has reduced, resulting in all financial assets being measured at amortised cost, fair value
through other comprehensive income or fair value through profit or loss. Areas to note following the adoption of IFRS 9 are:
• There has not been a change to the Group’s trade and other receivables balances as a result of the classification changes.
• The election available under IFRS 9 has been taken, allowing minority equity investments to continue to be held at fair value with changes going through other
comprehensive income (FVOCI). These equity investments were previously held as available-for-sale, with changes in fair value being recognised through
equity. Under IFRS 9 all fair value gains and losses will be reported through OCI, no impairment losses will be recognised in profit or loss and any gains or losses
realised on disposal of these investments will no longer be reclassified to profit or loss.
• The classification for financial liabilities is largely similar under the new standard. The Group has not had to adjust any classifications for financial liabilities.
Impairment
IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward looking ‘expected credit loss’ (ECL) model. This will apply to all financial assets measured at
amortised cost or FVOCI, except equity investments, and will be measured in respect of default events that will occur in 12 months from the reporting date or
over the lifetime of the financial asset, depending on certain criteria. A review of each category of financial assets has been performed to assess the level of credit
risk and the appropriate ECL to use. The Group has assessed that this only applies to its accounting for trade and other receivables and cash and cash equivalents,
as detailed below:
• The Group has limited credit risk in respect of trade and other receivables with its customers as the majority pay in advance or at the time of their visit. The
estimated ECLs are calculated using both actual credit loss experience and forward looking projections and do not result in material changes to the impairment
of trade and other receivables.
• Cash and cash equivalents are held with banks and financial institutions. The estimated ECLs are calculated based on the 12 month expected loss basis and
reflect the short term nature of the exposures. The Group considers that its cash and cash equivalents have a low credit risk based on the external credit
ratings of the counterparties. Based on this, the ECL is not significant for cash and cash equivalents.
At each reporting date the expected credit losses will be reviewed to reflect changes in credit risk and adjustments made accordingly. There has not been a
material adjustment to trade and other receivables or cash as a result of the new methodology.
Hedging
As allowed on initial application, the Group has chosen to apply its hedge accounting policy under IFRS 9 rather than continuing to apply IAS 39. The new
standard introduces a more principles-based approach with the intention of aligning the accounting for hedging instruments more closely with the Group’s risk
management strategies and to apply a more qualitative and forward looking approach to assessing hedge effectiveness. IFRS 9 also introduces new requirements
on rebalancing hedge relationships and prohibiting voluntary discontinuation of hedge accounting.
All of the Group’s existing hedge relationships that were previously designated as effective hedging relationships have continued to qualify for hedge accounting
under IFRS 9 and are aligned to the Group’s risk management strategy and objective. The new standard is applied prospectively and therefore there are no
adjustments on transition.
Additional disclosures or amendments have been provided where required.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION
108
109
SECTION 1
BASIS OF PREPAR ATION C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
SECTION 2
RESULTS FOR THE YEAR
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
1.1 BASIS OF PREPARATION (CONTINUED)
2.1 PROFIT BEFORE TAX
IFRS 15 ‘Revenue from contracts with customers’
IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaced IAS 18 ‘Revenue’, IAS 11
‘Construction contracts’ and related interpretations.
The Group has adopted IFRS 15 using the cumulative effect method (without practical expedients). This approach requires the effect of applying this standard to
be recognised at the date of initial application (i.e. 31 December 2017). There is no impact to retained earnings on transition because the timing of recognition of
each category of Merlin’s revenue under the transfer of risks and rewards principles in IAS 18 matches the timing under the control principles in IFRS 15. In line
with adopting IFRS 15 using the cumulative effect method, the information presented for 2017 has not been restated.
Impact
IFRS 15 requires Merlin to make an assessment, considering the control principles of IFRS 15, as to whether parties involved in providing goods or services to a
customer are acting as a principal (if they control delivery to the customer) or, if they are arranging for those goods or services to be provided by the other party,
as an agent. Under IAS 18 this assessment was made based on which entity had the exposure to the significant risks and rewards associated with the transaction.
We have reviewed how this change affects situations where a third party is involved, together with Merlin, in providing visitors to Merlin attractions with
admission tickets and/or accommodation, or commercial offerings such as photos and games services once inside a Merlin attraction. There is no difference in the
pattern of revenue recognition arising from this change.
• Trade partners – Merlin engages with trade partners (such as online travel agents) in selling admission tickets and accommodation to the visiting customer. In
instances where this leads to trade partners being considered Merlin’s agent, Merlin records revenue at the amount paid by the visiting customer (‘gross’) and
records the amount of underlying commission retained by the agent within cost of sales.
• Commercial offerings – Merlin partners with third parties in the operation of commercial offerings within theme park resorts and Midway attractions. The
most significant of these are photo and games operations where the Group has analysed which party is considered to control the relevant operation. The
nature of the operations concerned, and the judgements made, impact each Operating Group in different ways.
The following table summarises the impacts of adopting IFRS 15 on the Group’s consolidated income statement for the 52 weeks ended 29 December 2018 and
each of the line items affected. There was no material impact on the Group’s statement of financial position, statement of cash flows or statement of
comprehensive income:
2018
Revenue
Cost of sales
Gross profit
As reported
£m
Adjustment
£m
1,688
(298)
1,390
(35)
35
–
Amounts
without
adoption
of IFRS 15
£m
1,653
(263)
1,390
Disaggregation of revenue
The following categories of revenue (all excluding VAT and similar taxes) have been disaggregated:
• Visitor revenue – which represents admissions tickets, retail, food and beverage sales and other commercial offerings such as photos and games experiences
inside a Merlin attraction. Ticket revenue is recognised at point of entry. Revenue from annual passes and other tickets that entitle a customer to continued
visits over a period of time is deferred and then recognised evenly over the period that the pass is valid. Retail and food and beverage revenue, along with other
similar commercial offerings, is recognised at point of sale.
• Accommodation revenue – which represents overnight stay and conference room revenue along with food and beverage revenue earned within our hotels
and other accommodation offerings. Accommodation revenue is recognised at the time when a customer stays at Merlin accommodation.
• Other revenue – which represents sponsorship, function, management and service contract revenue along with other sundry items. Sponsorship revenue is
recognised over the relevant contract term. Function revenue is recognised at the time of the event. Management and service contract revenue is recognised in
line with the performance obligations in the specific contract.
Information regarding the Group’s results including this disaggregation of revenue by nature as required by IFRS 15 is included in note 2.1.
Segmental information
An operating segment, as defined by IFRS 8 ‘Operating segments’, is a component of the Group that engages in business activities from which it may earn
revenues and incur expenses. The Group is managed through its three Operating Groups, which form the operating segments on which the information shown
below is prepared. The Group determines and presents operating segments based on the information that is provided internally to the Chief Executive Officer
(CEO), who is the Group’s chief operating decision maker, and the Board. An operating segment’s operating results are reviewed regularly by the CEO to make
decisions about resources to be allocated to the segment and assess its performance.
2018
Visitor revenue
Accommodation revenue
Other revenue
Revenue(1)
EBITDA(2)
Depreciation and amortisation
Operating profit(2)
2017(3)
Visitor revenue
Accommodation revenue
Other revenue
Revenue(1)
EBITDA(2)
Depreciation and amortisation
Operating profit(2)
Midway
Attractions
£m
LEGOLAND
Parks
£m
Resort
Theme
Parks
£m
Segment
results
£m
Other
items(4)
£m
Exceptional
items(5)
£m
651
–
26
677
210
(71)
139
627
–
29
656
220
(68)
152
469
142
26
637
242
(48)
194
481
102
26
609
230
(39)
191
287
68
12
367
88
(37)
51
259
60
10
329
72
(36)
36
1,407
210
64
1,681
540
(156)
384
1,367
162
65
1,594
522
(143)
379
–
–
7
7
(46)
(11)
(57)
–
–
–
–
(48)
(8)
(56)
–
–
–
–
(4)
–
(4)
–
–
–
–
–
–
–
Total
£m
1,407
210
71
1,688
490
(167)
323
1,367
162
65
1,594
474
(151)
323
(1) Revenue is disaggregated into the three categories described in note 1.1.
(2) Performance is measured based on segment EBITDA, as included in internal management reports. Segment operating profit is included for information purposes.
(3) The Group has initially applied IFRS 15 and IFRS 9 at 31 December 2017. Under the transition methods chosen, comparative information is not restated.
(4) Other items include Merlin Magic Making, head office costs and various other costs, which cannot be directly attributed to the reportable segments.
(5) Details of exceptional items are provided in note 2.2.
Geographical areas
While each Operating Group is managed on a worldwide basis, part of our strategy is to diversify geographically across the four regions shown below. The
information presented is based on the geographical locations of the visitor attractions concerned.
Geographical information
United Kingdom
Continental Europe
North America
Asia Pacific
Deferred tax (note 2.4)
Investments (note 5.1)
Revenues
2018
£m
527
413
453
295
1,688
Non-current
assets
2018
£m
Revenues
2017
£m
Non-current
assets
2017
£m
939
1,031
748
668
3,386
35
61
3,482
486
389
438
281
921
986
620
594
1,594
3,121
33
59
3,213
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION 110
111
SECTION 2
RESULTS FOR THE YEAR C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
2.1 PROFIT BEFORE TAX (CONTINUED)
Revenue accounting policy
Revenue represents the amounts received from customers (excluding VAT and similar taxes) for admissions tickets, accommodation, retail, food and beverage
sales, other commercial offerings, and sponsorship. From time to time, the Group also enters into service contracts for attraction development.
Tickets, annual passes and other services can be bought in advance, generally online, in which case these advanced revenues are held in deferred revenue until the
visitor uses those tickets or services. Visitor revenue is then recognised when the visitor enters the attraction. Revenue from the sale of annual passes is deferred
and then recognised evenly over the period that the pass is valid. Retail and food and beverage sales revenues are recognised at the point of sale. Accommodation
revenue is recognised at the time when a customer stays at Merlin accommodation. Sponsorship revenue is recognised over the relevant contract term. Revenue
for attraction development is recognised as performance obligations under the contract are met. Service contract revenue in 2018 and 2017 is not material.
IFRS 15 requires Merlin to make an assessment, considering the control principles of IFRS 15, as to whether parties involved in providing goods or services to a
customer are acting as a principal (if they control delivery to the customer) or, if they are arranging for those goods or services to be provided by the other party,
as an agent. The impact of adopting IFRS 15 in the 52 weeks ended 29 December 2018 is detailed in note 1.1.
2.1 PROFIT BEFORE TAX (CONTINUED)
Auditor’s remuneration
Audit of these financial statements
Audit of financial statements of subsidiaries
Other assurance services
Services relating to corporate finance transactions
2.2 EXCEPTIONAL ITEMS
2018
£m
1.5
0.4
0.2
0.2
2.3
2017
£m
1.4
0.4
0.2
0.1
2.1
Cost of sales
Cost of sales of £298 million (2017: £255 million) represents variable expenses (excluding VAT and similar taxes) incurred from revenue generating activities. Retail
inventory, food and beverage consumables and costs associated with the delivery of accommodation are the principal expenses included within this category.
Accounting policy
Due to their nature, certain one-off and non-trading items can be classified separately as exceptional items in order to draw them to the attention of the reader.
In the judgement of the Directors this presentation shows the underlying performance of the Group more accurately.
Operating expenses
Staff numbers and costs
The average number of persons employed by the Group (including Directors) during the year, analysed by category, was as follows:
Exceptional items
The following items are exceptional and have been shown separately on the face of the consolidated income statement.
Operations
Attraction management and central administration
The aggregate payroll costs of these persons were as follows:
Wages and salaries
Share-based payments (note 4.6)
Social security costs
Other pension costs
Related party transactions with key management personnel
Key management comprises the Executive and Non-executive Directors of the Board and the members of the Executive Committee. Details of the
remuneration, shareholdings, share options, pension contributions and payments for loss of office of the Executive Directors are included in the Directors’
Remuneration Report on pages 74 to 89.
The remuneration of key management was as follows:
Key management emoluments including social security costs
Contributions to money purchase pension schemes
Share-based payments and other related payments
2018
£m
6.7
0.1
2.0
8.8
2018
19,057
2,066
21,123
2017
17,834
2,037
19,871
Within other operating expenses:
Productivity Agenda activities(1)
Exceptional items included within EBITDA and operating profit
Income tax credit on exceptional items above
Exceptional items for the year
2018
£m
2017
£m
4
4
–
4
–
–
–
–
2018
£m
381
8
46
13
448
(1) Certain one-off operational costs have been incurred in 2018 as part of the Group’s Productivity Agenda initiatives that are expected to continue through to 2021, as well as exit costs in respect of certain small, non-core
Midway sites. They are separately presented as they are not part of the Group’s underlying operating expenses.
2.3 FINANCE INCOME AND COSTS
Accounting policies
Income and costs
Finance income comprises interest income from financial assets and investments, applicable foreign exchange gains and gains on hedging instruments that are
recognised in the income statement. Finance costs comprise interest expense, finance charges on finance leases, applicable foreign exchange losses and losses
on hedging instruments that are recognised in the income statement. Interest income and interest expense are recognised as they accrue, using the effective
interest method.
Capitalisation of borrowing costs
Where assets take a substantial time to complete, the Group capitalises borrowing costs directly attributable to the acquisition, construction or production of
those assets.
2017
£m
360
3
44
13
420
2017
£m
4.8
0.1
1.5
6.4
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION
112
113
SECTION 2
RESULTS FOR THE YEAR C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
2.3 FINANCE INCOME AND COSTS (CONTINUED)
Finance income
In respect of assets not held at fair value
Interest income
In respect of assets held at fair value
Cash flow hedges – reclassified to profit and loss(1)
Other
Net foreign exchange gain
Finance costs
In respect of liabilities not held at fair value
Interest expense on financial liabilities measured at amortised cost
Re-measurement of financial liabilities measured at amortised cost(2)
Other interest expense
Other
Net foreign exchange loss
2018
£m
2017
£m
1
4
5
10
3
–
–
3
2018
£m
2017
£m
46
–
2
–
48
47
4
2
2
55
Capitalised borrowing costs amounted to £6 million in 2018 (2017: £3 million), with a capitalisation rate of 3.4% (2017: 2.9%). Tax relief on capitalised borrowing
costs amounted to £2 million in 2018 (2017: £1 million).
(1) As part of the refinancing undertaken during the year (see note 4.2), the Group restructured its interest rate swaps and was paid a net £5 million to cash-settle certain swaps. The swaps had previously been hedge
accounted through equity and £4 million has therefore been recycled through the income statement in the period to 29 December 2018 with the remainder to be recycled in the period to 2020. Further details of the
Group’s debt are presented in note 4.2.
(2) In 2017 the Group estimated that a refinancing of the bank facilities and multi-currency revolving credit facility was likely within the next 18 months, which was earlier than that previously assumed for accounting purposes.
As a result the Group accelerated the amortisation of financing costs in respect of these facilities and the resulting adjustment was recognised as a loss on re-measurement and presented in the income statement as a
charge of £4 million.
2.4 TAXATION
Accounting policies
The tax charge for the year is recognised in the income statement and the statement of comprehensive income, according to the accounting treatment of the
related transaction. The tax charge comprises both current and deferred tax.
Current tax is the expected tax payable on the taxable income for the year, using tax rates substantively enacted at the end of the reporting period, and any
adjustment to tax payable in respect of previous periods.
Deferred tax is provided on certain temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and taxation
purposes respectively. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that
affect neither accounting nor taxable profit other than in a business combination; and differences relating to investments in subsidiaries and joint ventures to the
extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or
settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the end of the reporting period.
After considering forecast future profits, deferred tax assets are recognised where it is probable that future taxable profits will be available against which those
assets can be utilised. This assessment is made after considering a number of factors, including the Group’s future trading expectations.
2.4 TAXATION (CONTINUED)
A current tax provision is recognised when the Group has a present obligation as a result of a past event and it is probable that the Group will be required to
settle that obligation. Tax provisions are based on management’s estimate of the amount of tax payable and the likelihood of settlement in relation to matters
which have yet to be concluded. These include matters arising from ongoing audits, as well as other uncertain positions. A combination of in-house tax experts,
previous experience and professional firms is used when assessing tax risks. Current provisions represent a number of different matters arising across the various
jurisdictions in which the Group operates. It is currently unclear when these matters will be settled, but certain matters have been open for several years and may
not be resolved in the coming year.
Recognised in the income statement
Current tax expense
Current year
Adjustment for prior periods
Total current income tax
Deferred tax expense
Origination and reversal of temporary differences
Changes in tax rate
Adjustment for prior periods
Total deferred tax
Total tax expense in income statement
Reconciliation of effective tax rate
Profit before tax
Income tax using the UK domestic corporation tax rate
Effect of tax rates in foreign jurisdictions
Non-deductible expenses
Income not subject to tax
Effect of changes in tax rate
Unrecognised temporary differences
Effect of recognising deferred tax assets previously unrecognised
Effect of USA tax reform
Adjustment for prior periods
2018
%
19.0%
Total tax expense in income statement
19.2%
The effective tax rate (ETR) reflects updates to the headline UK rate, including the effect on the measurement of deferred tax.
2018
£m
55
(3)
52
12
(6)
(3)
3
55
2017
%
19.3%
22.9%
2018
£m
285
54
15
5
(11)
(6)
4
–
–
(6)
55
2017
£m
65
(3)
62
24
(25)
1
–
62
2017
£m
271
52
22
8
(14)
–
4
(1)
(7)
(2)
62
The difference between the reported ETR of 19.2% and the UK standard tax rate of 19.0% is largely attributable to the Group’s geographic mix of profits and
reflects higher rates in certain jurisdictions, particularly the USA. In addition, the reported rate is increased by non-deductible expenses which primarily arise as a
result of depreciation on capital expenditure from continued investment in our attractions. These factors are offset by the Group’s internal financing
arrangements, which have been put in place to support development and ongoing funding needs in overseas territories.
The Group’s ETR has fallen from 22.9% to 19.0% (based on underlying results). This is primarily driven by the ongoing impact of a package of measures enacted in
the Tax Cuts and Jobs Act (USA tax reform) in the USA on 22 December 2017. In particular, the reduction in the US federal tax rate, effective in the 2018 period,
has driven a significant reduction in the effect of tax rates in foreign jurisdictions (2018: 5.2%; 2017: 8.2%). In 2017 the transitional impact of USA tax reform was
separately disclosed.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION 114
115
SECTION 2
RESULTS FOR THE YEAR C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
2.4 TAXATION (CONTINUED)
The net £7 million (2.4%) reduction in the prior year ETR comprised:
• the effect of changes in tax rates (£25 million) as deferred tax liabilities were revalued due to the federal tax rate reducing from 35% to 21% effective 1 January
2018; offset by
• an increase in unrecognised temporary differences (£9 million) resulting from new restrictions on interest deductibility; and
• other tax charges and deductions (£9 million) originating from revisions to the USA taxation of foreign investments.
Significant factors impacting the Group’s future ETR include the USA tax reform, the ability to continue current financing arrangements and changes to local or
international tax laws. With regard to the latter, the European Commission’s preliminary finding relating to the UK’s Controlled Foreign Company rules is further
detailed in note 5.4.
The Finance Act 2016, which provided for reductions in the main rate of UK corporation tax from 20% to 19% effective from 1 April 2017 and to 17% effective
from 1 April 2020, was substantively enacted on 19 September 2016.
2.4 TAXATION (CONTINUED)
Movement in deferred tax during the current year
Property, plant and equipment
Other short term temporary differences
Intangible assets
Tax value of loss carry-forwards
Net tax assets/(liabilities)
31 December
2017
£m
Recognised
in income –
USA
tax reform
£m
Recognised
in income –
other
£m
Recognised
in other
comprehensive
income
£m
Effect of
movements
in foreign
exchange
£m
29 December
2018
£m
(111)
21
(50)
2
(138)
–
–
–
–
–
(7)
2
2
–
(3)
–
–
–
–
–
(5)
–
(1)
–
(6)
(123)
23
(49)
2
(147)
Otherwise, the Group’s future ETR will primarily be affected by the geographic mix of profits.
Recognised directly in equity through the statement of other comprehensive income
Foreign exchange translation differences relating to the net investment in foreign operations
Total tax expense in statement of other comprehensive income
Deferred tax assets and liabilities
Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
2018
£m
–
–
Property, plant and equipment
Other short term temporary differences
Intangible assets
Tax value of loss carry-forwards
Tax assets/(liabilities)
Set-off tax
Net tax assets/(liabilities)
Assets
Liabilities
Net
2018
£m
20
29
–
2
51
(16)
35
2017
£m
19
29
–
2
50
(17)
33
2018
£m
(143)
(6)
(49)
–
(198)
16
(182)
2017
£m
(130)
(8)
(50)
–
(188)
17
(171)
2018
£m
(123)
23
(49)
2
(147)
–
(147)
2017
£m
1
1
2017
£m
(111)
21
(50)
2
(138)
–
(138)
Other short term temporary differences primarily relate to financial assets and liabilities and various accruals and prepayments.
Set-off tax is separately presented to show deferred tax assets and liabilities by category before the effect of offsetting these amounts in the statement of financial
position where the Group has the right and intention to offset these amounts.
In 2018 movements recognised in the income statement were principally due to tax allowances utilised in the UK and USA exceeding depreciation.
Movement in deferred tax during the previous year
Property, plant and equipment
Other short term temporary differences
Intangible assets
Tax value of loss carry-forwards
Net tax assets/(liabilities)
Recognised
in income –
USA
tax reform
£m
Recognised
in income –
other
£m
Recognised
in other
comprehensive
income
£m
Effect of
movements
in foreign
exchange
£m
30 December
2017
£m
28
(12)
–
–
16
(17)
–
–
1
(16)
–
(1)
–
–
(1)
6
(2)
–
–
4
(111)
21
(50)
2
(138)
1 January
2017
£m
(128)
36
(50)
1
(141)
In 2017 movements recognised in the income statement in respect of property, plant and equipment were principally due to the revaluation of deferred tax
liabilities in the USA partially offset by allowances utilised in the UK. Movements in other short term temporary differences were mainly due to the impact of the
USA tax reforms described previously and the provision for future deductions in respect of employee share options.
Unrecognised deferred tax assets
Property, plant and equipment
Other short term temporary differences
Tax value of loss carry-forwards
Net unrecognised tax assets
2018
£m
2
22
64
88
2017
£m
–
22
61
83
The unrecognised deferred tax assets relating to loss carry-forwards include £1 million (2017: £2 million) expiring in 0–5 years and £8 million (2017: £6 million)
expiring in 6–10 years. The remaining losses and other timing differences do not expire under current tax legislation.
The nature and location of the tax losses carried forward are such that there is currently no expectation that the losses will be utilised.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION
116
117
SECTION 2
RESULTS FOR THE YEAR C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
2.5 EARNINGS PER SHARE
Accounting policy
Basic earnings per share is calculated by dividing the profit for the year attributable to ordinary shareholders by the weighted average number of ordinary shares
in issue during the year.
Adjusted earnings per share is calculated in the same way except that the profit for the year attributable to ordinary shareholders is adjusted for exceptional items
(see note 2.2).
Diluted earnings per share is calculated by dividing the profit for the year attributable to ordinary shareholders by the weighted average number of ordinary
shares in issue during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all dilutive potential ordinary shares
into ordinary shares.
The following reflects the income and share data used in the basic and diluted earnings per share computations:
Profit attributable to ordinary shareholders
Exceptional items net of tax (see note 2.2)
Adjusted profit attributable to ordinary shareholders
Basic weighted average number of shares
Dilutive potential ordinary shares
Diluted weighted average number of shares
2018
£m
230
4
234
2018
2017
£m
209
–
209
2017
1,021,234,537
1,018,610,976
1,778,532
2,083,168
1,023,013,069
1,020,694,144
Share incentive plans (see note 4.6) are treated as dilutive to earnings per share when, at the reporting date, the awards are both ‘in the money’ and would be
issuable had the performance period ended at that date.
In 2018 and 2017, the PSP has a marginal dilutive effect as the performance measures have been partially achieved. The DBP, CSOP and AESP are marginally
dilutive as certain option tranches are ‘in the money’, after accounting for the value of services rendered in addition to the option price.
Earnings per share
Basic earnings per share on profit for the year(1)
Exceptional items net of tax
Adjusted earnings per share on adjusted profit for the year(1)
Diluted earnings per share
Diluted earnings per share on profit for the year(1)
Exceptional items net of tax
Diluted adjusted earnings per share on adjusted profit for the year(1)
(1) Earnings per share is calculated based on figures before rounding and is then rounded to one decimal place.
2018
Pence
22.5
0.4
22.9
2018
Pence
22.5
0.4
22.9
2017
Pence
20.5
–
20.5
2017
Pence
20.5
–
20.5
SECTION 3
OPER ATING ASSETS
AND LIABILITIES
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
3.1 PROPERTY, PLANT AND EQUIPMENT
Accounting policies
Property, plant and equipment (PPE) are stated at cost less accumulated depreciation and impairment losses.
Where components of an item of PPE have different useful lives, they are accounted for separately.
The initial cost of PPE includes all costs incurred in bringing the asset into use and includes external costs for the acquisition, construction and commissioning of
the asset, internal project costs (primarily staff expenses) and capitalised borrowing costs.
Assets acquired through business combinations
At the time of a business combination PPE is separately recognised and valued. Given the specialised nature of the PPE acquired, fair values are calculated on a
depreciated replacement cost basis. The key estimates are the replacement cost, where industry specific indices are used to restate original historic cost; and
depreciation, where the total and remaining economic useful lives are considered, together with the residual value of each asset. The total estimated lives applied
are consistent with those set out below. Residual values are based on industry specific indices.
New sites
Capital expenditure on new attractions includes all the costs of bringing the items of PPE within that attraction into use ready for the opening of the attraction.
Pre-opening costs are only capitalised to the extent they are required to bring PPE into its working condition. Other pre-opening costs are expensed as incurred.
On inception of a lease for a new site, where required, the estimated cost of decommissioning any additions is included within PPE and depreciated over the lease
term. A corresponding provision is set up as disclosed in note 3.5.
Existing sites
Subsequent expenditure on items of PPE in our existing estate can be broadly split into two categories:
• Capital expenditure which adds new items of PPE to an attraction or which extends the operational life, or enhances existing items, of PPE is accounted for as
an addition to PPE. Examples of such expenditure include new rides or displays and enhancements to rides or displays, which increase the appeal of our
attractions to visitors.
• Expenditure which is incurred to maintain the items of PPE in a safe and useable state and to maintain the useful life of items of PPE is charged to the income
statement as incurred. Examples of such expenditure include regular servicing and maintenance of buildings, rides and displays and ongoing repairs to items
of PPE.
Depreciation
Land is not depreciated. Assets under construction are not depreciated until they come into use, when they are transferred to buildings or plant and equipment
as appropriate. Depreciation is then charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of PPE. Asset
lives for plant and equipment vary depending on the nature of the asset, from short life assets such as IT assets, up to long term infrastructure assets. No residual
values are typically considered.
The estimated useful lives are as follows:
Asset class
Freehold/long leasehold buildings
Leasehold buildings
Plant and equipment
Depreciation policy
50 years
20–50 years (dependent on life of lease)
5–30 years
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION 118
119
SECTION 3
OPER ATING ASSETS
AND LIABILITIES C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
3.1 PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Property, plant and equipment
Cost
At 1 January 2017
Additions – owned assets
Additions – leased assets
Movements in asset retirement provisions
Disposals
Transfers
Effect of movements in foreign exchange
Balance at 30 December 2017
Additions – owned assets
Movements in asset retirement provisions (note 3.5)
Disposals
Transfers
Effect of movements in foreign exchange
Balance at 29 December 2018
Depreciation
At 1 January 2017
Depreciation for the year – owned assets
Depreciation for the year – leased assets
Disposals
Effect of movements in foreign exchange
Balance at 30 December 2017
Depreciation for the year – owned assets
Depreciation for the year – leased assets
Disposals
Effect of movements in foreign exchange
Balance at 29 December 2018
Carrying amounts
At 31 December 2016
At 30 December 2017
At 29 December 2018
Land and
buildings
£m
Plant and
equipment
£m
Under
construction
£m
1,186
1,309
10
98
2
(2)
70
(29)
41
13
1
(7)
188
(23)
1,335
1,522
43
8
–
153
49
1,588
281
36
4
(1)
(9)
311
39
5
–
11
366
905
1,024
1,222
37
(2)
(5)
104
28
1,684
563
105
4
(7)
(6)
659
117
4
(5)
12
787
746
863
897
190
278
–
–
–
(258)
(5)
205
270
–
–
(257)
7
225
–
–
–
–
–
–
–
–
–
–
–
190
205
225
Total
£m
2,685
329
111
3
(9)
–
(57)
3,062
350
6
(5)
–
84
3,497
844
141
8
(8)
(15)
970
156
9
(5)
23
1,153
1,841
2,092
2,344
Depreciation is calculated in line with the policy stated previously. During the year the Group reviews useful economic lives and tests PPE for impairment in
accordance with the Group’s accounting policy, as referred to in note 3.3. As a result no material adjustments were made in either 2017 or 2018.
The Group leases buildings and plant and equipment under finance lease agreements secured on those assets. Additions of leased assets in 2017 were in respect
of the LEGOLAND Japan finance lease entered into on the opening of the park in April 2017 (note 4.4).
At 29 December 2018 the net carrying amount of leased buildings was £106 million (2017: £103 million) and the net carrying amount of leased plant and
equipment was £35 million (2017: £38 million). Further details in respect of leases and lease obligations are provided in note 4.4.
3.1 PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Capital commitments
At the year end the Group has a number of outstanding capital commitments in respect of capital expenditure at its existing attractions (including
accommodation), as well as for Midway attractions and LEGOLAND parks that are under construction. These commitments are expected to be settled within
two financial years of the reporting date. These amount to £142 million (2017: £143 million) for which no provision has been made.
At year end foreign exchange rates, the Group is intending to invest £148 million in LEGOLAND Korea (2017: £73 million), net of project funding from
LL Developments (see note 5.3).
3.2 GOODWILL AND INTANGIBLE ASSETS
Accounting policies
Goodwill represents the difference between the cost of an acquisition and the fair value of the identifiable net assets acquired less any contingent liabilities
assumed. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to groups of cash-generating units and is not amortised but
is tested annually for impairment. In respect of joint ventures, the carrying amount of goodwill is included in the carrying amount of the investment in the
joint venture.
Where they arise on acquisition, brands have been valued based on discounted future cash flows using the relief from royalty method, including amounts into
perpetuity. Currently all such brands held are assessed as having indefinite useful economic lives. This assessment is based upon the strong historical performance
of the brands over a number of economic cycles, the ability to roll out our brands, and the Directors’ intentions regarding the future use of brands. The Directors
feel this is a suitable policy for a brands business which invests in and maintains the brands, and foresee no technological developments or competitor actions
which would put a finite life on the brands. The brands are tested annually for impairment.
Expenditure on internally generated goodwill and brands is recognised in the income statement as an expense as incurred.
Other intangible assets comprise software licences, sponsorship rights and other contract based intangible assets. They are amortised on a straight-line basis from
the date they are available for use. They are stated at cost less accumulated amortisation and impairment losses.
The estimated useful lives of other intangible assets are as follows:
Asset class
Licences
Other intangible assets
Estimated useful life
Life of licence (up to 15 years)
Relevant contractual period (up to 30 years)
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION 120
121
SECTION 3
OPER ATING ASSETS
AND LIABILITIES C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
3.2 GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
Goodwill and intangible assets
Cost
At 1 January 2017
Additions
Effect of movements in foreign exchange
Balance at 30 December 2017
Additions
Effect of movements in foreign exchange
Balance at 29 December 2018
Amortisation
At 1 January 2017
Amortisation for the year
Effects of movements in foreign exchange
Balance at 30 December 2017
Amortisation for the year
Effect of movements in foreign exchange
Balance at 29 December 2018
Carrying amounts
At 31 December 2016
At 30 December 2017
At 29 December 2018
Intangible assets
Goodwill
£m
Brands
£m
Other
£m
Total
£m
993
–
(1)
992
–
10
1,002
177
–
1
178
–
1
179
816
814
823
196
–
2
198
–
2
200
13
–
–
13
–
–
13
183
185
187
33
3
–
36
1
–
37
15
2
–
17
2
–
19
18
19
18
1,222
3
1
1,226
1
12
1,239
205
2
1
208
2
1
211
1,017
1,018
1,028
Intangible assets are tested for impairment in accordance with the Group’s accounting policy, as referred to in note 3.3. As a result of these tests, no impairment
charges have been made in the year (2017: £nil).
Goodwill
Goodwill is allocated to the Group’s operating segments which represent the lowest level at which it is monitored and tested for impairment. It is denominated in
the relevant local currencies and therefore the carrying value is subject to movements in foreign exchange rates.
Midway Attractions
LEGOLAND Parks
Resort Theme Parks
2018
£m
568
43
212
823
2017
£m
563
42
209
814
3.2 GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
Brands
The Group has valued the following acquired brands, all with indefinite useful economic lives. They are all denominated in their relevant local currencies and
therefore the carrying value is subject to movements in foreign exchange rates.
Midway Attractions
Madame Tussauds
SEA LIFE
London Eye
Other
Resort Theme Parks
Gardaland Resort
Alton Towers Resort
THORPE PARK
Heide Park
Other
2018
£m
2017
£m
28
17
10
8
63
52
32
15
13
12
124
187
28
17
10
8
63
51
32
15
12
12
122
185
The Madame Tussauds brand value is predominantly related to the London attraction but includes value identified with the Group’s other Madame Tussauds
attractions. The SEA LIFE brand is related to the Group’s portfolio of SEA LIFE attractions. The London Eye, Gardaland Resort, Alton Towers Resort, THORPE
PARK and Heide Park brands all arise from those specific visitor attractions.
3.3 IMPAIRMENT TESTING
Accounting policies
The carrying amounts of the Group’s goodwill, intangible assets and PPE are reviewed at the end of each reporting period to determine whether there is any
indication of impairment. If any such indication exists or if the asset has an indefinite life, the asset’s recoverable amount is estimated.
The process of impairment testing is to estimate the recoverable amount of the assets concerned, and recognise an impairment loss whenever the carrying
amount of those assets exceeds the recoverable amount.
The level at which the assets concerned are reviewed varies as follows:
Asset
Goodwill
Brands
PPE
Goodwill is reviewed at an Operating Group level, being the relevant grouping of cash-generating units (CGUs) at which the benefit of such
goodwill arises. A CGU is the smallest identifiable group of assets that generates largely independent cash inflows, being the Group’s
individual attractions.
Brands are reviewed at an individual CGU level.
PPE is reviewed at an individual CGU level, being the Group’s individual attractions.
For assets that are in continuing use but do not generate largely independent cash inflows, the recoverable amount is determined for the CGU to which the
assets belong.
Impairment losses are recognised in the income statement. They are allocated first to reduce the carrying amount of goodwill, and then to reduce the carrying
amount of other intangible assets and other assets on a pro rata basis.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION 122
123
SECTION 3
OPER ATING ASSETS
AND LIABILITIES C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
3.3 IMPAIRMENT TESTING (CONTINUED)
3.3 IMPAIRMENT TESTING (CONTINUED)
Calculation of recoverable amount
In accordance with accounting standards the recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. To assess value in
use, estimated future cash flows are discounted to their present value using an appropriate pre-tax discount rate, derived from the Group’s post-tax weighted
average cost of capital. The Group uses a multiple of EBITDA to estimate fair value which is based on the Group’s average market capitalisation as a multiple of
the Group’s underlying EBITDA. The Group’s internally approved five year business plans, being the current year and four future years, are used as the basis for
these calculations, with cash flows beyond the four year outlook period then extrapolated using a long term growth rate.
Common assumptions have been adopted for the purpose of testing goodwill across the business and for testing brand values where their risk profiles are similar.
The key assumptions and estimates used when calculating the net present value of future cash flows from the Group’s businesses are as follows:
Estimate
Future cash flows
Growth in EBITDA
Timing and quantum of future
capital and maintenance
expenditure
Long term growth rate
Discount rates to reflect the risks
involved
Assumed to be equivalent to the operating cash flows of the businesses less the cash flows in respect of capital expenditure.
The Group uses EBITDA less an allocation of central costs, in line with other recharges which occur in the business, as a
proxy for the operating cash flows of its attractions as they are not significantly impacted by movements in working capital.
EBITDA is forecast by an analysis of both projected revenues and costs. Visitor numbers and revenue projections are based
on market analysis, including the total available market, historic trends, competition and site development activity, both in
terms of capital expenditure on rides and attractions as well as marketing activity.
Projections of operating costs are based on historical data, adjusted for variations in visitor numbers and planned expansion
of site activities as well as general market conditions.
Projections are based on the attractions’ long term development plans, taking into account the capital investment necessary
to maintain and sustain the performance of the attractions’ assets.
A growth rate of 2.5% (2017: 2.5%) was determined based on management’s long term expectations, taking account of
historical averages and future expected trends in both market development and market share growth.
Based on the estimated weighted average cost of capital of a ‘market participant’ within the main geographical regions where
the Group operates, these are drawn from market data and businesses in similar sectors, and adjusted for asset specific risks.
The key assumptions of the ‘market participant’ include the ratio of debt to equity financing, risk free rates and the medium
term risks associated with equity investments. Net present values are calculated using pre-tax discount rates derived from
the Group’s post-tax weighted average cost of capital.
Midway Attractions
LEGOLAND Parks
Resort Theme Parks
Pre-tax discount rates
Post-tax discount rates
2018
9.2%
9.2%
9.8%
2017
9.8%
10.2%
10.2%
2018
7.5%
7.3%
7.9%
2017
7.8%
7.6%
8.3%
Sensitivity analysis
Impairment reviews are often sensitive to changes in key assumptions. Sensitivity analysis has therefore been performed on the calculated recoverable amounts
considering incremental changes in the key assumptions.
Particular focus is given to material amounts where headroom is more limited. As in prior years, this solely relates to goodwill attributed to the Resort Theme
Parks Operating Group (RTP) where the headroom is £93 million (2017: £32 million). The Midway Attractions and LEGOLAND Parks Operating Groups, as well
as individual brands, show considerable headroom and are not sensitive to even significant changes in any of the key assumptions.
In undertaking sensitivity analysis for RTP, consideration has been given to movements in forecast EBITDA, increases in discount rates and reductions in long term
growth rates.
At the year end the Directors consider that the forecasts used reflect the current best estimate of future trading in RTP. It is noted, however, that the calculations
are inherently sensitive to the level of growth within RTP, which may be affected by factors such as weather patterns and the wider economic trading
environment. While in the short term slower growth would be highly unlikely to affect valuations by a substantial amount, longer term shortfalls that affect the
outlook for the fourth year of the plan (which drives the terminal value) would have a more significant impact. If EBITDA for RTP as a whole was forecast to be
9% (2017: 3%) lower than currently anticipated for 2023 (2017: than anticipated for 2022), headroom would be absorbed in full.
Discount rates have been derived from market data. As these rates are intended to be long term in nature they are expected to be reasonably stable in the short
term, however market discount rates could increase in future. If the discount rate used across RTP had been higher by a factor of 8% to 10.6% (2017: 3% to 10.5%),
headroom would have been absorbed in full.
The long term growth rate, which is applied to the cash flows of the final year in the business plan, was determined based on management’s long term
expectations, taking account of historical averages and future expected trends in both market development and market share growth. If circumstances caused
the rate to lower to 1.4% (2017: 2.1%), headroom would be absorbed in full.
3.4 WORKING CAPITAL
Accounting policies
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is measured using the first-in first-out principle and includes expenditure incurred in
acquiring the inventories and bringing them to their present location and condition.
Trade and other receivables
Trade and other receivables are recognised and carried at the original invoice amount less a loss allowance calculated using the simplified expected credit loss
(ECL) model approach. Trade receivables are written off when there is no reasonable expectation of recovery. Other receivables are stated at their amortised
cost less any impairment losses. Estimated ECLs are calculated using both actual credit loss experience and forward looking projections.
Inventories
Maintenance inventory
Goods for resale
2018
£m
11
36
47
2017
£m
9
28
37
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION 124
125
SECTION 3
OPER ATING ASSETS
AND LIABILITIES C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
3.4 WORKING CAPITAL (CONTINUED)
Trade and other receivables
Trade receivables
Other receivables
Prepayments and contract assets
Ageing of trade receivables
The ageing analysis of trade receivables, net of allowance for non-recoverable amounts, is as follows:
Neither past due nor impaired
Up to 30 days overdue
Between 30 and 60 days overdue
Between 60 and 90 days overdue
Over 90 days overdue
Information about the Group’s exposure to credit risk is included in note 4.3.
Trade and other payables
Trade payables
Accruals
Deferred income
Other payables
Current assets
Non-current assets
2018
£m
29
45
51
125
2017
£m
24
36
40
100
2018
£m
–
2
12
14
2018
£m
16
6
3
2
2
29
Current liabilities
Non-current liabilities
2018
£m
47
173
119
14
353
2017
£m
44
149
99
14
306
2018
£m
–
–
–
47
47
2017
£m
–
–
11
11
2017
£m
18
5
1
–
–
24
2017
£m
–
1
–
27
28
Accruals
Accruals comprise balances in relation to both operating and capital costs incurred at the reporting date but for which an invoice has not been received and
payment has not yet been made.
Deferred income
Deferred income comprises revenues received or invoiced at the reporting date which relate to future periods. The main components of deferred income relate
to advanced ticket revenues in respect of online bookings and annual pass purchases; pre-booked accommodation; and certain sponsorship and similar
arrangements. In 2018 this also includes £14 million received in respect of the development of LEGOLAND Korea, which is described further in note 5.3.
3.5 PROVISIONS
Accounting policy
Provisions are recognised when the Group has legal or constructive obligations as a result of past events and it is probable that expenditure will be required to
settle those obligations. They are measured at the Directors’ best estimates, after taking account of information available and different possible outcomes.
If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the
time value of money and, where appropriate, the risks specific to the liability.
Provisions
Balance at 31 December 2017
Provisions made during the year
Utilised during the year
Unused amounts reversed
Unwinding of discount
Effect of movements in foreign exchange
Balance at 29 December 2018
2018
Current
Non-current
2017
Current
Non-current
Asset
retirement
provisions
£m
Other
£m
Total
£m
56
10
–
(4)
1
1
64
–
64
64
–
56
56
21
6
(3)
–
–
–
24
7
17
24
5
16
21
77
16
(3)
(4)
1
1
88
7
81
88
5
72
77
Asset retirement provisions
Certain attractions operate on leasehold sites and these provisions relate to the anticipated costs of removing assets and restoring the sites concerned at the end
of the lease term. These leases are typically of a duration of between 10 and 60 years.
They are established on inception and reviewed annually. The provisions are discounted back to present value with the discount then being unwound through the
income statement as part of finance costs. The cost of establishing these provisions is capitalised within the cost of the related asset.
Other
Other provisions largely relate to the estimated cost arising from open insurance claims, tax matters and legal issues.
There are no anticipated future events that would be expected to cause a material change in the timing or amount of outflows associated with the provisions.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION 126
127
SECTION 4
CAPITAL STRUCTURE
AND FINANCING
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
4.1 NET DEBT
4.2 INTEREST-BEARING LOANS AND BORROWINGS (CONTINUED)
Analysis of net debt
Net debt is the total amount of cash and cash equivalents less interest-bearing loans and borrowings and finance lease liabilities. Cash and cash equivalents
comprise cash balances, call deposits and other short term liquid investments such as money market funds which are subject to an insignificant risk of a change
in value.
The interest-bearing loans and borrowings are initially recognised at fair value, net of transaction costs and are subsequently stated at amortised cost. Any
difference between the proceeds (net of transaction costs) and the redemption amount is amortised through the income statement over the period of the
borrowings using the effective interest method. Fixed rate borrowings, which have been hedged to floating rates, are measured at amortised cost adjusted for
changes in the value attributable to the hedged risk arising from the changes in underlying market interest rates.
Cash and cash equivalents
Interest-bearing loans and borrowings (note 4.2)
Finance leases (note 4.4)
Net debt
31 December
2017
£m
309
(1,278)
(191)
(1,160)
Net
cash
flows(1)
£m
(202)
259
10
67
Non-cash
movements(2)
Effect of
movements
in foreign
exchange(3)
£m
–
(45)
(9)
(54)
£m
3
(36)
(10)
(43)
29 December
2018
£m
110
(1,100)
(200)
(1,190)
(1) Net cash flows include the net drawdown of loans and borrowings and cash interest paid relating to loans and borrowings.
(2) Non-cash movements include the finance costs relating to loans and borrowings from the income statement, together with the fair value movement in relation to the hedged debt (see note 4.2).
(3) As disclosed in notes 4.2 and 4.4 a substantial proportion of the Group’s net debt is denominated in Euros, US Dollars and Japanese Yen.
4.2 INTEREST-BEARING LOANS AND BORROWINGS
Accounting policy
Interest-bearing loans and borrowings are initially recognised at fair value less attributable fees. These fees are then amortised through the income statement on
an effective interest rate basis over the expected life of the loan (or over the contractual term where there is no clear indication that a shorter life is appropriate).
If the Group’s estimate of the expected life based on repayment subsequently changes, the resulting adjustment to the effective interest rate calculation is
recognised as a gain or loss on re-measurement and presented separately in the income statement, in accordance with IFRS 9.
Interest-bearing loans and borrowings
Non-current
Floating rate bank facilities due 2020
£600 million (2017: £300 million) floating rate revolving credit facility due 2023 (2017: 2020)
€700 million fixed rate notes due 2022
$400 million fixed rate notes due 2026
Current
Interest payable
2018
£m
–
148
631
313
2017
£m
649
–
622
–
1,092
1,271
8
1,100
7
1,278
During the year the Group refinanced a significant portion of its long term debt. The Group issued $400 million US Dollar denominated 5.75% senior notes due
2026 and increased its revolving multi-currency credit facility from £300 million to £600 million with the repayment date extended to April 2023. The proceeds,
together with surplus cash, were used to repay £250 million of Sterling and $540 million of US Dollar denominated term loans due to mature in March 2020.
The Group’s facilities are:
• A £600 million multi-currency revolving credit facility of which £148 million had been drawn down at 29 December 2018 (2017: £nil). The margin on this facility
is dependent on the Group’s adjusted leverage ratio and at 29 December 2018 was at a margin of 1.25% (2017: 1.75%) over the floating interest rates when
drawn. The relevant floating interest rates are LIBOR and the USD benchmark rate, which were 0.73% (2017: 0.51%), and 2.64% (2017: 1.61%) respectively at
29 December 2018.
• A bond in the form of €700 million seven year notes with a coupon rate of 2.75% to mature in March 2022.
• A bond in the form of $400 million eight year notes with a coupon rate of 5.75% to mature in June 2026.
The interest-bearing loans and borrowings are unsecured but guaranteed by the Company and certain of its subsidiaries.
The Group is required to comply with certain customary financial and non-financial covenants in the bank facilities, including a requirement to maintain certain
ratios of EBITDA to both net finance costs and net debt. It is also required to comply with certain non-financial covenants in the €700 million and $400 million
notes. All covenant requirements were satisfied throughout the year.
4.3 FINANCIAL RISK MANAGEMENT
Liquidity risk
Liquidity risk is the risk that the Group would not have sufficient funds to meet its financial obligations as they fall due. The Group’s Treasury department
produces short term and long term cash forecasts to identify liquidity requirements and headroom, which are reviewed by the Group’s Chief Financial Officer.
Surplus cash is actively managed across Group bank accounts to cover local shortfalls or invested in bank deposits or other short term liquid investments such as
money market funds. In some countries bank cash pooling arrangements are in place to optimise the use of cash.
As at the reporting date the Group had £110 million of cash and cash equivalents (2017: £309 million) and a £600 million revolving credit facility, of which
£148 million was drawn down (2017: £300 million of which £nil drawn down), in order to meet its obligations and commitments that will fall due.
The following table sets out the contractual maturities of financial liabilities, including interest payments. This analysis assumes that interest rates prevailing at the
reporting date remain constant.
2018
Floating rate bank facilities due 2023
€700 million fixed rate notes due 2022
$400 million fixed rate notes due 2026
Finance lease liabilities
Derivatives
Trade payables
2017
Floating rate bank facilities due 2020
€700 million fixed rate notes due 2022
Finance lease liabilities
Derivatives
Trade payables
0 to <1
year
£m
1 to <2
years
£m
2 to <5
years
£m
5 years
and over
£m
Contractual
cash flows
£m
(5)
(18)
(18)
(10)
–
(47)
(98)
(21)
(17)
(10)
1
(44)
(91)
(5)
(18)
(18)
(10)
–
–
(163)
(657)
(55)
(32)
–
–
–
–
(371)
(308)
1
–
(173)
(693)
(462)
(360)
1
(47)
(51)
(907)
(678)
(1,734)
(21)
(17)
(10)
1
–
(654)
(665)
(30)
1
–
–
–
(304)
–
–
(696)
(699)
(354)
3
(44)
(47)
(1,348)
(304)
(1,790)
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION
128
129
SECTION 4
CAPITAL STRUCTURE
AND FINANCING C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
4.3 FINANCIAL RISK MANAGEMENT (CONTINUED)
4.3 FINANCIAL RISK MANAGEMENT (CONTINUED)
Interest rate risk
The Group is exposed to interest rate risk on both interest-bearing assets and liabilities. The Group has a policy of actively managing its interest rate risk exposure
using a combination of fixed rate debt and interest rate swaps.
At 29 December 2018 the Group had €700 million and $400 million of fixed rate debt (2017: €700 million). Interest rate swaps are used to maintain a balance
between fixed and floating rate debt. In aggregate 77% (2017: 79%) of the year end interest-bearing loans and borrowings is at a fixed rate for a weighted average
period of 4.6 years (2017: 3.4 years). To achieve the desired balance of fixed and floating interest rates across currencies, the Group uses both floating to fixed
interest rate swaps (which are part of cash flow hedging relationships) and fixed to floating interest rate swaps (which are part of fair value hedging relationships).
Interest rate swaps are recognised at fair value which is determined by reference to market rates. The fair value is the estimated amount that the Group would
receive or pay to exit the swap, taking into account current interest rates, credit risks and bid/ask spreads. Following initial recognition, changes in fair value are
recognised immediately in profit or loss, except where the Group adopts hedge accounting.
When hedge accounting, the Group formally documents the relationship between the hedging instruments and hedged items. It makes an assessment, at
inception and on an ongoing basis, as to whether the hedging instruments are expected to be ‘highly effective’ in offsetting the changes in the fair value or cash
flows of the respective hedged items during the life of the hedge.
Changes in the fair value of interest rate swaps that are designated and qualify as cash flow hedges are recognised in other comprehensive income and presented
in the hedging reserve in equity. Any ineffective portion of changes in fair value is recognised immediately in profit or loss. Cumulative gains and losses would
remain in equity until either the hedged transaction is no longer expected to occur, or until the hedged transaction occurs, at which point they will be reclassified
to profit or loss.
Changes in the fair value of interest rate swaps that are designated and qualify as fair value hedges are recognised in profit or loss immediately, together with any
changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, the
fair value adjustment to the carrying value of the hedged item arising from the hedged risk is amortised to profit and loss from that date. At 29 December 2018
the Group had €40 million (2017: €40 million) of fair value interest rates swaps with a value of less than £1 million (2017: less than £1 million), and $120 million
(2017: $nil) of fair value interest rates swaps with a value of £2 million (2017: £nil). A 100 basis points fall in the interest rates with a similar duration as the swaps
would lead to an increase in value of £8 million (2017: £1 million) and a 100 basis points rise in the interest rates with a similar duration as the swaps would lead to a
decrease in value of £7 million (2017: £1 million).
All interest rate swaps held by the Group are hedge accounted.
Sensitivity analysis
Based on the net debt position as at 29 December 2018, taking into account interest rate swaps, each 100 basis points fall or rise in market interest rates would
result in an increase or decrease in net interest paid of £2 million (2017: less than £1 million). This has been calculated by applying the interest rate change to the
Group’s variable rate cash, borrowings and derivatives.
Foreign currency risk
As the Group operates internationally the performance of the business is sensitive to movements in foreign exchange rates. The Group’s potential currency
exposures comprise transaction and translation exposures.
The Group ensures that its net exposure to foreign currency balances is kept to a minimal level by using foreign currency swaps to exchange balances back into
Sterling or by buying and selling foreign currencies at spot rates when necessary. The fair value of foreign exchange contracts is the present value of future cash
flows and is determined by reference to market rates. At 29 December 2018 the fair value of foreign currency swap assets was less than £1 million
(2017: £2 million) and the foreign currency swap liabilities was £4 million (2017: £1 million), none of which are hedge accounted.
Transaction exposures
The revenue and costs of the Group’s operations are denominated primarily in the currencies of the relevant local territories. Any significant cross-border trading
exposures would be hedged by the use of forward foreign exchange contracts.
Translation exposures
The Group’s results, as presented in Sterling, are subject to fluctuations as a result of exchange rate movements. The Group does not hedge this translation
exposure to its earnings but, where material, may carry out net asset hedging by borrowing in the same currencies as the currencies of its operating units or
by using forward foreign exchange contracts. The Group’s debt (excluding finance leases) is therefore denominated in Euros, US Dollars and Sterling and at
29 December 2018 consisted of €700 million, $540 million and £38 million and there are forward foreign exchange contracts in place in respect of
JPY 13,404 million.
Gains or losses arise on the retranslation of the net assets of foreign operations at different reporting dates and are recognised within the consolidated statement
of comprehensive income. They will predominantly relate to the retranslation of opening net assets at closing foreign exchange rates, together with the
retranslation of retained foreign profits for the year (that have been accounted for in the consolidated income statement at average rates) at closing rates.
Exchange rates for major currencies are set out below.
Gains or losses also arise on the retranslation of foreign currency denominated borrowings designated as effective net investment hedges of overseas net assets.
These are offset in equity by corresponding gains or losses arising on the retranslation of the related hedged foreign currency net assets. The Group also treats
specific intercompany loan balances, which are not intended to be repaid in the foreseeable future, as part of its net investment. In the event of a foreign entity
being sold or a hedging item being extinguished, such exchange differences would be recognised in the income statement as part of the gain or loss on sale.
The following exchange rates have been used in the translation of the results of foreign operations:
US Dollar
Euro
Closing
rate for
2016
1.24
1.17
Weighted
average
rate for
2017
1.29
1.14
Closing
rate for
2017
1.35
1.13
Weighted
average
rate for
2018
1.34
1.13
Closing
rate for
2018
1.27
1.11
The Sterling equivalents of financial assets and liabilities denominated in foreign currencies were:
2018
Cash and cash equivalents
Floating rate bank facilities due 2023
€700 million fixed rate notes due 2022
$400 million fixed rate notes due 2026
Finance lease liabilities
2017
Cash and cash equivalents
Floating rate bank facilities due 2020
€700 million fixed rate notes due 2022
Finance lease liabilities
Sterling
£m
Carrying value
Euro
£m
US Dollar
£m
Other
£m
Total
£m
18
(38)
–
–
(53)
(73)
199
(250)
–
(53)
(104)
13
–
(631)
–
(37)
(655)
13
–
(622)
(36)
(645)
15
(110)
–
(313)
–
(408)
20
(399)
–
–
(379)
64
–
–
–
(110)
(46)
77
–
–
(102)
(25)
110
(148)
(631)
(313)
(200)
(1,182)
309
(649)
(622)
(191)
(1,153)
Sensitivity analysis on foreign currency risk
A 10% strengthening of all currencies against Sterling would increase net debt by £111 million (2017: £105 million). As described above, gains or losses in the income
statement and equity are offset by the retranslation of the related foreign currency net assets or specific intercompany loan balances.
A 10% strengthening of all currencies against Sterling would reduce the fair value of foreign exchange contracts and result in a charge to the income statement of
£9 million (2017: £6 million).
Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Credit risk is
limited to the carrying value of the Group’s monetary assets. The Group has limited credit risk with its customers, the vast majority of whom pay in advance or at
the time of their visit. There are credit policies in place with regard to its trade receivables with credit evaluations performed on customers requiring credit over a
certain amount.
The Group manages credit exposures in connection with financing and treasury activities including exposures arising from bank deposits, cash held at banks and
derivative transactions, by appraisal, formal approval and ongoing monitoring of the credit position of counterparties. Counterparty exposures are measured
against a formal transaction limit appropriate to that counterparty’s credit position.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION 130
131
SECTION 4
CAPITAL STRUCTURE
AND FINANCING C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
4.3 FINANCIAL RISK MANAGEMENT (CONTINUED)
4.4 LEASE OBLIGATIONS (CONTINUED)
The Group robustly appraises investments before they are made to ensure the associated credit risk is acceptable. Performance of investments are closely
monitored, in some cases through Board participation, to ensure returns are in line with expectations and credit risk remains acceptable. There were no overdue
amounts in respect of investments and no impairments have been recorded (2017: £nil).
Fair values
Fair value hierarchy
The Group analyses financial instruments in the following ways:
• Level 1: uses unadjusted quoted prices in active markets.
• Level 2: uses inputs that are derived directly or indirectly from observable prices (other than quoted prices).
• Level 3: uses inputs that are not based on observable market data.
Fair value versus carrying amounts
The fair values of financial assets and liabilities are presented in the table below, together with the carrying amounts shown in the statement of financial position.
Short term receivables, payables and cash and cash equivalents have been excluded from the following disclosures on the basis that their carrying amount is a
reasonable approximation to fair value.
Held at amortised cost
Floating rate bank facilities due 2023 (2017: 2020)
€700 million fixed rate notes due 2022
$400 million fixed rate notes due 2026
Finance lease liabilities
Held at fair value
Derivative financial instruments
Investments
Fair value
hierarchy
Level 2
Level 1
Level 1
Level 3
Level 2
Level 3
2018
Carrying
amount
£m
Fair value
£m
2017
Carrying
amount
£m
Fair value
£m
(148)
(631)
(313)
(200)
(1)
61
(148)
(641)
(313)
(200)
(1)
61
(649)
(622)
–
(191)
2
59
(649)
(652)
–
(191)
2
59
(1,232)
(1,242)
(1,401)
(1,431)
The fair values shown above for the bank facilities and fixed rate notes have been calculated using market values. The fair values of the finance leases are
determined by reference to similar lease agreements. There is no difference between the carrying value and the fair value of investments that has been estimated
by reference to discounted cash flows.
There have been no transfers between levels in 2018 or 2017.
4.4 LEASE OBLIGATIONS
Accounting policies
Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. All other leases are
classified as operating leases. Where land and buildings are held under finance leases the accounting treatment of the land is considered separately from that of
the buildings. Leased assets acquired by way of finance lease are stated at an amount equal to the lower of their fair value and the present value of the minimum
lease payments at inception of the lease, less accumulated depreciation and impairment losses.
Finance lease payments
Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated during the
lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
Operating lease payments
Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received and
predetermined non-contingent rent increases are recognised in the income statement as an integral part of the total lease expense over the lease term. This
therefore excludes the potential impact of future performance or rent increases based on inflationary indices.
Lease arrangements
The Group’s most significant lease arrangements relate to a sale and leaseback transaction undertaken during 2007, involving the PPE of certain attractions within
the Midway Attractions and Resort Theme Parks Operating Groups. The leases are accounted for as finance or operating leases depending on the specific
circumstances of each lease and the nature of the attraction. For certain of the sites an individual lease agreement is split for accounting purposes as a combination
of finance and operating leases, reflecting the varied nature of assets at the attraction. Each of these sale and leaseback agreements runs for a period of 35 years
from inception and allows for annual rent increases based on the inflationary index in the United Kingdom and fixed increases in Continental Europe. The Group
has the option, but is not contractually required, to extend each of the lease agreements individually for two further terms of 35 years, subject to an adjustment
to market rates at that time.
LEGOLAND Japan was opened during 2017. The park was developed under the Group’s ‘operated and leased’ model whereby the Group’s local operating
company leases the site and park infrastructure from a development partner. The development partners are related parties, being KIRKBI Invest A/S and LLJ
Investco K.K, a subsidiary of KIRKBI A/S; with KIRKBI A/S being a shareholder of the Group and a related party (note 5.3). The lease is for a period of 50 years and
is accounted for partly as a finance lease and partly as an operating lease depending on the nature of the underlying assets concerned. Land and longer life assets,
for example core elements of the park’s infrastructure, are accounted for as operating leases. Finance lease assets are those elements that will be substantially or
entirely consumed over the lease term. This accounting judgement was underpinned by a review of the cost of construction by asset type together with estimates
of the lives of the assets concerned.
The Group also enters into operating leases for sites within the Midway Attractions Operating Group and central areas. These are typically of a duration
between 10 and 60 years, with rent increases determined based on local market practice. In addition to a fixed rental element, rents within the Midway
Attractions Operating Group can also contain a performance related element, typically based on turnover at the site concerned. Options to renew leases exist at
these sites in line with local market practice in the territories concerned.
The key contractual terms in relation to each lease are considered when calculating the rental charge over the lease term. The potential impact on rent charges of
future performance or increases based on inflationary indices are each excluded from these calculations.
There are no significant operating restrictions placed on the Group as a result of its lease arrangements.
The impact of the adoption of IFRS 16 is explained in note 5.5.
Lease costs and commitments
During 2018 £107 million (2017: £106 million) was recognised as an expense in the income statement in respect of operating leases. Of this £18 million
(2017: £18 million) was contingent on performance.
The lease commitments in the following tables run to the end of the respective lease term and do not include possible lease renewals. Where relevant, the lease
commitments noted do not include the potential impact of future performance or rent increases based on inflationary indices.
Finance leases
These tables provide information about the future minimum lease payments and contractual terms of the Group’s finance lease liabilities, as follows:
Less than one year
Between one and five years
More than five years
Future
minimum
lease
payments
2018
£m
10
42
389
441
Present
value of
minimum
lease
payments
2018
£m
1
7
192
200
Future
minimum
lease
payments
2017
£m
10
40
385
435
Present
value of
minimum
lease
payments
2017
£m
1
6
184
191
Interest
2017
£m
9
34
201
244
Interest
2018
£m
9
35
197
241
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION 132
133
SECTION 4
CAPITAL STRUCTURE
AND FINANCING C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
4.4 LEASE OBLIGATIONS (CONTINUED)
4.5 EQUITY AND CAPITAL MANAGEMENT (CONTINUED)
Finance lease liabilities
Finance lease liabilities
Finance lease liabilities
Currency
GBP
EUR
JPY
Nominal
interest
rate
5.64%
9.11%
1.65%
Year of
maturity
2042
2042
2067
2018
£m
53
37
110
200
2017
£m
53
36
102
191
The nominal interest rate for finance leases in the table above represents the weighted average effective interest rate. This is used because the table above
aggregates finance leases with the same maturity date and currency.
Operating leases
The minimum rentals payable as lessee under non-cancellable operating leases are as follows:
Less than one year
Between one and five years
More than five years
2018
£m
92
367
1,393
1,852
2017
£m
88
353
1,456
1,897
4.5 EQUITY AND CAPITAL MANAGEMENT
Capital management
The capital structure of the Group consists of debt which includes borrowings (see note 4.2), cash and cash equivalents and equity attributable to equity holders
of the parent Company, as disclosed below. The Group’s objective when managing capital is to maintain a strong capital base so as to ensure investor and creditor
confidence and to sustain future development of the business; to provide returns for shareholders; and to optimise the capital structure to reduce the cost of
capital. There are no externally imposed capital requirements on the Group.
To enable the Group to meet its objective, the Directors monitor returns on capital through constant review of earnings generated from the Group’s capital
investment programme and through regular budgeting and planning processes, manage capital in a manner so as to ensure that sufficient funds for capital
investment and working capital are available, and ensure that the requirements of the Group’s debt covenants are met.
The Group does not routinely make additional issues of capital, other than for the purpose of raising finance to fund significant acquisitions or developments
intended to increase the overall value of the Group.
Share plans have been created to allow employees of the Group to participate in the ownership of the Group’s equity instruments, in order to ensure employees
are focused on growing the value of the Group to achieve the aims of all the shareholders. The Group’s equity-settled share plans are settled either by the issue of
shares by Merlin Entertainments plc or by the purchase of shares in the market.
Share capital and reserves
Share capital
Ordinary shares of £0.01 each
On issue and fully paid at beginning of year
Issued in the year
On issue and fully paid at end of year
2018
Number
2018
£m
2017
Number
1,019,572,449
2,500,000
1,022,072,449
10
1,015,809,266
–
3,763,183
10
1,019,572,449
2017
£m
10
–
10
Issue of new shares
During the year the Company issued 2,500,000 ordinary shares at nominal value of one pence each in connection with the Group’s employee share incentive
schemes (note 4.6). At 29 December 2018, 1,136,636 shares were held in an employee benefit trust in order to help settle the Group’s equity-settled
share schemes.
The Company also received £6 million in relation to the exercise of options under the Company Share Option Plan (CSOP) and the All Employee Sharesave Plan
(AESP). This was taken to the share premium account.
Ordinary shares
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at general meetings of
the Company.
Each ordinary share in the capital of the Company ranks equally in all respects and no shareholder holds shares carrying special rights relating to the control of
the Company.
The Company has entered into a Relationship Agreement with its major shareholder, KIRKBI, in connection with the exercise of its rights as a major shareholder
in the Company and the right to appoint Directors to the Board.
The nominal value of shares in issue is shown in share capital, with any additional consideration for those shares shown in share premium.
Dividends
Dividends are recognised through equity on the earlier of their approval by the Company’s shareholders or their payment.
Final dividend for the 53 weeks ended 31 December 2016 of 4.9 pence per share
Interim dividend for the 52 weeks ended 30 December 2017 of 2.4 pence per share
Final dividend for the 52 weeks ended 30 December 2017 of 5.0 pence per share
Interim dividend for the 52 weeks ended 29 December 2018 of 2.5 pence per share
Total dividends paid
2018
£m
–
–
51
25
76
2017
£m
50
24
–
–
74
The Directors of the Company propose a final dividend of 5.5 pence per share for the year ended 29 December 2018 (2017: 5.0 pence per share), amounting
to £56 million (2017: £51 million). The total dividend for the current year, subject to approval of the final dividend, will be 8.0 pence per share (2017: 7.4 pence
per share).
Translation reserve
The translation reserve of £(10)million (2017: £(18) million) comprises all foreign exchange differences arising from the translation of the financial statements of
foreign operations, primarily relating to the statement of financial position at reporting dates. The reporting date foreign exchange rates by major currency are
provided in note 4.3.
Hedging reserve
The hedging reserve of £2 million (2017: £1 million) comprises the effective portion of the cumulative net change in interest rate swaps related to hedged
transactions that have not yet occurred.
4.6 SHARE-BASED PAYMENT TRANSACTIONS
Accounting policy
The fair value of the share plans is recognised as an expense over the expected vesting period with a corresponding entry to retained earnings, net of deferred
tax. The fair value of the share plans is determined at the date of grant. Non-market based vesting conditions (i.e. earnings per share and return on capital
employed targets) are taken into account in estimating the number of awards likely to vest, which is reviewed at each accounting date up to the vesting date,
at which point the estimate is adjusted to reflect the actual awards issued. No adjustment is made after the vesting date even if the awards are forfeited or are
not exercised.
The Group operates cash-settled versions of the employee incentive plans for employees in certain territories. The issues and resulting charges of these plans are
not material to the financial statements.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION 134
135
SECTION 4
CAPITAL STRUCTURE
AND FINANCING C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
4.6 SHARE-BASED PAYMENT TRANSACTIONS (CONTINUED)
4.6 SHARE-BASED PAYMENT TRANSACTIONS (CONTINUED)
The fair value per award granted and the assumptions used in the calculations for the significant grants in 2017 and 2018 are as follows:
Scheme
Date of grant
PSP
PSP
CSOP
CSOP
AESP
AESP
AESP
AESP
30 March 2017
11 April 2018
30 March 2017
11 April 2018
2 March 2017
3 April 2017
9 April 2018
9 April 2018
Exercise
price
(£)
Share price
at grant
date
(£)
Fair
value per
award
(£)
Expected
dividend
yield
Expected
volatility
Award life
(years)
Risk free
rate
–
–
4.74
3.47
4.10
3.96
2.83
2.97
4.72
3.43
4.72
3.43
4.82
4.76
3.46
3.46
4.72
3.43
0.85
0.65
0.88
0.98
0.79
0.65
n/a
n/a
1.5%
2.2%
1.5%
1.5%
2.1%
2.1%
n/a
n/a
21%
23%
21%
21%
24%
24%
3.0
3.0
4.6
4.5
2.2
3.2
3.2
2.1
n/a
n/a
0.4%
1.0%
0.1%
0.2%
0.9%
0.8%
The key assumptions used in calculating the share-based payments were as follows:
• The binomial valuation methodology is used for the PSP, CSOP and DBP. The Black-Scholes model is used to value the AESP.
• The expected volatility is based on the historical volatility of the Company’s shares.
• The risk free rate is equal to the prevailing UK Gilts rate at grant date, which is commensurate with the expected term.
• Expected forfeiture rates are based on recent experience of staff turnover levels.
• Behavioural expectations have been taken into account in estimating the award life of the CSOP.
• The charge is spread over the vesting period on a straight-line basis.
Equity-settled plans
The Group operates four employee share incentive plans: the Performance Share Plan (PSP), the Deferred Bonus Plan (DBP), the Company Share Option Plan
(CSOP) and the All Employee Sharesave Plan (AESP) as set out in the Directors’ Remuneration Report and the tables below. A summary of the rules for the
plans and the performance conditions attaching to the PSP are given in the Directors’ Remuneration Report.
Analysis of share-based payment charge
PSP
CSOP
AESP
Analysis of awards
PSP
DBP
CSOP
AESP
Total
2018
£m
2017
£m
5
1
2
8
–
1
2
3
Date of grant
April 2015 – September 2018
March 2015 – March 2017
November 2013 – September 2018
February 2014 – April 2018
Exercise
price (£)
Period when
exercisable
–
2019–2021
– 2019–2020
3.15–4.81
2019–2028
2.83–4.10
2019–2021
Average
remaining
contractual
life (years)
Number
of shares
2018
Number
of shares
2017
1.5
0.4
7.6
2.3
8,152,506
6,547,590
34,296
315,461
5,808,839
4,305,685
6,615,393
5,385,690
20,611,034
16,554,426
The weighted average exercise prices (WAEP) over the year were as follows:
At 1 January 2017
Granted during the year
Forfeited during the year
Exercised during the year
Lapsed during the year
Expired during the year
At 30 December 2017
Granted during the year
Forfeited during the year
Exercised during the year
Lapsed during the year
Expired during the year
At 29 December 2018
Exercisable at end of year
At 30 December 2017
At 29 December 2018
(1) Nil-cost options
PSP(1)
Number
DBP(1)
Number
Number
WAEP
(£)
Number
WAEP
(£)
CSOP
AESP
7,430,215
308,272
3,893,704
3.93
6,311,715
2,545,871
18,792
1,431,475
4.73
2,125,664
(191,817)
(6,436)
(378,328)
4.43
(684,369)
(1,501,445)
(5,167)
(632,749)
3.21
(2,264,027)
(1,735,234)
–
–
–
–
–
–
(8,417)
4.47
(103,293)
6,547,590
315,461
4,305,685
4.25
5,385,690
3,898,736
(252,950)
673
(66)
2,134,615
(474,242)
(458,256)
(281,772)
(148,254)
(1,582,614)
–
–
–
–
(8,965)
8,152,506
34,296
5,808,839
3.47
4.13
3.15
–
4.52
4.00
4,546,781
(1,424,138)
(1,507,489)
–
(385,451)
6,615,393
–
–
–
–
1,055,910
1,613,014
3.19
3.76
18,898
68,052
3.12
3.97
3.32
2.98
–
2.96
3.49
2.83
3.55
3.24
–
3.24
3.10
3.11
3.25
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION 136
137
SECTION 5
OTHER NOTES
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
5.1 INVESTMENTS
Accounting policy
The Group holds investments in two forms.
Minority equity investments are accounted for as ‘fair value through other comprehensive income’ (FVOCI), having taken the election available under IFRS 9. This
applies to the investments in LEGOLAND Malaysia, LEGOLAND Korea and Big Bus Tours Group Holdings Limited. As no observable market data is available for
these minority equity holdings, fair value is determined by reference to discounted future cash flows, with movements recorded in other comprehensive income.
Associates and joint ventures are those entities over whose activities the Group has joint control or significant influence, established by contractual agreement.
The consolidated financial statements include the Group’s share of the total recognised income and expenses on an equity accounted basis, from the date that
joint control or influence commences until the date that it ceases.
Balance at 31 December 2017
Effects of movement in foreign exchange
At 29 December 2018
LEGOLAND
Malaysia
£m
LEGOLAND
Korea
£m
Big Bus
Tours
£m
LEGOLAND
Dubai Hotel
£m
9
–
9
3
–
3
35
2
37
12
–
12
Total
£m
59
2
61
Minority equity investments
LEGOLAND Malaysia
The Group has a minority equity investment in IDR Resorts Sdn. Bhd. (IDR). IDR and its subsidiaries are deemed to be related parties as together they own
LEGOLAND Malaysia (see note 5.3).
LEGOLAND Korea
The Group has a minority equity investment in LL Developments, the local investment company providing support to LEGOLAND Korea (see note 5.3).
Big Bus Tours Group Holdings Limited
The Group has an investment in Big Bus Tours Group Holdings Limited, the leading global owner-operator of Hop On Hop Off City Tours. The investment was
substantially all in the form of loan notes. The transaction also provided Merlin with a minority equity investment valued at £nil (2017: £nil). During 2017, the loan
notes were modified resulting in the financial asset held at historic cost being derecognised and a minority equity investment measured at fair value being
recognised instead. No gain or loss arose as a result. This was due to changes made to the rights of the issuer of the loan notes that resulted in them having the
characteristics of an equity instrument rather than of debt. At 29 December 2018 the investment is held at £37 million (2017: £35 million), and there have been no
fair value movements recognised (2017: £nil).
Investments in associates and joint ventures
LEGOLAND Dubai Hotel
On 14 February 2017 the Group invested £12 million in LL Dubai Hotel LLC, which is the company developing the hotel at LEGOLAND Dubai. The Group holds
a 40% equity interest.
5.2 EMPLOYEE BENEFITS
Accounting policies
Defined contribution pension schemes
In the case of defined contribution schemes, the Group pays fixed contributions into a separate fund on behalf of the employee and has no further obligations to
them. The risks and rewards associated with this type of scheme are assumed by the members rather than the employer. Obligations for contributions to defined
contribution pension schemes are recognised as an expense in the income statement as incurred.
Defined benefit pension schemes
A defined benefit scheme is a post-employment benefit scheme other than a defined contribution scheme. The Group’s net obligation is calculated for each
scheme by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is
discounted to determine its present value and offset by the fair value of any scheme assets. The calculation is performed by a qualified actuary using the projected
unit credit method. All actuarial gains and losses are recognised in the period they occur directly in equity through other comprehensive income.
5.2 EMPLOYEE BENEFITS (CONTINUED)
Defined contribution pension schemes
The Group operates a number of defined contribution pension schemes and the total expense relating to those schemes in the current year was £13 million
(2017: £13 million).
Defined benefit pension schemes
The principal scheme that the Group operates is a closed scheme for certain former UK employees of The Tussauds Group, which was acquired in 2007. The
scheme entitles retired employees to receive an annual payment based on a percentage of final salary for each year of service that the employee provided. The
pension schemes have not directly invested in any of the Group’s own financial instruments or in properties or other assets used by the Group.
The most recent full actuarial valuation of the scheme was carried out as at 31 December 2015. As a result, the Group agreed to pay annual deficit reduction
contributions of £455,500, increasing at 3% per annum until 2021, together with an additional one-off payment of £2,260,000 which was paid in 2017. The next
triennial valuation is as at 31 December 2018 and is in progress.
The Group expects less than £1 million in ongoing contributions to be paid to its defined benefit schemes in 2019. The weighted average duration of the defined
benefit obligation at 29 December 2018 was 19 years (2017: 21 years).
The assets and liabilities of the schemes are:
Equities
Corporate bonds and cash
Property
Fair value of scheme assets
Present value of defined benefit obligations
Net pension liability
Movement in the net pension liability
At 1 January 2017
Net interest
Contributions by employer
Benefits paid
Remeasurement gain
At 30 December 2017
Net interest
Contributions by employer
Benefits paid
Remeasurement loss
Assets distributed on settlement
Liabilities extinguished on settlement
At 29 December 2018
2018
£m
23
4
5
32
(38)
(6)
Present
value of
scheme
assets
£m
Present
value of
defined
benefit
obligations
£m
32
1
3
(1)
2
37
1
1
(1)
(2)
(4)
–
32
(43)
(1)
–
1
–
(43)
(1)
–
1
1
–
4
(38)
2017
£m
25
7
5
37
(43)
(6)
Net
pension
liability
£m
(11)
–
3
–
2
(6)
–
1
–
(1)
(4)
4
(6)
The amount recognised in the income statement was £nil (2017: £nil). The amount recognised in the statement of other comprehensive income was a loss of
£1 million (2017: gain of £2 million).
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION
138
139
SECTION 5
OTHER NOTES C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
5.2 EMPLOYEE BENEFITS (CONTINUED)
5.3 RELATED PARTY TRANSACTIONS (CONTINUED)
During the year certain members were given the option to transfer their benefits out of the scheme by way of either a Flexibility at Retirement exercise or an
Enhanced Transfer Value exercise. The settlement loss arising from this was £nil.
Actuarial assumptions
Principal actuarial assumptions (expressed as weighted averages) at the year end were:
Discount rate
Future salary increases
Rate of price inflation
2018
2.8%
n/a
3.3%
2017
2.5%
3.5%
3.2%
The scheme closed to future accrual for active members on 31 May 2018, therefore the link to future salary increases has been severed.
Assumptions regarding future mortality are based on published statistics and mortality tables. For the Tussauds Group scheme the actuarial table used is S2PxA.
The mortality assumption adopted predicts that a current 65 year old male would have a life expectancy to age 87 and a female would have a life expectancy to
age 89.
5.3 RELATED PARTY TRANSACTIONS
Identity of related parties
The Group has related party relationships with a major shareholder, key management personnel, joint ventures and other co-investors. The defined benefit
pension scheme for certain former UK employees of The Tussauds Group is also a related party (see note 5.2).
All dealings with related parties are conducted on an arm’s length basis.
Transactions with shareholders
During the year the Group entered into transactions with a major shareholder, KIRKBI Invest A/S; the LEGO Group, a related party of KIRKBI Invest A/S; and
LLJ Investco K.K, a subsidiary of KIRKBI A/S.
Transactions entered into, including the purchase and sale of goods, payment of fees, royalties and rent, and trading balances outstanding at 29 December 2018
and 30 December 2017, were as follows:
2018
KIRKBI Invest A/S
LEGO Group
LLJ Investco K.K.
2017
KIRKBI Invest A/S
LEGO Group
LLJ Investco K.K.
Goods and services
Amount owed
by related
party
£m
Sales
£m
Purchases,
royalties
and rent
£m
Amount owed
to related
party
£m
–
1
–
1
–
1
–
1
–
2
–
2
–
1
4
5
13
63
8
84
12
61
10
83
3
3
–
6
3
2
–
5
During 2017 the Group entered into an agreement with KIRKBI Invest A/S to exchange small parcels of land in Billund, Denmark. This was conducted on an arm’s
length basis. The value of the land sold to KIRKBI was £2 million and the cost of the land purchased was £4 million.
As set out in note 4.4 the Group has entered into a 50 year lease with LLJ Investco K.K. The Group’s obligations come in the form of fixed rental payments of
£6 million per year in addition to turnover rent and ongoing repair obligations under the terms of the lease. The amount in the table above represents the rental
payment incurred during the period.
Transactions with key management personnel
Key management of the Group, being the Executive and Non-executive Directors of the Board, the members of the Executive Committee and their immediate
relatives control 1.2% (2017: 1.2%) of the voting shares of the Company.
The details of the remuneration, long term incentive plans, shareholdings, share options and pension entitlements of individual Directors are included in the
Directors’ Remuneration Report on pages 74 to 89. The remuneration of key management is disclosed in note 2.1.
Transactions with other related parties
LEGOLAND Malaysia
As part of the agreement for the development and operation of LEGOLAND Malaysia, the Group has subscribed for share capital in IDR Resorts Sdn. Bhd. (IDR)
which together with its subsidiaries owns the park (see note 5.1). On this basis, IDR and its subsidiaries are deemed to be related parties.
Transactions entered into, including the purchase and sale of goods, payment of fees and trading balances outstanding at 29 December 2018 and 30 December
2017, are as follows:
Sales to related party
Amounts owed by related party
2018
£m
4
3
2017
£m
5
3
LEGOLAND Korea
During the year the Group entered into transactions with LL Developments, a Korean company which acts under the direction of the Gangwon Province and
which will provide funding and infrastructure support of KRW 80 billion to the development of LEGOLAND Korea. Before the end of the reporting period
LL Developments provided KRW 20 billion (£14 million) to the Group as the first tranche of this support, which the Group has committed to spend on costs
associated with the project. This has been recorded within deferred income (see note 3.4). The funding and infrastructure support will be accounted for as a
capital grant and offset against the total project costs within property, plant and equipment. The conditions of the funding require that Merlin completes the
park’s construction and operates the park for a period of time post-opening.
5.4 CONTINGENT LIABILITIES
In 2017 the European Commission (EC) published a preliminary finding that certain elements of the UK’s Controlled Foreign Company rules amount to unlawful
State Aid. If the EC confirms its preliminary finding and there are no successful appeals, the Group calculates the maximum potential liability, excluding penalties
and interest, to be £36 million. Based upon advice taken, the Group does not consider any provision is necessary at this time. The Group continues to monitor
developments and a final EC decision is expected in early 2019, but is subject to possible appeal.
5.5 NEW STANDARDS AND INTERPRETATIONS
The following standards, amendments to standards and interpretations have been issued in the year in addition to the ones covered in note 1.1. There has been
no significant impact to the Group as a result of their issue.
• IFRIC 22 ‘Foreign currency transactions and advance consideration’
• Amendments to IAS 40 ‘Transfers of investment property’
• Amendments to IFRS 2 ‘Classification and measurement of share-based payment transactions’
• Amendments to IFRS 4 ‘Applying IFRS 9 Financial instruments with IFRS 4 Insurance contracts’
• Amendments to IAS 28 ‘Investments in associates and joint ventures’
EU endorsed IFRS and interpretations with effective dates after 31 December 2018 relevant to the Group will be implemented in the financial year when the
standards become effective.
IFRS 16
Background
IFRS 16 ‘Leases’ is effective for 2019 reporting periods onwards and introduces a single, on-balance sheet lease accounting model for lessees. IFRS 16 replaces
existing leases guidance, including IAS 17 ‘Leases’, IFRIC 4 ‘Determining whether an arrangement contains a lease’, SIC-15 ‘Operating leases – incentives’ and
SIC-27 ‘Evaluating the substance of transactions involving the legal form of a lease’. Under IFRS 16 the Group, as the lessee, will recognise an asset representing its
right to use the underlying leased asset, and a lease liability representing its obligation to make lease payments. The Group will elect 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 will be excluded
from the IFRS 16 lease accounting requirements and be expensed on a straight-line basis over the life of the lease.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION 140
141
SECTION 5
OTHER NOTES C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
5.5 NEW STANDARDS AND INTERPRETATIONS (CONTINUED)
5.5 NEW STANDARDS AND INTERPRETATIONS (CONTINUED)
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 will recognise a new asset in the form of a right-of-use (ROU) asset, together with an associated
lease liability. The income statement will then reflect a depreciation charge for the ROU asset and an interest expense on the lease liability. This will replace the
previous accounting for operating leases that were expensed within operating expenses on a straight-line basis over the term of the lease.
• 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.
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. This judgement will require review
at each reporting period. 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. As the Group is currently less than 12 years into this period its assessment is that at this point, it is not reasonably certain that these leases will be
renewed, taking into account the factors noted above. This judgement will be 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.
Impact assessment
As at 29 December 2018, the Group’s future minimum lease payments under non-cancellable operating leases amounted to £1,852 million (2017: £1,897 million)
on an undiscounted basis (see note 4.4). Of these commitments an insignificant value relates to short term and low value leases which will continue to be
recognised on a straight-line basis as an expense within the income statement.
For leases within the scope of IFRS 16 the nature of expenses will change from a straight-line operating lease expense to a depreciation charge and an interest
expense. Under existing accounting standards, during 2018 £107 million was recognised as an expense in respect of operating leases. Where the Group’s rental
expense is linked to turnover or other performance criteria, or relates to short term and low value leases, these elements will continue to be recorded as rent
within operating expenses. Based on 2018 results the impact on EBITDA of adopting IFRS 16 would therefore have been an increase of approximately
£85 million. Due to the Group’s most significant leases being in their earlier stages, the ‘front loading’ impact of the finance costs results in an initial reduction
in reported earnings. There would therefore have been a decrease in reported profit before tax of approximately £15 million.
As at 30 December 2018, the Group expects to recognise ROU assets of approximately £1,020 million, including ROU assets in respect of existing finance leases
and asset retirement provisions on leased properties, both previously classified under property, plant and equipment. The Group expects to recognise total lease
liabilities of approximately £1,200 million, including existing finance lease liabilities of £200 million. The impact of adopting IFRS 16 on net debt would therefore be
approximately £1,000 million.
A net accruals and prepayments adjustment will reduce liabilities by approximately £30 million, primarily resulting from the derecognition of balances in relation to
IAS 17 lease accounting where leases were expensed to the income statement on a straight-line basis. An increase in deferred tax assets of approximately
£30 million is also anticipated. Based on information currently available the adjustments will in aggregate result in a decrease in net assets of approximately
£100 million. The numbers above are approximate as there has been a need to re-assess the accounting treatment for leases which contained elements of both
operating leases and finance leases. This has involved reviewing the historic values of leased assets at inception and their treatment under IFRS 16 in subsequent
periods on an asset by asset basis. We will refine these approximate numbers as we embed the processes for accounting under IFRS 16 into the business.
The Group’s leverage threshold loan covenants are under ‘frozen-GAAP’ and as such the adoption of IFRS 16 is not expected to impact the ability to comply
with them.
Transition
The Group plans to apply IFRS 16 initially on 30 December 2018, using the fully retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 will
be recognised, in line with IAS 8 ‘Accounting policies, changes in accounting estimates and errors’, by restating the 52 week period ending 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 plans to apply the practical expedient to grandfather the definition of a lease on transition. This means that it will apply IFRS 16 to all contracts entered
into before 30 December 2018 and identified as leases in accordance with IAS 17 and IFRIC 4.
Other standards
The IASB has also issued the following standards, amendments to standards and interpretations that will be effective for the Group as from 1 January 2019. The
Group does not expect any significant impact on its consolidated financial statements from these amendments.
• IFRS 17 ‘Insurance contracts’
• IFRIC Interpretation 23 ‘Uncertainty over income tax treatment’
• Amendments to IFRS 9 ‘Prepayment features with negative compensation’
• Amendments to IFRS 10 and IAS 28 ‘Sale or contribution of assets between an investor and its associate or joint venture’
• Amendments to IAS 19 ‘Plan amendment, curtailment or settlement’
• Amendments to IAS 28 ‘Long-term interests in associates and joint ventures’
• Annual Improvements to IFRS Standards 2015–2017 Cycle (issued in December 2017)
5.6 ULTIMATE PARENT COMPANY INFORMATION
The largest group in which the results of the Company are consolidated is that headed by Merlin Entertainments plc, incorporated in the United Kingdom. No
other group financial statements include the results of the Company.
5.7 SUBSEQUENT EVENTS
On 21 February 2019, the Company entered into an agreement to sell its Australian ski resorts at Mount Hotham and Falls Creek to Vail Resorts Inc. for a cash
consideration of A$174 million, subject to certain adjustments related to the timing of completion. These attractions form part of the Midway Attractions
Operating Group. In 2018 revenue and underlying EBITDA for the two sites were £35 million and £11 million respectively.
5.8 SUBSIDIARY AND JOINT VENTURE UNDERTAKINGS
The Group has the following investments in subsidiaries and joint ventures:
Subsidiary undertaking
AAE Unit Trust
AQDEV Pty Limited
Aquia Pty Ltd
Australian Alpine Enterprises Holdings Pty Ltd
Australian Alpine Enterprises Pty Ltd
Australian Alpine Reservation Centre Pty Ltd
Falls Creek Ski Lifts Pty Ltd
Gebi Falls Creek Pty Ltd
Illawarra Tree Topps Pty Ltd
LEGOLAND Discovery Centre Melbourne Pty Ltd
Limlimbu Ski Flats Ltd
Living and Leisure Australia Limited
Living and Leisure Australia Management Limited
Living and Leisure Australia Trust
Living and Leisure Finance Trust
LLA Aquariums Pty Limited
Melbourne Underwater World Pty Ltd
Melbourne Underwater World Trust
ME LoanCo (Australia) Pty Limited
Country of
incorporation
Class of
share held
Ownership
2018
Ownership
2017
Australia(1)
–
Australia(2)
Ordinary
Australia(1)
Ordinary
Australia(1)
Ordinary
Australia(1)
Ordinary
Australia(1)
Ordinary
Australia(1)
Ordinary
Australia(3)
Ordinary
Australia(1)
Ordinary
Australia(2)
Ordinary
Australia(4)
Ordinary
Australia(1)
Ordinary
Australia(1)
Ordinary
Australia(1)
Australia(1)
–
–
Australia(1)
Ordinary
Australia(1)
Ordinary
Australia(1)
–
Australia(2)
Ordinary
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
64.7%
100.0%
100.0%
64.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
64.7%
100.0%
100.0%
64.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION 142
143
SECTION 5
OTHER NOTES C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
5.8 SUBSIDIARY AND JOINT VENTURE UNDERTAKINGS (CONTINUED)
5.8 SUBSIDIARY AND JOINT VENTURE UNDERTAKINGS (CONTINUED)
Subsidiary undertaking
Merlin Entertainments (Australia) Pty Ltd
MHSC DP Pty Ltd
MHSC Hotels Pty Ltd
MHSC Properties Pty Ltd
MHSC Transportation Services Pty Ltd
Mount Hotham Management and Reservation Pty Ltd
Mount Hotham Skiing Company Pty Ltd
MUW Holdings Pty Ltd
Northbank Development Trust
Northbank Place (Vic) Pty Ltd
Oceanis Australia Pty Ltd
Oceanis Australia Unit Trust
Oceanis Developments Pty Ltd
Oceanis Foundation Pty Ltd
Oceanis Holdings Limited
Oceanis Korea Unit Trust
Oceanis NB Pty Ltd
Oceanis Northbank Trust
Oceanis Unit Trust
Sydney Attractions Group Pty Ltd
Sydney Tower Observatory Pty Limited
Sydney Wildlife World Pty Limited
The Otway Fly Pty Ltd
The Otway Fly Unit Trust
The Sydney Aquarium Company Pty Limited
Underwater World Sunshine Coast Pty Ltd
US Fly Trust
White Crystal (Mount Hotham) Pty Ltd
Madame Tussauds Austria GmbH
MT Austria Holdings GmbH
SEA LIFE Centre Belgium N.V.
Christchurch Investment Company Limited
Merlin Entertainments (Canada) Inc
Madame Tussauds Exhibition (Beijing) Company Limited
Madame Tussauds Exhibition (Shanghai) Company Limited
Madame Tussauds Exhibition (Wuhan) Company Limited
Merlin Entertainments Hong Kong Limited
Merlin Entertainments (Shanghai) Company Limited
Merlin Exhibition (Chongqing) Company Limited
Country of
incorporation
Class of
share held
Ownership
2018
Ownership
2017
Australia(1)
Ordinary
Australia(1)
Ordinary
Australia(1)
Ordinary
Australia(1)
Ordinary
Australia(1)
Ordinary
Australia(1)
Ordinary
Australia(1)
Ordinary
Australia(1)
Ordinary
Australia(1)
–
Australia(5)
Ordinary
Australia(1)
Ordinary
Australia(1)
–
Australia(1)
Ordinary
Australia(1)
Ordinary
Australia(1)
Ordinary
Australia(1)
–
Australia(1)
Ordinary
Australia(1)
Australia(1)
–
–
Australia(2)
Ordinary
Australia(2)
Ordinary
Australia(2)
Ordinary
Australia(1)
Ordinary
Australia(1)
–
Australia(2)
Ordinary
Australia(1)
Ordinary
Australia(1)
–
Australia(3)
Ordinary
Austria(6)
Ordinary
Austria(6)
Ordinary
Belgium(7)
Ordinary
British Virgin Islands(8)
Ordinary
Canada(9)
Ordinary
China(10) Ordinary
China(11) Ordinary
China(12) Ordinary
China(13) Ordinary
China(56) Ordinary
China(14) Ordinary
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
50.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
82.2%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
50.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
82.2%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
–
100.0%
Subsidiary undertaking
Merlin Exhibition (Shenyang) Company Limited
Merlin Indoor Children’s Playground (Shanghai) Company Limited
Shanghai Chang Feng Oceanworld Co. Ltd
LEGOLAND ApS
Merlin Entertainments Group Denmark Holdings ApS
SEA LIFE Helsinki Oy
SEA LIFE France SARL
Dungeon Deutschland GmbH
Heide-Park Soltau GmbH
LEGOLAND Deutschland Freizeitpark GmbH
LEGOLAND Deutschland GmbH
LEGOLAND Discovery Centre Deutschland GmbH
LEGOLAND Holidays Deutschland GmbH
LLD Share Beteiligungs GmbH
LLD Share GmbH & Co. KG
Madame Tussauds Deutschland GmbH
Merlin Entertainments Group Deutschland GmbH
SEA LIFE Deutschland GmbH
SEA LIFE Konstanz GmbH
Tussauds Deutschland GmbH
Tussauds Heide Metropole GmbH
Merlin Entertainments India Private Limited
Merlin Entertainments Ireland 1 Limited
Merlin Entertainments Ireland 2 Limited
SEA LIFE Centre Bray Limited
Gardaland S.r.l.
Incoming Gardaland S.r.l.
Merlin Attractions Italy S.r.l.
Merlin Entertainments Group Italy S.r.l.
Merlin Water Parks S.r.l.
Ronchi del Garda S.p.A.
Ronchi S.p.A.
LEGOLAND Japan Limited
Merlin Entertainments (Japan) Limited
Merlin Entertainments Group Luxembourg 3 S.à r.l. (b)
Merlin Lux Finco 1 S.à r.l.
Merlin Lux Finco 2 S.à r.l.
LEGOLAND Malaysia Hotel Sdn. Bhd
Merlin Entertainments Group (Malaysia) Sdn. Bhd
Country of
incorporation
Class of
share held
Ownership
2018
Ownership
2017
China(15) Ordinary
China(16) Ordinary
China(17) Ordinary
Denmark(18) Ordinary
Denmark(18) Ordinary
Finland(19) Ordinary
France(20) Ordinary
Germany(21) Ordinary
Germany(22) Ordinary
Germany(23) Ordinary
Germany(23) Ordinary
Germany(21) Ordinary
Germany(24) Ordinary
Germany(24) Ordinary
Germany(23) Ordinary
Germany(21) Ordinary
Germany(21) Ordinary
Germany(21) Ordinary
Germany(21) Ordinary
Germany(22) Ordinary
Germany(22) Ordinary
India(25) Ordinary
Ireland(26) Ordinary
Ireland(26) Ordinary
Ireland(27) Ordinary
Italy(28) Ordinary
Italy(29) Ordinary
Italy(28) Ordinary
Italy(28) Ordinary
Italy(28) Ordinary
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
99.9%
99.9%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
99.9%
99.9%
100.0%
100.0%
100.0%
Italy(30) Ordinary
(a) 49.4%
(a) 49.4%
Italy(28) Ordinary
Japan(31) Ordinary
Japan(32) Ordinary
Luxembourg(33) Ordinary
Luxembourg(33) Ordinary
Luxembourg(33) Ordinary
Malaysia(34) Ordinary
Malaysia(35) Ordinary
90.4%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
90.4%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION 144
145
SECTION 5
OTHER NOTES C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
5.8 SUBSIDIARY AND JOINT VENTURE UNDERTAKINGS (CONTINUED)
5.8 SUBSIDIARY AND JOINT VENTURE UNDERTAKINGS (CONTINUED)
Subsidiary undertaking
Merlin Entertainments Studios (Malaysia) Sdn. Bhd
Amsterdam Dungeon B.V.
LEGOLAND Discovery Centre Scheveningen B.V.
Madame Tussauds Amsterdam B.V.
Merlin Entertainments Holdings Nederland B.V.
SEA LIFE Centre Scheveningen B.V.
Auckland Aquarium Limited
Merlin Entertainments (New Zealand) Limited
Merlin Entertainments (SEA LIFE PORTO) Unipessoal Lda
Merlin Entertainments Singapore Pte. Ltd
Busan Aquaria Twenty One Co. Ltd
LEGOLAND Korea LLC
Merlin Entertainments Korea Company Limited
SLCS SEA LIFE Centre Spain S.A.
Merlin Entertainments (Thailand) Limited
Siam Ocean World Bangkok Co Ltd
Istanbul Sualti Dunyasi Turizm Ticaret A.S
Madame Tussauds Museum LLC
Merlin Holdings Limited
Alton Towers Limited
Alton Towers Resort Operations Limited
Charcoal CLG 1 Limited (company limited by guarantee)
Charcoal CLG 2 Limited (company limited by guarantee)
Charcoal Holdco Limited
Charcoal Midco 1 Limited
Charcoal Newco 1 Limited
Charcoal Newco 1a Limited
Chessington Hotel Limited
Chessington World of Adventures Limited
Chessington World of Adventures Operations Limited
Chessington Zoo Limited
CWA PropCo Limited
LEGOLAND US Holdings Limited
LEGOLAND Windsor Park Limited
London Aquarium (South Bank) Limited
London Dungeon Limited
London Eye Holdings Limited
London Eye Management Services Limited
Madame Tussaud’s Limited
Country of
incorporation
Class of
share held
Ownership
2018
Ownership
2017
Malaysia(34) Ordinary
Netherlands(36) Ordinary
Netherlands(37) Ordinary
Netherlands(38) Ordinary
Netherlands(39) Ordinary
Netherlands(40) Ordinary
New Zealand(41) Ordinary
New Zealand(41) Ordinary
Portugal(42) Ordinary
Singapore(43) Ordinary
South Korea(44) Ordinary
South Korea(45) Ordinary
South Korea(44) Ordinary
Spain(46) Ordinary
Thailand(47) Ordinary
Thailand(48) Ordinary
Turkey(49) Ordinary
100.0%
100.0%
100.0%
100.0%
100.0%
60.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
–
100.0%
100.0%
60.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
UAE(50)
–
(c) 48.0%
(c) 48.0%
UAE(51) Ordinary
(c) 1.0%
(c) 1.0%
UK(52) Ordinary
UK(52) Ordinary
UK(52)
UK(52)
–
–
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Subsidiary undertaking
Madame Tussauds Touring Exhibition Limited
Merlin Attractions Operations Limited
Merlin Entertainment Limited
Merlin Entertainments (Asia Pacific) Limited
Merlin Entertainments (Blackpool) Limited
Merlin Entertainments (Dungeons) Limited
Merlin Entertainments (NBD) Limited
Merlin Entertainments (SEA LIFE) Limited
Merlin Entertainments Crown (UK) Limited
Merlin Entertainments Developments Limited
Merlin Entertainments Group Employee Benefit Trustees Limited
Merlin Entertainments Group Holdings Limited
Merlin Entertainments Group Limited
Merlin Entertainments Group Operations Limited
Merlin’s Magic Wand Trustees Limited
Merlin UK Finance 1A Limited
Merlin UK Finance 2A Limited
Merlin UK Finco 1 Limited
Merlin UK Finco 2 Limited
Merlin US Holdings Limited
Pirate Adventure Golf Limited
SEA LIFE Centre (Blackpool) Limited
SEA LIFE Centres Limited
SEA LIFE Trustees Limited
The London Planetarium Company Limited
The Millennium Wheel Company Limited
The Seal Sanctuary Limited
The Tussauds Group Limited
Thorpe Park Operations Limited
Tussauds Attractions Limited
Tussauds Group (UK) Pension Plan Trustee Limited
Tussauds Limited
Warwick Castle Limited
Lake George Fly LLC
LEGOLAND California LLC
LEGOLAND Discovery Center Arizona LLC
LEGOLAND Discovery Center Boston LLC
LEGOLAND Discovery Center Columbus LLC
Country of
incorporation
Class of
share held
Ownership
2018
Ownership
2017
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
UK(52) Ordinary
USA(53)
USA(54)
USA(54)
USA(54)
USA(54)
–
–
–
–
–
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION 146
147
SECTION 5
OTHER NOTES C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
5.8 SUBSIDIARY AND JOINT VENTURE UNDERTAKINGS (CONTINUED)
5.8 SUBSIDIARY AND JOINT VENTURE UNDERTAKINGS (CONTINUED)
Subsidiary undertaking
LEGOLAND Discovery Centre (Dallas) LLC
LEGOLAND Discovery Centre (Meadowlands) LLC
LEGOLAND Discovery Center Michigan LLC
LEGOLAND Discovery Center Philadelphia LLC
LEGOLAND Discovery Center San Antonio LLC
LEGOLAND Discovery Centre US LLC
LEGOLAND New York LLC
Madame Tussauds Hollywood LLC
Madame Tussaud Las Vegas LLC
Madame Tussauds Nashville LLC
Madame Tussaud’s New York LLC
Madame Tussauds Orlando LLC
Madame Tussauds San Francisco LLC
Madame Tussauds Washington LLC
Merlin Entertainments Crown (US) Inc
Merlin Entertainments Group Florida LLC
Merlin Entertainments Group US Holdings Inc
Merlin Entertainments Group US LLC
Merlin Entertainments Group Wheel LLC
Merlin Entertainments North America LLC
Merlin Entertainments Short Breaks LLC
Merlin Entertainments US NewCo LLC
San Francisco Dungeon LLC
SEA LIFE Center San Antonio LLC
SEA LIFE Charlotte LLC
SEA LIFE Meadowlands LLC
SEA LIFE Michigan LLC
SEA LIFE Minnesota LLC
SEA LIFE Orlando LLC
SEA LIFE US LLC
The Tussauds Group LLC
Country of
incorporation
Class of
share held
Ownership
2018
Ownership
2017
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
USA(54) Ordinary
USA(54)
–
USA(54) Ordinary
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
USA(54)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Joint venture undertaking
LL Dubai Hotel LLC
Country
of incorporation
Class of
share held
Ownership
2018
Ownership
2017
UAE(55) Ordinary
40.0%
40.0%
(a) Merlin Entertainments plc has control over this entity via control of the immediate parent entity and the control that the immediate parent entity has over the subsidiary entity.
(b) Merlin Entertainments Group Luxembourg 3 S.à r.l. is held by the Company. All other subsidiaries are held by intermediate subsidiaries.
(c) Merlin Entertainments plc has 100% of the beneficial ownership of these entities.
Registered offices
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
(27)
(28)
(29)
(30)
(31)
(32)
(33)
(34)
(35)
(36)
(37)
(38)
(39)
(40)
(41)
(42)
(43)
(44)
(45)
(46)
(47)
(48)
(49)
(50)
(51)
(52)
(53)
(54)
(55)
(56)
Level 11, 50 Queen Street, Melbourne, VIC, 3000, Australia
Level 16, 201 Elizabeth Street, Sydney, NSW, 2000, Australia
3 Ireland Street Bright, VIC, 3741, Australia
Falls Creek Road, 3699 Falls Creek, Victoria, Australia
Doncaster Road 861, 3109 Melbourne – Doncaster East, Victoria, Australia
Riesenradplatz 5–6, 1020 Wien, Vienna, Austria
Koning Albert 1 Laan 116, 8370, Blankenberge, Belgium
P.O. Box 3340, Road Town, Tortola, British Virgin Islands
Suite 5300 Commerce Court West, 199 Bay Street, Toronto, ON, M5L 1B9, Canada
No. 4, 6, 8, 10, 12, 14, 16, 18 Qianmen Avenue, Dongcheng District, Beijing, China
10/F New World Building, No 2–68 Nanjing Xi Road, Shanghai 200003, China
21, Han Street, Wuchang District, (Shops 40/41/42) Building 5, Lot J2, Wuhan, China
3F, St John’s Building, No. 33 Garden Road, Central, Hong Kong
4–11, Fu 9, No. 133, Nanpin Road, Nan’an District, Chongqing, China
No. 2 Jia-1, Bolan Road, Heping District, Shenyang, China
L2–25, 2F, 3F Parkside Plaza, Putuo District, Shanghai, China
189, Dadhue Road, Pu Tuo District, Shanghai, 200062, China
Aastvej 10, 7190 Billund, Denmark
Tivolitie 10, Helsinki 00510, Finland
Centre Commercial Val d’Europe, Espace 502, 14 cours du Danube, Serris, 7711 Marne-La-Vallée, France
Kehrwieder 5, 20457 Hamburg, Germany
Heidenhof 1, 29614 Soltau, Germany
Legoland Allee, 89312, Gunzburg, Germany
Prinzregentenstrasse 18, 80538 Munich, Germany
44, Regal Building, Connaught Place, New Delhi, Central Delhi DL, 110001, India
6th Floor, 2 Grand Canal Square, Dublin 2, Ireland
First Floor, Fitzwilton House, Wilton Place, Dublin 2, Ireland
Via Derna 4, Castelnuovo del Garda, 37014, Verona, Italy
Via Vivaldi n.7, Castelnuovo del Garda Verona, 37014, Verona, Italy
Loc Ronchi, Castel del Garda Verona, 37014, Verona, Italy
2-2-1, Kinjoufutou Minato-ku, Nagoya-shi, Japan
Island Mall, Decks Tokyo Beach, 1-6-1 Daiba, Minato-ku, Tokyo, Japan
20, Rue Eugène Ruppert, L-2453, Luxembourg
Suite 2–4, Level 2, Tower Block, Menera Milenium, Jalan Damanlela, Pusat Bandar Damansara, 50490 Kuala Lumpur, Malaysia
No. 7, Jalan LEGOLAND, Bandar Medini Iskandar Malaysia, 79250 Iskandar Puteri, Johor, Malaysia
Fred. Roeskestraat 123, 1076 EE Amsterdam, Netherlands
Gevers Deynootweg 970, 2586 BW Den Haag, Netherlands
Dam 20 GEBOUW P&C, 1012 NP Amsterdam, Netherlands
Croeselaan 18, Utrecht, Netherlands
Rokin 78, 1012 KW Amsterdam, Netherlands
Level 12, 55 Shortland Street, Auckland 1010, New Zealand
Avenida Da Boavista 3265, 7th Floor, 4100–137 Porto, Portugal
10, Changi Business Park Central 2, #05-01, HansaPoint@CBP, 486030, Singapore
1411-4, Jung 1-dong, Haenudee-Gu, Busan, Republic of Korea
Yoseon-dong, 8F Moorim Building, 16 Joongang-ro, Chuncheon-si, Gangwon-do, Republic of Korea
Puerto Marina, Benalmadena-Costa, 29630 Benalmadena, Malaga, Spain
989 Siam Discovery Center 6, 6A, 7 and 8th Floors, Rama I Road, Kwaeng Pathumwan, Khet Pathumwan, Bangkok 10330, Thailand
B1–B2 Floor Siam Paragon, 991 Rama 1 Road, Khweng Patumwan, Bangkok 10330, Thailand
Kocatepe Mah, Pasa Cad, Forum Istanbul AVM No. 5/5, Bayrampasa, Turkey
Office 1601, 48 Burj Gate, Burj Khalifa, Dubai, United Arab Emirates
Emaar Square, Building 3, Level 5, P.O. Box 37172, Dubai, United Arab Emirates
Link House, 25 West Street, Poole, Dorset, BH15 1LD, United Kingdom
80 State Street, Albany, New York 12207–2543, United States
1209 Orange Street, Wilmington, New Castle County, Delaware, 19801, United States
201-01 Emaar Square, PO Box 123311, Dubai, United Arab Emirates
Room 01b&32&K1, Third Floor of LC Mall, No. 1-2, 2389 Zhangyang Road, Shanghai Pilot Free Trade Zone, China
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO THE ACCOUNTSOTHER INFORMATION 148
149
M E R L I N E N T E R T A I N M E N T S P L C
COMPANY FINANCIAL
STATEMENTS
Company statement of financial position at 29 December 2018 (2017: 30 December 2017)
COMPANY FINANCIAL
STATEMENTS
Company statement of changes in equity at 29 December 2018 (2017: 30 December 2017)
Non-current assets
Investments
Other receivables
Current assets
Other receivables
Cash and cash equivalents
Total assets
Current liabilities
Interest-bearing loans and borrowings
Other payables
Tax payable
Non-current liabilities
Interest-bearing loans and borrowings
Other payables
Total liabilities
Net assets
Issued capital and reserves attributable to owners of the Company
Total equity
The notes on pages 150 to 154 form part of these financial statements.
Note
iii
iv
iv
vi
v
vi
v
vii
2018
£m
3,137
1,260
4,397
4
2
6
2017
£m
3,129
1,449
4,578
3
7
10
4,403
4,588
7
9
1
17
942
201
1,143
1,160
3,243
3,243
3,243
7
8
–
15
1,271
–
1,271
1,286
3,302
3,302
3,302
The parent Company financial statements were approved by the Board of Directors on 27 February 2019 and were signed on its behalf by:
Nick Varney
Chief Executive Officer
Anne-Francoise Nesmes
Chief Financial Officer
At 1 January 2017
Profit for the year
Total comprehensive income for the year
Shares issued
Equity dividends
Share incentive schemes:
– movement in reserves for employee share schemes
At 30 December 2017
Profit for the year
Total comprehensive income for the year
Shares issued
Equity dividends
Share incentive schemes:
– movement in reserves for employee share schemes
At 29 December 2018
Note
Share
capital
£m
10
–
–
–
–
–
10
–
–
–
–
–
10
vii
iii
vii
vii
iii
vii
Share
premium
£m
2
–
–
8
–
–
10
–
–
6
–
–
16
Retained
earnings
£m
3,178
175
175
–
(74)
Total
equity
£m
3,190
175
175
8
(74)
3
3
3,282
3,302
3
3
–
3
3
6
(76)
(76)
8
8
3,217
3,243
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATION 150
151
COMPANY FINANCIAL
STATEMENTS
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
i ACCOUNTING POLICIES
i ACCOUNTING POLICIES (CONTINUED)
These financial statements were prepared in accordance with Financial Reporting Standard 101 ‘Reduced Disclosure Framework’ (FRS 101).
In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements of International Financial Reporting
Standards as adopted by the EU (Adopted IFRSs), but makes amendments where necessary in order to comply with Companies Act 2006 and has set out below
where advantage of the FRS 101 disclosure exemptions has been taken.
The consolidated financial statements of Merlin Entertainments plc are prepared in accordance with International Financial Reporting Standards and are available
to the public and may be obtained from Link House, 25 West Street, Poole, Dorset, BH15 1LD. Company financial statements have been prepared and approved
by the Directors in accordance with International Financial Reporting Standards as adopted by the EU (Adopted IFRSs).
In these financial statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures:
• Cash flow statement and related notes;
• Disclosures in respect of transactions with wholly owned subsidiaries;
• Disclosures in respect of capital management;
• The effects of new but not yet effective IFRSs;
• Disclosures in respect of the compensation of key management personnel.
As the consolidated financial statements of Merlin Entertainments plc include the equivalent disclosures, the Company has also taken the exemptions under
FRS 101 available in respect of the following disclosures:
• IFRS 2 ‘Share-based payment’ in respect of Group settled share-based payments;
• Certain disclosures required by IFRS 13 ‘Fair value measurement’ and the disclosures required by IFRS 7 ‘Financial instrument disclosures’.
Share-based payments
The fair value of equity-settled share-based payments is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at
grant date and charged as the employees become unconditionally entitled to the rights.
The Group’s equity-settled share plans are settled either by the issue of shares by Merlin Entertainments plc or by the purchase of shares in the market. The fair
value of the share plans is recognised as an expense over the expected vesting period net of deferred tax with a corresponding entry to retained earnings. The
fair value of the share plans is determined at the date of grant. Non-market based vesting conditions (i.e. earnings per share and return on capital employed
targets) are taken into account in estimating the number of awards likely to vest. The estimate of the number of awards likely to vest is reviewed at each
accounting date up to the vesting date, at which point the estimate is adjusted to reflect the actual awards issued. No adjustment is made after the vesting date
even if the awards are forfeited or are not exercised.
The Group operates cash-settled versions of the employee incentive schemes for employees in certain territories. The issues and resulting charges of these
schemes are not material to the financial statements.
Loans to Group undertakings
Loans to Group undertakings are recognised initially at fair value and subsequently at amortised cost using the effective interest rate method, less provision
for impairment.
Classification of financial instruments issued by the Group
Financial instruments are recognised on the statement of financial position when the Company becomes party to the contractual provisions of the instrument.
The accounting policy for each type of financial instrument is included within the relevant note.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these financial statements.
These financial statements have been prepared for the 52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017).
Financial assets are initially measured at fair value, unless otherwise noted, and are subsequently measured at amortised cost, fair value through other
comprehensive income or fair value through profit or loss. A financial asset is derecognised when the contractual rights to the cash flows from the asset expire or
the Company transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity.
The Directors have taken advantage of the exemption available under s408 of the Companies Act 2006 and have not presented a profit and loss account of
the Company.
A summary of the Company’s significant accounting policies is set out below.
Investments in subsidiaries
Investments in subsidiaries are stated at cost, less provision for impairment. The carrying amount of the Company’s investments in subsidiaries is reviewed
annually to determine whether there is any indication of impairment. If any such indication exists, the investment’s recoverable amount is estimated. If the carrying
value of the investment exceeds the recoverable amount, the investment is considered to be impaired and is written down to the recoverable amount. The
impairment loss is recognised in the income statement.
Foreign currency
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange
gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the income statement.
Taxation
Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement unless it relates to items recognised directly
in equity, when it is recognised directly in equity, or when it relates to items recognised in other comprehensive income, when it is recognised through the
statement of comprehensive income.
Financial liabilities are initially measured at fair value, plus, in the case of other financial liabilities, directly attributable transaction costs. Other financial liabilities,
primarily the Company’s interest-bearing loans and borrowings, are measured at amortised cost. Financial liabilities are measured at fair value through profit or
loss and are held on the statement of financial position at fair value. A financial liability is derecognised when the Company’s obligations are discharged, expire or
are cancelled. Finance payments associated with financial liabilities are dealt with as part of finance costs.
An equity instrument is any contract that has a residual interest in the assets of the Company after deducting all of its liabilities. Finance payments associated with
financial instruments that are classified in equity are dividends and are recorded directly in equity.
Where financial instruments consist of a combination of debt and equity, the Company will assess the substance of the arrangement in place and decide how to
attribute values to each taking into consideration the policy definitions above.
Interest-bearing loans and borrowings
These are initially recognised at the principal value of the loan concerned, less any related fees. These fees are then amortised through the income statement on
an effective interest rate basis over the expected life of the loan (or over the contractual term where there is no clear indication that a shorter life is appropriate).
If the Company’s estimate of the expected life based on repayment subsequently changes, the resulting adjustment to the effective interest rate calculation is
recognised as a gain or loss on re-measurement and presented separately in the income statement.
Dividends
Dividends are recognised through equity on the earlier of their approval by the Company’s shareholders or their payment.
Current tax is the expected tax payable on the taxable income for the year, using tax rates substantively enacted at the end of the reporting period, and any
adjustment to tax payable in respect of previous periods.
ii OPERATING EXPENSES
Deferred tax is provided on certain temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and taxation
purposes respectively. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that
affect neither accounting nor taxable profit other than in a business combination; and differences relating to investments in subsidiaries and joint ventures to the
extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or
settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the end of the reporting period.
After considering forecast future profits, deferred tax assets are recognised where it is probable that future taxable profits will be available against which those
assets can be utilised.
Staff numbers and costs
The average number of persons employed by the Company during the year was nine (2017: nine). All employees were Directors of the Company.
The employment costs of the Directors of the Company have been borne by Merlin Entertainments Group Limited for their services to the Group as a whole.
The costs related to these Directors are included within the Directors’ Remuneration Report on pages 74 to 89. One Director accrued benefits under defined
contribution schemes during the year (2017: one).
Auditor’s remuneration
Fees paid to KPMG for audit and other services to the Company are not disclosed in its individual accounts as the Group accounts are required to disclose such
fees on a consolidated basis (note 2.1 of the consolidated financial statements).
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO MERLIN ENTERTAINMENTS PLCOTHER INFORMATION
152
153
COMPANY FINANCIAL
STATEMENTS C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
iii INVESTMENT IN SUBSIDIARY UNDERTAKING
vi INTEREST-BEARING LOANS AND BORROWINGS
Cost and carrying value
At 1 January 2017
Capital contributions to subsidiaries
At 30 December 2017
Capital contributions to subsidiaries
At 29 December 2018
Shares in
subsidiary
undertaking
£m
3,126
3
3,129
8
3,137
Where subsidiary undertakings incur charges for share-based payments in respect of share options and awards granted by the Company, a capital contribution of
the same amount is recognised as an investment in subsidiary undertakings with a corresponding credit to shareholders’ equity.
Non-current
Floating rate bank facilities due 2020
£600 million (2017: £300 million) floating rate revolving credit facility due 2023 (2017: 2020)
€700 million fixed rate notes due 2022
$400 million fixed rate notes due 2026
Current
Interest payable
2018
£m
–
–
631
311
942
7
949
2017
£m
649
–
622
–
1,271
7
1,278
The subsidiary undertaking at the year end is as follows:
Company
Activity
Country of
incorporation
Shareholding
Description of
shares held
During the year the Group refinanced a significant portion of its long term debt. The Group issued $400 million US Dollar denominated 5.75% senior notes due
2026 and increased its revolving multi-currency credit facility from £300 million to £600 million with the repayment date extended to April 2023. The proceeds
were used to repay £250 million of Sterling and $540 million of US Dollar denominated term loans due to mature in March 2020.
Merlin Entertainments Group Luxembourg 3 S.à r.l.
Holding company
Luxembourg
100.0%
Ordinary
A full list of Group companies is included in note 5.8 of the consolidated financial statements on pages 141 to 147.
iv OTHER RECEIVABLES
Amounts owed by Group undertakings
Current assets
Non-current assets
2018
£m
4
2017
£m
3
2018
£m
1,260
2017
£m
1,449
Amounts owed by Group undertakings comprise funds loaned by the Company to fellow Group undertakings. The non-current loans have maturities of 2020
and 2022 and carry interest rates that are based on the costs of servicing the external bank facilities and loan notes.
v OTHER PAYABLES
Amounts owed to Group undertakings
Accruals
Current liabilities
Non-current liabilities
2018
£m
8
1
9
2017
£m
7
1
8
2018
£m
201
–
201
2017
£m
–
–
–
Amounts owed by Group undertakings comprise funds loaned to the Company by fellow Group undertakings. The non-current loans have a maturity date of
2027 and carry interest rates that are based on the costs of servicing the external bank facilities and loan notes.
The Group’s facilities are:
• A £600 million multi-currency revolving credit facility of which £148 million had been drawn down by a Group undertaking at 29 December 2018 (2017: £nil).
The margin on this facility is dependent on the Group’s adjusted leverage ratio and at 29 December 2018 was at a margin of 1.25% (2017: 1.75%) over the
floating interest rates when drawn. The relevant floating interest rates are LIBOR and the USD benchmark rate, which were 0.73% (2017: 0.51%), and 2.64%
(2017: 1.61%) respectively at 29 December 2018.
• A bond in the form of €700 million seven year notes with a coupon rate of 2.75% to mature in March 2022.
• A bond in the form of $400 million eight year notes with a coupon rate of 5.75% to mature in June 2026.
The interest-bearing loans and borrowings are initially recognised at fair value, net of transaction costs and are subsequently stated at amortised cost. Any
difference between the proceeds (net of transaction costs) and the redemption amount is amortised through the income statement over the period of the
borrowings using the effective interest method. Fixed rate borrowings, which have been hedged to floating rates, are measured at amortised cost adjusted for
changes in the value attributable to the hedged risk arising from the changes in underlying market interest rates.
The interest-bearing loans and borrowings are unsecured but guaranteed by the Company and certain of its subsidiaries.
The Group is required to comply with certain customary financial and non-financial covenants in the bank facilities, including a requirement to maintain certain
ratios of EBITDA to both net finance costs and net debt. It is also required to comply with certain non-financial covenants in the €700 million and $400 million
notes. All covenant requirements were satisfied throughout the year.
vii EQUITY
Share capital
Ordinary shares of £0.01 each
At beginning of the year
Shares issued
At end of the year
2018
Number
2018
£m
2017
Number
1,019,572,449
2,500,000
1,022,072,449
10
1,015,809,266
–
3,763,183
10
1,019,572,449
2017
£m
10
–
10
Issue of new shares
During the year the Company issued 2,500,000 ordinary shares at nominal value of one pence each in connection with the Group’s employee share incentive
schemes (note 4.6 in the consolidated financial statements). The Company also received £6 million in relation to the exercise of options under the Company
Share Option Plan (CSOP) and the All Employee Sharesave Plan (AESP). This was taken to the share premium account.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTNOTES TO MERLIN ENTERTAINMENTS PLCOTHER INFORMATION 154
M E R L I N E N T E R T A I N M E N T S P L C
A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 8
M E R L I N E N T E R T A I N M E N T S P L C
155
N O T E S T O M E R L I N E N T E R T A I N M E N T S P L C
COMPANY FINANCIAL
STATEMENTS C O N T I N U E D
52 weeks ended 29 December 2018 (2017: 52 weeks ended 30 December 2017)
vii EQUITY (CONTINUED)
Ordinary shares
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at general meetings of
the Company.
Retained earnings
The profi t after tax for the year in the accounts of Merlin Entertainments plc is £3 million (2017: profi t after tax of £175 million). All of the Company’s retained
earnings are distributable (with the exception of those movements in reserves for employee share schemes).
Dividends
Final dividend for the 53 weeks ended 31 December 2016 of 4.9 pence per share
Interim dividend for the 52 weeks ended 30 December 2017 of 2.4 pence per share
Final dividend for the 52 weeks ended 30 December 2017 of 5.0 pence per share
Interim dividend for the 52 weeks ended 29 December 2018 of 2.5 pence per share
Total dividends paid
2018
£m
–
–
51
25
76
2017
£m
50
24
–
–
74
The Directors of the Company propose a fi nal dividend of 5.5 pence per share for the year ended 29 December 2018 (2017: 5.0 pence per share), amounting
to £56 million (2017: £51 million). The total dividend for the current year, subject to approval of the fi nal dividend, will be 8.0 pence per share (2017: 7.4 pence
per share).
In making this proposal the Directors have considered the resources available to the Company and its subsidiaries. Specifi cally they have taken account of the
Company’s signifi cant distributable profi ts, as noted above, as well as the position and liquidity of the Group disclosed in the consolidated statement of fi nancial
position as explained in the Group going concern disclosures on page 105.
viii RELATED PARTY TRANSACTIONS
Transactions with subsidiary undertakings, which principally relate to the provision of funding within the Group, are carried out on an arm’s length basis.
Outstanding balances are placed on intercompany accounts (notes iv and v).
During the fi nancial year the Company received a dividend from Merlin Entertainments Group Luxembourg 3 S.à r.l. of £nil (2017: £174 million).
For full details of transactions and arrangements with the Company’s largest shareholder, see note 5.3 of the consolidated fi nancial statements.
FINANCIAL RECORD
Results
Revenue
Underlying EBITDA
Underlying operating profi t
Operating profi t
Profi t before tax
Adjusted earnings per share (p)
Dividend per share (p)
Consolidated statement of fi nancial position
Property, plant and equipment
Intangible assets
Cash and cash equivalents
Non-current interest-bearing loans and borrowings
Total equity
Consolidated statement of cash fl ows
Net cash fl ow from operating activities
Changes in working capital
Net (decrease)/increase in cash and cash equivalents
2018
£m
2017
£m
2016(1)
(52 weeks)
£m
2016(1)
(53 weeks)
£m
2015
£m
2014
£m
1,688
1,594
1,428
1,457
1,278
1,249
494
327
323
285
22.9
8.0
2,344
1,028
110
1,092
1,744
450
(22)
(202)
474
323
323
271
20.5
7.4
2,092
1,018
309
1,271
1,567
413
1
90
433
302
302
259
19.5
7.1
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
451
320
320
277
20.8
7.1
1,841
1,017
215
1,147
1,428
433
23
40
402
291
291
237
17.8
6.5
1,495
923
152
1,003
1,149
325
(19)
(137)
411
311
311
226
17.7
6.2
1,410
942
285
1,131
1,063
357
(4)
16
(1) In 2016 the consolidated Group fi nancial statements were prepared on a ‘53 week’ basis for the period ending 31 December 2016. In most years we report on a ‘52 week’ period. In certain years an additional week
is included to ensure that the statutory fi nancial year end date stays in line with the end of December. The ‘52 week’ information for 2016 is also presented here to provide a more direct comparison of performance.
The difference between the two periods is the week ending 31 December 2016.
S
S
T
T
R
R
A
A
T
T
E
E
G
G
I
I
C
C
R
R
E
E
P
P
O
O
R
R
T
T
G
G
O
O
V
V
E
E
R
R
N
N
A
A
N
N
C
C
E
E
F
F
I
I
N
N
A
A
N
N
C
C
I
I
A
A
L
L
S
S
T
T
A
A
T
T
E
E
M
M
E
E
N
N
T
T
S
S
O
T
H
E
R
I
N
F
O
R
M
A
T
O
N
I
156
157
GLOSSARY
Adjusted earnings per share is calculated by dividing the profit for the year attributable to ordinary shareholders,
adjusted for exceptional items, by the weighted average number of ordinary shares in issue during the year.
Organic growth
Growth from like for like businesses and new business development at constant currency and accounting standards and
excluding growth from acquisitions.
ROCE
Rooms
RPC
RTP
Second gate
SLC
The Code
Return on Capital Employed. The profit measure used in calculating ROCE is based on underlying operating profit after
tax. The capital employed element of the calculation is based on average net operating assets which include all net
assets other than deferred tax, derivative financial assets and liabilities, and net debt.
A single accommodation unit at one of our theme parks, for example a hotel room, lodge or glamping tent.
Revenue per capita, defined as visitor revenue divided by number of visitors.
Resort Theme Parks Operating Group.
A visitor attraction at an existing resort with a separate entrance and for which additional admission fees are charged.
SEA LIFE Centre aquarium attractions. These are part of the Midway Attractions Operating Group.
UK Corporate Governance Code.
The Merlin Way
The culture of the Group which encompasses our vision and values.
Top Box
Underlying
Visitors
The highest level of customer satisfaction that we record in our customer surveys.
Underlying information presented excludes exceptional items that are classified separately within the
financial statements.
Represents all individual visits to Merlin owned or operated attractions.
Wizard Wants to Know (WWTK) WWTK is our annual online employee survey.
Terms used
Unless otherwise stated, the terms ‘Merlin’, ‘Merlin Entertainments’, ‘the Group’, ‘We’ and ‘Us’ refer to the Company (Merlin Entertainments plc) and, as
applicable, its subsidiaries and/or interests in joint ventures.
Percentages are calculated based on figures before rounding and are then rounded to one decimal place.
Adjusted EPS
Capex
Cluster
Capital expenditure.
A group of attractions located in a city close to one another.
Constant currency growth
Using 2017 exchange rates.
CWE
Conservation, Welfare and Engagement. The SEA LIFE team that focuses on delivering world class animal welfare
throughout our animal care network and developing new guest experiences.
DreamWorks Tours – Shrek’s
Adventure!
This attraction is part of the Midway Attractions Operating Group.
EBITDA
EPS
EU GDPR
Exceptional items
Profit before finance income and costs, taxation, depreciation and amortisation and after taking account of attributable
profit after tax of joint ventures.
Earnings per share.
EU General Data Protection Regulation.
Due to their nature, certain one-off and non-trading items can be classified as exceptional in order to draw them to the
attention of the reader and to show the underlying business performance more accurately.
Existing estate (EE)
EE comprises all attractions other than new openings.
IP
IPO
KIRKBI
KPI
LBC
LCA
LDC
Like for like (LFL)
Listing
LLP
Merlin Magic Making (MMM)
Merlin’s Magic Wand (MMW)
Intellectual Property.
Initial Public Offering.
KIRKBI owns 75% of LEGO A/S and owns 29.64% of the share capital of Merlin Entertainments plc.
Key Performance Indicator.
Little BIG City attractions. These are part of the Midway Attractions Operating Group.
Licence and Co-operation agreement. This agreement sets out the rights granted to the Group to use the LEGO and
LEGOLAND brands.
LEGOLAND Discovery Centre attractions. These are part of the Midway Attractions Operating Group.
2018 LFL growth refers to the growth between 2017 and 2018 on a constant currency basis using 2017 exchange rates
and includes all businesses owned and operated before the start of 2017.
Listing on the London Stock Exchange.
LEGOLAND Parks Operating Group.
MMM is the unique resource that sits at the heart of everything Merlin does. It is our specialist in-house site-search and
business development; creative design; production; and project management team. MMM also pursues acquisition and
investment opportunities.
MMW forms a key element of Merlin’s Corporate Social Responsibility commitment. Our partner children’s charity
delivers magical experiences around the world to children who are facing challenges of serious illness, disability
or adversity.
Midway or Midway attractions
The Midway Attractions Operating Group and/or the Midway attractions within it. Midway attractions are typically
smaller, indoor attractions located in city centres, resorts or shopping malls.
MT
Madame Tussauds attractions. These are part of the Midway Attractions Operating Group.
‘Net Promoter’ score
How we measure the propensity of our customers to recommend our attractions.
New Business Development (NBD) NBD relates to attractions that are newly opened or under development for future opening, together with the addition
of new accommodation at existing sites. New openings can include both Midway attractions and new theme parks.
NBD combines with the existing estate to give the full estate of attractions.
Non-core
Attractions which Merlin has ceased the operation of during the period.
Operating free cash flow
Underlying EBITDA less existing estate capex.
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATION
158
159
OTHER FINANCIAL
INFORMATION
SHAREHOLDER
INFORMATION
Foreign exchange rate sensitivity
The Group’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 2018 revenues and EBITDA of re-translating them at 2017 foreign exchange (FX) rates.
Currency
USD
EUR
AUD
Other
Increase in 2018 revenues at 2017 FX rates
Currency
USD
EUR
AUD
Other
Increase in 2018 EBITDA at 2017 FX rates
2017
average
FX rates
2018
average
FX rates
%age
movement in
FX rates
Revenue
impact
£m
1.29
1.14
1.68
1.34
1.13
1.78
3.9%
(0.8)%
5.7%
17
(2)
6
4
25
2017
average
FX rates
2018
average
FX rates
%age
movement in
FX rates
EBITDA
impact
£m
1.28
1.13
1.67
1.34
1.13
1.78
4.0%
0.0%
5.9%
6
–
2
1
9
Return on capital employed (ROCE)
The return is based on underlying operating profit after tax. Tax is calculated for the purposes of ROCE by applying the Group’s underlying ETR for the year
(2018: 19.0%, 2017: 22.9%) to the Group’s underlying operating profit.
The capital employed element of the calculation is based on average net operating assets for the relevant period between the opening and closing statements of
financial position. Net operating assets include all net assets other than deferred tax, derivative financial assets and liabilities, and net debt.
Underlying operating profit
Taxation
Return
Net assets
Less:
Deferred tax assets
Deferred tax liabilities
Net debt (note 4.1)
Derivative financial assets
Derivative financial liabilities
Net operating assets at the period end
Capital employed
ROCE
2018
£m
327
(62)
265
1,744
(35)
182
2017
£m
323
(74)
249
1,567
(33)
171
1,190
1,160
(3)
4
3,082
2,973
8.9%
(5)
3
2,863
2,730
9.1%
Share listing
The Company’s shares are listed on the London Stock Exchange.
Share register and registrars
The Company’s share register is maintained and administered in the UK
by Computershare Investor Services PLC (Computershare) at the
following address:
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol
BS99 6ZZ
Telephone:
+44 (0)370 703 6259
Investor Centre:
www.investorcentre.co.uk/
contactus
Website:
www.computershare.com
Computershare operates a portfolio service for Merlin shareholders called
Investor Centre. This provides our shareholders with online access to
information about their investments as well as a facility to help manage their
holdings online, such as being able to:
• Update dividend mandate bank instructions and review dividend
payment history.
Shareholder communications
We encourage our shareholders to receive their communications from the
Company electronically using email and web-based communications. This
means that information about the Company can be received as soon as it is
available. The use of electronic communications also reduces costs and the
impact on the environment. Shareholders can register for electronic
communications through Investor Centre or by contacting Computershare.
Shareholders with any queries regarding their shareholding should
contact Computershare.
The Investor Relations section of our corporate website also contains
information which shareholders may find helpful.
Annual General Meeting (AGM)
The AGM of the Company will be held on 3 May 2019 at the offices of
LEGOLAND Windsor Resort Hotel, Winkfield Road, Windsor, SL4 4AY at
11:00am. Details of each resolution to be considered at the meeting and voting
instructions will be provided in the Notice of AGM which will be issued to
shareholders under separate cover.
Registered in
England and Wales
Company number
08700412
• Update member details and address changes.
• Register to receive Company communications electronically.
EPIC/TIDM
MERL
ISIN
GB00BDZT6P94
Computershare also offers an internet and telephone share dealing service to
existing shareholders which can also be accessed through the Investor Centre.
LEI
549300ZTI0VEFO6WV007
Dividends
An interim dividend of 2.5 pence per share was paid on 24 September 2018 to
shareholders on the share register on 17 August 2018.
A final dividend for the year ended 29 December 2018 of 5.5 pence per share
will be recommended to shareholders for approval at the 2019 Annual
General Meeting of the Company.
Registered office
Merlin Entertainments plc
Link House
25 West Street
Poole
Dorset
BH15 1LD
Telephone:
+44 (0)1202 440082
Email:
investor.relations@merlinentertainments.biz
Website: www.merlinentertainments.biz
Dividend Re-Investment Plan
The Company has a Dividend Re-Investment Plan (DRIP) which allows holders
of ordinary shares, who choose to participate, to use their cash dividends to
acquire additional shares in the Company which will be purchased on their
behalf by the DRIP administrator. Further information in relation to the DRIP
will be sent to shareholders in advance of the 2019 Annual General Meeting.
Financial calendar
The principal dates in our financial calendar for 2019 are as follows:
Preliminary Announcement of Results
Annual General Meeting
Interim Results Announcement
28 February
3 May
1 August
Company Secretary
Matthew Jowett
Investor relations director
Simon Whittington
External auditors
KPMG LLP
Gateway House, Tollgate
Chandlers Ford
Southampton
SO53 3TG
Joint corporate brokers
Barclays Bank PLC
5 North Colonnade
Canary Wharf
London
E14 4BB
Telephone:
+44 (0)23 8020 2000
Citigroup Global Markets Limited
Citigroup Centre, Canada Square
Canary Wharf
London
E14 5LB
ANNUAL REPORT AND ACCOUNTS 2018MERLIN ENTERTAINMENTS PLCMERLIN ENTERTAINMENTS PLCFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSGOVERNANCESTRATEGIC REPORTOTHER INFORMATION 160
M E R L I N E N T E R T A I N M E N T S P L C
A N N U A L R E P O R T A N D A C C O U N T S 2 0 1 8
N O T E S
Registered offi ce:
Merlin Entertainments plc
Link House
25 West Street
Poole
Dorset
BH15 1LD
United Kingdom
Registered number: 08700412
Registered in England and Wales
www.merlinentertainments.biz
LEGO (including NINJAGO, Star Wars, Batman and The LEGO Movie) – LEGO, the LEGO logo,
the Brick and Knob configurations, the Minifigure, NINJAGO and LEGOLAND are trademarks of
the LEGO Group. ©2018 The LEGO Group.
THE LEGO® BATMAN MOVIE © & ™ DC Comics, Warner Bros. Entertainment Inc., & The LEGO
Group. All Rights Reserved.
THE LEGO® MOVIE © & ™ LEGO Group & Warner Bros. Entertainment Inc. All Rights Reserved.
Star Wars © & ™ 2018 Lucasfilm Ltd. All rights reserved.
DreamWorks (including Shrek, How to Train Your Dragon and Kung Fu Panda) – Shrek, Kung Fu Panda,
How To Train Your Dragon © DreamWorks Animation LLC. All Rights Reserved.
Ghostbusters – ™ & © 2018 Columbia Pictures Industries, Inc. All Rights Reserved.
The Gruffalo – © 1999 & ™ Julia Donaldson & Axel Scheffler. Licensed by Magic Light Pictures Ltd.
CBeebies – © 2018 All Rights Reserved by BBC Worldwide.
Bear Grylls – a registered trademark of Bear Grylls Ventures LLP.
Peppa Pig © Astley Baker Davies Ltd/Entertainment One UK Ltd 2003.
Madame Tussauds – The Madame Tussauds images shown depict wax figures created and owned by
Madame Tussauds.
London Eye – London Eye conceived and designed by Marks Barfield Architects.