Pendragon
Annual Report 2019

Plain-text annual report

2019 ANNUAL REPORT “ A much improved second half performance and a return to profitability in challenging market conditions were more than offset by significant underlying losses in the first half of the year, resulting in an overall underlying loss before tax in FY19. Financial performance in the first half was impacted by a combination of issues, with the principal driver being the impact of the clearance of used car stock from excess levels. The second half performance improved as a result of actions taken by management to re-set performance, which included the closure of 22 underperforming Car Store locations, better management of used vehicle inventory and a clear focus on operational cost management. The improvement in performance during the second-half puts the business on a much stronger footing for FY20. The company is closely monitoring the unprecedented impact of the COVID-19 virus and its potential impact on the economy. At the moment, and excluding any impact from COVID-19, the company expects Group underlying profit before tax for FY20 to be in line with market expectations, but will continue to watch the situation closely, particularly in light of the measures that were announced by the UK Government on 16 March. At this stage, it is too early to accurately quantify what the impact may be.” 2 Pendragon PLC Annual Report 2019 CONTENTS STRATEGIC REPORT 4 Chief Executive Officer Statement 5 Business Segments 6 Financial Summary 7 Operational and Financial Highlights 7 Performance Indicators 8 9 Business Profiles 16 Life at Pendragon PLC 18 Industry Insight s172 Statement OPERATIONAL AND FINANCIAL REVIEW 21 Business Review 30 Financial Review 34 Risk Overview & Management 42 Viability Statement DIRECTORS REPORT 44 Board of Directors 46 Corporate Governance Report 50 Corporate Social Responsibility Report 52 Committee Reports 60 Directors’ Remuneration Report 79 Directors’ Report FINANCIAL STATEMENTS 83 Statement of Director’s Responsibilities in Respect of the Annual Report and the Financial Statements 84 Independent Auditor’s Report 93 Consolidated Income Statement 94 Consolidated Statement of Comprehensive Income 95 Consolidated Statement of Changes in Equity 96 Consolidated Balance Sheet 97 Consolidated Cash Flow Statement 98 Reconciliation of Net Cash Flow to Movement in Net Debt 99 Notes to the Financial Statements 182 Company Balance Sheet 183 Company Statement of Comprehensive Income 184 Company Statement of Changes in Equity 185 Notes to the Financial Statements of the Company 194 Advisors, Banks and Shareholder Information 195 5 Year Group Review 3 Pendragon PLC Annual Report 2019 CHIEF EXECUTIVE OFFICER STATEMENT Bill Berman, Chief Executive Officer “I am excited to have been appointed to the role of Chief Executive Officer of Pendragon and look forward to the prospect of leading the business through a period of rapid change and innovation in the automotive retail sector. Despite having only been with the business for a short period of time, it is clear this is a company with great potential and a very strong team. 2019 was a year of transition for the Group, that played out against challenging market conditions, however, we returned to profitable growth in the second half and this provides us with a solid platform for the coming year. At the moment, we are closely monitoring the impact of COVID-19 on the economy as the situation continues to develop. We will be providing a fuller update on the Group strategy later in the year, which will continue to be based on four strategic pillars; the opportunity to create a strong, stand-alone used car brand, an improved and stable platform in the Franchised UK Motor division, delivering growth in Pinewood and further strengthening our leasing business. I am confident in the long- term prospects for Pendragon and look forward to communicating our strategy in more detail in due course.” BOARD AND MANAGEMENT CHANGES • A number of Board and senior management positions have been added to strengthen the business to support its future growth potential. • Bill Berman appointed as Chief Executive Officer. • Two new Non-Executive Board members appointed. • New roles of Chief Information Officer and Chief Marketing Officer created and appointed. OUTLOOK • We remain cautious given the ongoing level of economic uncertainty post the UK’s exit from the EU, with trade terms only agreed until the end of 2020. We will continue to monitor market conditions and respond accordingly. • The company has considered and will continue to monitor the threat and economic implications of COVID-19. At the moment, and excluding any impact from COVID-19, the company expects Group underlying profit before tax for FY20 to be in line with market expectations, but will continue to watch the situation closely, particularly in light of the measures that were announced by the UK government on 16 March. At this stage, it is too early to accurately quantify what the impact maybe. • The Group has taken some additional protective measures such as deferring commitments in our capital expenditure programme, increasing the flexibility we have in our marketing spend, closely monitoring inventory levels and developing alternating work schedules and home working options for employees.   4 Pendragon PLC Annual Report 2019BUSINESS SEGMENTS We have five main business divisions that make up our Group: CAR STORE Sale and servicing of vehicles in the UK FRANCHISED UK MOTOR Sale and servicing of vehicles in the UK SOFTWARE Licencing of Software as a service to automotive businesses LEASING Supply of new vehicles and fleet management to businesses US MOTOR (Discontinued) Sale and servicing of vehicles in the US I N G t o r y n h i c l e s e v e S A E N D L ply of used c a r i n ef eete d v m d p u S o r f T A E E L F s n o r i o f t a r e m p e t o E s r y a s c R g d A W n i d e s a eff cient u Market le T F O S NEW V Supply of u fro m p s e E H I C L E a d r t e c a x r c i R E T h n A a v I n e g n e t o s r y L I N G T e c f h o n r v ic e al e q V E H IC L hicle reco E SERVIC uipment a ditioning d e E & REPAIR n n xpertise USED VEHICLE RETAILING 5 Pendragon PLC Annual Report 2019 FINANCIAL SUMMARY 4,739.1 4,627.0 4,506.1 552.9 550.5 472.7 11.7 11.9 10.5 2017 2018 2019 2017 2018 2019 2017 2018 2019 £4,506.1M REVENUE £472.7M GROSS PROFIT 10.5% GROSS MARGIN 83.8 76.2 60.4 47.8 3.3 2.8 26.7 (16.4) (1.2) 2017 2018 2019 2017 2018 2019 2017 2018 2019 £26.7M UNDERLYING OPERATING PROFIT £(16.4)M UNDERLYING PROFIT BEFORE TAX (1.2)P UNDERLYING EPS 91.4 65.3 (14.4) (71.1) (44.4) (114.1) 124.1 126.1 119.7 2017 2018 2019 2017 2018 2019 2017 2018 2019 £(71.1)M OPERATING (LOSS)/PROFIT £(114.1)M (LOSS)/PROFIT BEFORE TAX £119.7M NET DEBT NOTE: Throughout this document, Alternative Performance Measures have been used which are non-GAAP measures that are presented to provide readers with additional financial information that is regularly reviewed by management and should not be viewed in isolation or as an alternative to the equivalent GAAP measure, see note 1 of the Financial Statements for details. 6 Pendragon PLC Annual Report 2019OPERATIONAL AND FINANCIAL HIGHLIGHTS OPERATIONAL AND FINANCIAL HIGHLIGHTS • Group Revenue £4,506.1m +3.8% LFL (-2.6% total) • Loss After Tax £(117.4)m (2018 : £(50.5)m loss) • Underlying (Loss) / Profit Before Tax £(16.4)m loss (2018 : £47.8m profit). H1 loss of £(32.2)m loss, H2 profit of £15.8m • Dividend – The Group is not proposing a final dividend for FY19 (2018: 0.7p) • Non-Underlying Charge of £97.7m (2018 : £92.2m charge) including a non-cash charge principally for impairment of goodwill and non-current assets of £130.2m. • Closing Net Debt – £119.7m (FY18 : £126.1m), down 5.1w% PERFORMANCE INDICATORS KEY FINANCIAL MEASURES KPI Definition 2019 Performance Change Underlying EPS Underlying profit after tax divided by weighted average number of shares (1.2)p down >100% Underlying PBT Underlying profit before tax excludes items that are not in- curred in the normal course of business and are sufficiently significant and / or irregular to impact the underlying trends in the business £(16.4)m down >100% Underlying Operating Margin Underlying operating profit divided by underlying revenue 0.6% down 62.5% Underlying Net Debt Net debt : underlying EBITDA is the ratio of our net debt to underlying EBITDA Ratio 1.5 up 66.6% KEY STRATEGIC MEASURES KPI Definition 2019 Performance Change Aftersales Retail Labour Sales Retail labour sales is activity direct to consumers for the servicing and repair of motor vehicles (like for like) Retail growth 3.6% up 1.5% Used Revenue All used revenues (like for like) £1,829.0m down 0.0% Online Growth Website visits to Evanshalshaw.com, Stratstone.com and Carstore.com 34.9m visitors up 21.8% 7 Pendragon PLC Annual Report 2019 s172 STATEMENT Statement by the directors in performance of their statutory duties in accordance with s172(1) Companies Act 2006 The board of directors of Pendragon PLC consider, both individually and together, that they have acted in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole (having regard to the stakeholders and matters set out in s172(1)(a)-(f) of the Act) in the decisions taken during the year ended 31 December 2019. • Our plan was designed to have a long-term beneficial impact on the company and to contribute to its success in delivering a high quality of service across all of our business divisions: Franchised UK Motor, Software, Leasing and UK Motor. • Our team members are fundamental to the delivery of our plan. We aim to be responsible employer in our approach to the pay and benefits our team members receive. The health, safety and well-being of our team members is one of our primary considerations in the way we do business. • Engagement with suppliers and customers is key to our success. We meet with our major manufacturing partners regularly throughout the year and take the appropriate action, when necessary, to prevent involvement in modern slavery, corruption, bribery and breaches of competition law. • Our plan took into account the impact of the Group’s operations on the community and environment and our wider social responsibilities, and in particular how we comply with environmental legislation and pursue waste-saving opportunities and react promptly to local community concerns. • As the Board of Directors, our intention is to behave responsibly and ensure that the management operate the business in a responsible manner, operating within the high standards of business conduct and good governance expected for a business such as ours and in doing so, will contribute to the delivery of our plan. The intention is to nurture our reputation, through both the construction and delivery of our plan, that reflects our responsible behaviour. • As the Board of Directors, our intention is to behave responsibly towards our shareholders and treat them fairly and equally, so they too may benefit from the successful delivery of our plan. 8 Pendragon PLC Annual Report 2019BUSINESS PROFILES 10 Car Store 10 Franchised UK Motor 12 14 Software - Pinewood Leasing – Pendragon Vehicle Management 15 US Motor Group 9 Pendragon PLC Annual Report 2019BUSINESS PROFILES CAR STORE Own brand proposition for the sale of used vehicles in the U.K.. Operating Highlights • A full market and operating model assessment of Car Store was completed during H1, which confirmed there is a significant and attractive market opportunity and that the proposition is well received by its target customers. • Following this, a clear roadmap of short-term and long- term steps were established. The short-term actions included the closure of 22 Car Stores and one preparation centre in H2. In addition, following a review of capacity, a further preparation centre was closed. • During the first half of FY19, Car Store incurred underlying operating losses of £(19.1)m, of which £(6.1)m resulted from the clearance of used car stock from excess levels that had built up at the end of FY18, and £(13.0)m was due to operational performance contraints. In the second half of FY19, Car Store had operating losses of £(6.1)m. • Significant performance improvements in the remaining 12 stores since the closure programme was completed, with underlying operating losses from the remaining 12 stores reducing to £(1.1)m in the fourth quarter. Further improvements are targeted during 2020. “Our UK Motor division is recognised through our two main consumer brands in the UK, Evans Halshaw and Stratstone, complemented by our used car only brand, Car Store” FRANCHISED UK MOTOR Sale and servicing of vehicles in the UK. Operating Highlights • H1 reported underlying operating loss of £(7.7)m (H1 2018 : £31.8m) , H2 reported underlying operating profit of £20.7m (H2 2018 : £21.2m). • H1 2019 was impacted by the previously disclosed clearance of used car stock from excess levels. • Used car gross margins stabilised at 7.8% in H2 vs 4.9% in H1. • Further progress has been made with right-sizing the Franchised UK Motor operation with 6 Jaguar Land Rover sites either disposed of or closed in FY19. • While market conditions remained challenging during H2, with the new car market down (1.1)%. The Group outperformed the new car market in the period, with H2 like-for-like new car unit sales growth of 2.3%. • Underlying operating costs were well managed in H2 and on a proforma IAS17 basis, in total were down 5.6% (down 0.8% on a LFL basis) as a result of the previously announced cost reduction programmes. 10 Pendragon PLC Annual Report 2019Evans Halshaw 120 Ford 38 Vauxhall 30 Citroën 14 Renault 6 Dacia 6 Peugeot 6 DAF 4 Hyundai 4 Nissan 4 Kia 3 SEAT 1 EH Used Car Centres 4 Stratstone 46 Land Rover 5 Jaguar 5 Mercedes-Benz 8 BMW 7 MINI 7 Smart 2 Porsche 5 Aston Martin 3 Harley-Davidson 2 Ferrari 1 SS Used Car Centres 1 Car Stores 12 178 UK RETAIL POINTS 253K VEHICLES SOLD WEBSITE VISITS UP 22% 35M VISITS 11 Pendragon PLC Annual Report 2019BUSINESS PROFILES SOFTWARE - PINEWOOD Licencing of Software as a Service to automotive business users. Operating Highlights • Underlying operating profit up 14.5% to £13.4m (2018 : £11.7m). • The software business continues to perform well, with continued international expansion. • Additional customers were added in multiple territories, including Norway and Sweden during 2019. “Our Dealer Management System is split by role-type, collating common tasks together to make dealerships more efficient. With one central database, all information is shared throughout the system.” Integration with Microsoft Outlook Digital Workshop Scheduling Customer Contact Plans Digital Vehicle Health Checks Dealer Management System Features Every part of the business in one place. From CRM, to workshop workflows and parts processing, financial analysis and stock management. Pinewood works with most vehicle manufacturers to provide global solutions. Our interconnected module structure provides visibility and access to Stock feeds to websites Customer Mapping tools Technician job cards Wholesale Funding information across dealership operations, preventing the need for double keying or multiple add-on systems. This is a valuable time saving asset for our users, facilitating increased SMS Integration Reporting Suite Social Media integrations Tyre Hotel productivity and reduced inputting time. 8% GROWTH IN REVENUE MICROSOFT PARTNER 12 Pendragon PLC Annual Report 2019 Integration with over 50 manufacturers Cars: Commercial Vehicles: Motorbikes: Pinnacle Apps Our apps are designed to streamline processes and improve efficiency across the whole dealership. Our fully integrated suite of apps work seamlessly with our Pinewood DMS. Our apps are multi-platform and users can choose their preferred tablet or mobile, across iOS, Windows and Android devices. Tech+ Improve the service and repair experience, including video integration Host+ Integrated video processes including 360° tours of a used vehicle and technician time management. in stock, or visually identifying work required following a health check. Pay+ Fully integrated, PCI-DSS P2PE accredited card payment app. Stock+ Respond to enquiries with personalised videos, instantly update Parts+ Issue parts on-the-move, saving time with our in-built barcode scanner. stock information and store vehicle documentation. 13 Pendragon PLC Annual Report 2019 BUSINESS PROFILES LEASING - PENDRAGON VEHICLE MANAGEMENT Fleet and contract hire provider. Source of used vehicle supply. Operating Highlights • Underlying operating profit down 13.5% to £12.8m (2018 : £14.8m), as a result of the previously disclosed provision release of £2.8m in FY18. • Continued high return on investment from a low capital base. • Valuable source of used car stock to the group. “At Pendragon Vehicle Management we supply fleet vehicles and provide services to help customers manage their fleets, improving efficiency, reducing costs and saving time.” Pendragon Vehicle Management At pendragonvehiclemanagement.co.uk our Business to Business (B2B) brand focusses on comprehensive solutions for fleet customers. Utilising market leading fleet software, tailored options are developed for the ever evolving requirements of businesses. From a variety of options on Fleet Management, to all elements of Fleet Funding across cars and commercial vehicles, business solutions are crafted to focus on customer priorities, from uptime to driving cost control. Pendragon Vehicle Management has evolved to offer bespoke Business to Employee (B2E) schemes as an alternative to company cars option for employees. In addition there are also a variety of Daily Rental and flexible rental solutions for customers. Fleet Management Fleet Funding Telematics Duty of Care Fuel Cards Contract Hire For Cars Contract Purchase Outsourced Administration Maintenance and Accident Repair Management Contract Hire For Vans Sale and Leaseback Business to Employee Schemes • Businesses can offer employees brand new cars as a company benefit. Rental Solutions • Fast response service with over 300,000 • No company car or company car tax complications, and there is no benefit vehicles ready to access. in kind tax to pay. • Real time Rental Management system • Motivational tool to drive engagement managed by Pendragon Vehicle • Daily and also flexible (three months and Management. beyond) rental options available. • Unlike salary sacrifice schemes this offers an alternative direct to employee • Car, van and specialist vehicle hire, delivered contract (through a Personal Contract Hire agreement), reducing company within four hours. administration. B V R L A MEMBER 14 DRIVER APP Pendragon PLC Annual Report 2019US MOTOR GROUP Sale and servicing of vehicles in the U.S. Operating Highlights • Disposal of two franchise locations in 2019 (Mission Viejo • Puente Hills Chevrolet disposal was completed in February 2020 for consideration of £16.5m. and Newport Beach) for a combined consideration of • Discussions for the remaining two sites in the US Motor £59.3m. Group are continuing. • This followed the initial disposal of Newport Beach Aston • On target for expected total gross proceeds from the Martin in 2018 for £3.1m. combined sale of US assets of c.£100m pre-tax. Pendragon North America Hornburg.com is a local brand that has been serving Southern California since 1947. Focussed on the sale and service of premium vehicles, Hornburg represents Jaguar and Land Rover across two locations. Our Chevrolet outlet in Puente Hills is our additional vehicle franchise in California, retailing new Chevrolet and pre-owned domestic vehicles and also offering service and repair. Jaguar 2 Land Rover 2 Chevrolet 1 Jaguar Santa Monica Land Rover Santa Monica Jaguar Los Angeles Land Rover Rover Los Angeles Chevrolet Puente Hills 15 Pendragon PLC Annual Report 2019LIFE AT PENDRAGON Our team members are what makes us great and what sets us apart from our competition. We believe we have the best RETAIN: The automotive industry is changing more quickly than it people in the business, and that’s not through luck. ever has and we recognise that there is a great demand for We adopt a simple people strategy focussed on three key We’ve addressed this by introducing more flexible working areas: patterns designed to allow greater work-life balance and meet flexibility and personal development from our team members. the needs of modern families. IDENTIFY I RETAIN I GROW IDENTIFY: It’s all about enhancing and empowering career experiences; offering great employment opportunities for external job seekers, whilst maximising career opportunities for all current team members. Our strategy of identifying the best talent starts with our current team members. We maximise career development opportunities and offer the chance to progress and diversify their careers with us. As a retailer operating in an ever-changing industry we have created new roles that appeal to a wider and more diverse market, making a real difference to our diversity agenda. We remain focussed on making our business and our sector appeal to future generations to continue the success of our business. Over the past few years we have utilised market-leading digital attraction solutions to embed our online recruitment strategy and have implemented a new recruitment systems and associated processes. Continually investing in technology enables us to build game changing experiences for us and the candidate. Additional apprenticeships in aftersales workshops, customer services and IT have been introduced in the past year along with the continuation of our ever-popular graduate and undergraduate schemes across Central Operations and our retailer network. In recent years our resourcing team have been shortlisted for In 2019 we furthered our commitment to Time to Change in the Best Online Candidate Experience Award, and won Best support of mental health through increased Mental Health first Use of Mobile in the OnRec Awards; but far more valuable to aider training and learning programmes for leaders, showing us is the fantastic feedback we get from candidates. our dedication to the mental wellbeing of our Team Members and customers alike. Team Members have participated in a number of events throughout the included Time to Talk day and Mental Health Week, where Team Members took the opportunity to break the stigma surrounding mental health issues by talking openly and fundraising for the charity Mind. Our MyReward benefits mobile application is available to all Team Members and can be used to access exclusive company benefits, from retail discounts and offers on shopping to finding support and advice on wellbeing. 16 Pendragon PLC Annual Report 2019GROW: Our Learning and Development team offer comprehensive and CELEBRATING SUCCESS Celebrating Team Members success, both individually and as tailored development programmes for every team member. part of a team, is an essential part of life at Pendragon and Training is offered as a mix of classroom, on the job and digital helps everyone feel valued. Daily peer-to-peer recognition modules designed to suit team member’s individual learning is encouraged through initiatives such as our Extra Mile styles. recognition programme and high performer incentive schemes run annually, with winners enjoying prizes such as short During 2019 the Learning and Development team worked European group trips. in partnership with Leaders to support our rapidly evolving business needs, including the development and implementation of a new and successful company-wide approach to managing performance, On-Track. The team also introduced a fully revised and updated Learning Management System “Pendragon Learn”, providing access to online learning from any device for the first time. 2019 also saw the launch of a number of new leadership development initiatives to support our talent pipelines including Aspiring Leaders for Team Members wanting to take the step up into a Leadership role, and STARS for aspiring Business Managers. These new programmes sat naturally alongside our flagship High Potential Talent programme which was expanded to all our motor retail brands ready for 2020. Customer satisfaction is key to our success and we have a renewed focus on developing a customer service culture, supported by sales, leadership and operational training through our online and classroom courses delivered at our Training Academy in Mansfield and regional locations across the country. Our development programmes are delivered by a dedicated team of trainers who work closely with external training COMMUNITY Our extensive footprint across the UK gives our dealerships a partners to further upskill our front-line teams. We also work unique ability to operate locally within communities but with closely with our manufacturer partners to provide training the backing of a large national organisation. We encourage on the latest automotive technologies, as well as with local our teams to be a responsible and valued part of their local educational authorities to give Team Members the support and community, supporting them however and whenever they can. recognition their hard work and commitment deserves. We support national and local charitable activities through the TRAINING DAYS COMPLETED 6,439 172,609 HOURS OF E LEARNING COMPLETED 42,793 TRAINING HOURS COMPLETED year through both fundraising and Team Member activities and have in the past 12 months furthered our commitment to support activities aligned to our diversity and inclusion agendas. CAR CAFÉ In 2019 we continued our popular Car Café community events over the summer months, spreading our love of cars further into communities across the UK. The events, which remained free to attend, hosted thousands of guests at locations including our Head Office in Nottingham and our dealerships up and down the country. The Car Café meets bought together some of the countries rarest, most desirable and much loved vehicles, both in person and via it’s increasing social media following. 17 Pendragon PLC Annual Report 2019INDUSTRY INSIGHT NEW CAR VEHICLE REGISTRATIONS FOR YEAR ENDED 31 DECEMBER ('000) UK Retail Registrations UK Fleet Registrations UK New Registrations Group Represented* UK Retail Registrations Group Represented* UK Fleet Registrations 2019 2018 Change % 1,018.3 1,052.2 1,292.8 1,314.9 -3.2% -1.7% 2,311.1 2,367.1 -2.4% 660.0 700.6 844.9 906.5 -5.8% -6.8% Group Represented* UK New Registrations 1,504.9 1,607.1 -6.4% Source: new car vehicle registrations data from the ‘Society of Motor Manufacturers and Traders’. *Group Represented is defined as national registrations for the franchised brands that the Group represents as a franchised dealer. USED CAR MARKET The used car market in FY19 in the UK was 7.6m units, a fall of AFTERSALES MARKET The main determinant of the aftersales market is the number 0.1% against 2018. This represents a market opportunity that of vehicles on the road, known as the ‘car parc’. The car parc is c.3.3 times the size by volume of the new car market. The in the UK has risen to 35.1m vehicles at FY19, a rise of 1.4% used market is more stable than the new vehicle sector, being on the prior year. The car parc can also be segmented into less affected by fluctuations in the UK economy and providing markets representing different age groups. At the end of a more reliable supply chain than the new market. HY19, around 20% of the car parc was represented by less than three-year-old cars, around 20% by four to six-year-old cars and 60% is greater than seven-year-old cars. The demand for servicing and repair activity is less affected than other sectors by economic conditions, as motor vehicles require regular maintenance and repair for safety, economy and performance reasons. Units 10.0m 9.0m 8.0m 7.0m 6.0m 5.0m 4.0m 3.0m 2.0m 1.0m 0 18 UK CAR PARC BY AGE OF VEHICLE 6 1 0 2 7 1 0 2 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 6 1 0 2 7 1 0 2 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 6 1 0 2 7 1 0 2 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 6 1 0 2 7 1 0 2 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 6 1 0 2 7 1 0 2 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 0-3 YEARS 4-6 YEARS 7-10 YEARS 11-15 YEARS >15 YEARS Source: GMAP (2016 to 2019) and Pendragon (2020 to 2021) Pendragon PLC Annual Report 2019 Units 3.0m 2.8m 2.6m 2.4m 2.2m 2.0m 1.8m 1.6m 1.4m 1.2m 1.0m 0.8m 0.6m 0.4m 0.2m 0 UK NEW CAR MARKET 2.63m 2.69m 2.54m 2.37m 2.31m 2.252m 2.270m 1.43m 1.49m 1.42m 1.32m 1.29m 1.21m 1.21m 1.12m 1.05m 1.02m 2015 2016 2017 2018 2019 2020 2021 PRIVATE FLEET/BUSINESS PENDRAGON FORECAST Source: SMMT (2015 to 2021) NEW CAR MARKET The UK new car market was 2.311m in FY19 which is a reduction transacted at a lower margin and consumes higher levels of working capital than retail, and represents 56% of the market of 2.4% over the prior year. The UK new car market is divided in the year. into two markets, retail and fleet. The retail market is the direct selling of vehicle units to individual customers and operates at The new retail market was down by 3.2% in FY19, and the new a higher margin than the fleet market. The retail market is the fleet market fell by 1.7% in the year. All new car market figures key market opportunity for the Group and represents 44% of are from the Society of Motor Manufacturers and Traders the total market in the year. The fleet market represents the (SMMT). sale of multiple vehicles to businesses, and is predominately Units 10.0m 8.0m 6.0m 4.0m 2.0m 0 UK USED CAR MARKET 7.4m 7.9m 7.8m 7.6m 7.7m 7.8m 7.9m 2015 2016 2017 2018 2019 2020 2021 Source: GMAP (2015 to 2019) and Pendragon (2020 to 2021) 19 Pendragon PLC Annual Report 2019OPERATIONAL AND FINANCIAL REVIEW 21 Business Review 30 Financial Review 34 Risk Overview & Management 20 Pendragon PLC Annual Report 2019BUSINESS REVIEW SEGMENTAL PERFORMANCE Units sold H1 2019 H2 2019 FY19 H1 2018 H2 2018 FY18 Change (%) LFL Change (%) USED UNITS Car Store Franchised UK Motor US Motor Total NEW UNITS Franchised UK Motor US Motor Gross Profit 17,474 76,105 1,452 10,392 59,102 1,046 27,866 135,207 2,498 12,944 78,334 1,630 15,499 65,475 1,658 28,443 143,809 -2.0% -6.0% 3,288 -24.0% 95,031 70,540 165,571 92,908 82,632 175,540 -5.7% 43,085 3,413 38,338 2,662 81,423 6,075 45,060 3,394 38,365 3,551 83,425 6,945 46,498 41,000 87,498 48,454 41,916 90.370 -2.4% -12.5% -3.2% 13.3% -2.1% -21.2% -1.1% -0.1% 1.7% 0.0% STRATEGY AND BUSINESS REVIEW The business is organised into 5 segments, analysed as follows: • Software – Licencing of Software as a Service to global • Car Store – Own brand proposition for the sale of used automotive business users vehicles in the U.K. • Leasing – Fleet and contract hire provider. Source of used • Franchised UK Motor – sale and servicing of vehicles in the vehicle supply U.K. (£m) REVENUE Car Store Franchised UK Motor Software Leasing US Motor Revenue GROSS PROFIT Car Store Franchised UK Motor Software Leasing US Motor • US Motor – Sale and servicing of vehicles in the U.S. H1 2019 H2 2019 FY19 H1 2018 H2 2018 FY18 170.8 1,999.2 8.9 42.8 233.9 99.5 1,731.6 9.4 21.6 188.4 270.3 146.7 3,730.8 2,048.3 18.3 64.4 422.3 8.4 40.8 232.0 153.8 1,725.6 8.5 16.5 246.4 300.5 3,773.9 16.9 57.3 478.4 2,455.6 2,050.5 4,506.1 2,476.2 2,150.8 4,627.0 5.3 182.2 7.9 8.4 31.4 5.6 189.4 8.5 8.7 25.3 10.9 371.6 16.4 17.1 56.7 10.3 227.1 7.4 8.2 30.1 14.3 205.0 7.5 10.6 30.0 24.6 432.1 14.9 18.8 60.1 Change (%) LFL Change (%) -10.0% -1.1% 8.3% 12.4% -11.7% -2.6% -55.7% -14.0% 10.1% -9.0% -5.7% 6.3% 3.8& 8.3% 12.4% 1.2% 3.8% -46.5% -10.4% 10.1% -9.0% -0.3% Gross Profit 235.2 237.5 472.7 283.1 267.4 550.5 -14.1% -10.1% UNDERLYING OPERATING PROFIT Car Store Franchised UK Motor Software Leasing US Motor Underlying Operating Profit Gross Margin (%) Operating Margin (%) (19.1) (7.7) 6.5 6.3 3.3 (10.7) 9.6% -0.4% (6.1) 20.7 6.9 6.5 9.4 37.4 11.6% 1.8% (25.2) 13.0 13.4 12.8 12.7 26.7 10.5% 0.6% (6.4) 31.8 5.6 6.1 5.6 42.7 11.4% 1.7% (5.5) 21.2 6.1 8.7 3.0 (11.9) 53.0 11.7 14.8 8.6 111.8% -75.5% 14.5% -13.5% 47.7% 166.7% -66.0% 14.5% -13.5% 93.9% 33.5 76.2 -65.0% -49.8% 12.4% 1.6% 11.9% 1.6% -1.4% -1.0% -1.6% -1.1% 21 Pendragon PLC Annual Report 2019BUSINESS REVIEW CAR STORE (£m) Revenue Gross Profit Gross margin rate Underlying Operating Expenses Underlying Operating (Loss) Underlying Operating Margin H1 2019 H2 2019 FY19 H1 2018 H2 2018 FY18 Change (%) -10.0% -55.7% -4.2% FY19** 270.3 10.9 4.0% 170.8 5.3 3.1% (24.4) 99.5 5.6 5.6% (11.7) 270.3 10.9 4.0% (36.1) 146.7 10.3 7.0% 153.8 14.3 9.3% 300.5 24.6 8.2% (16.7) (19.8) (36.5) -1.1% (37.3) (19.1) (6.1) (25.2) (6.4) (5.5) (11.9) 111.8% (26.4) (11.2)% (6.1)% (9.3)% (4.4)% (3.6)% (4.0)% -5.3% (9.8)% Total Revenue Change 16.4% -35.3% -10.0% Like-for-like Revenue Change Units Sold Number of Locations Average Selling Price* 27.5% -11.8% -6.3% 17,474 34 8,283 10,392 27,866 12 8,333 12 8,307 12,944 25 9,502 15,499 28,443 -2.0% 32 9,022 32 9,231 -10.0% *Trading dealerships only **Restated on a proforma IAS17 basis to exclude impact of IFRS16 for comparison purposes CAR STORE Operating Review During the first half of FY19, Car Store incurred underlying Improved stock management. The levels of stock at each site has been subject to improved controls to prevent over- stocking re-occurring. The stock profile of Car Store vehicles operating losses of £(19.1)m, of which £(6.1)m resulted from the was refined during the second half to limit the focus to the clearance of used car stock from excess levels that had built up prime retail market of cars up to seven years old, and reducing at the end of FY18, with the remainder driven by operational the exposure to older vehicles. performance constraints. As outlined in the Group’s interim results, a detailed strategic and market review of the Car Store Following the clearance in the over-age stock. improved business was completed during the first half of the year and the controls have been put in place to manage the ageing of stock decision was taken to close 22 of the 34 Car Stores and one of in order to mitigate losses on over-age cars. Used car gross the three vehicle preparation centres. The review concluded margins increased from 3.8% in H1 2019 to 4.6% in quarter three that the stores that were identified for closure did not have 2019 and to 7.4% in quarter four 2019. the right physical characteristics to succeed as a Car Store location, for example, converted ex-franchised dealerships Increased management focus – The reduction in the size of the that had limited external display space. The closures were estate, combined with the improvement of the suitability of the completed during September and October 2019. remaining sites has enabled the Car Store management team to better focus on driving performance. Since the closure programme was completed, and following a further review of the production capacity of Car Stores As a result of these actions, performance improved significantly main preparation centre in Coventry, an additional vehicle in the last quarter of FY19 such that underlying operating preparation centre has been closed, which will further improve losses for Car Store reduced from £(5.0)m in quarter three the underlying cost performance of the business. This additional 2019 to £(1.1)m in quarter four FY19, giving a £(6.1)m underlying reduction was facilitated by an increase in capacity at Coventry operating loss in the second half of the year. Whilst Car Store following an operational process review to improve both the is expected to remain loss making in FY20, management now speed, and quality of vehicle preparation. believe that this underlying loss will be limited to around £5m and believe there remains scope for further performance In addition to the store closure programme, a number of actions improvement in the remaining portfolio and will continue to to improve performance were taken during H2, including: focus on driving this during FY20. 22 Pendragon PLC Annual Report 2019Good progress has been made with the property management of the closed store estate. Of the total of 24 sites (22 stores Financial Review Revenue reduced by 10.0% in FY19 as a result of the 22 store and two preparation centres) closed, eight have been either closures (6.3% revenue increase on an LFL basis in FY19). sold, had the lease surrendered or been sublet as at the end of Units sold reduced by 2.0% in FY19 (13.3% units increase on a February 2020. The remaining sites will continue to be actively LFL basis in FY19). The average sales price per unit reducing marketed, with several of the remaining sites currently under from £9,231 to £8,307. offer. We remain confident that the strategic opportunity for a gross profit in FY19). This was primarily a consequence of the standalone used car proposition is significant. The strategic clearance of used car stock from excess levels and a fall in review completed during the first half (outlined in detail in the national used car values. The falling national used car values in FY19 interim results) confirmed there is an attractive used-car FY19 also adversely affected profitability. Gross profit reduced by 55.7% in FY19 (46.5% reduction in LFL market within the UK, where Car Store should be strategically advantaged against peers given its stock purchasing scale Operating costs decreased by 1.1% in FY19 (3.9% reduction on a and relationships, its scale purchasing of parts and high levels LFL basis in FY19). On a proforma IAS17 basis, operating costs of brand referrals and cross site traffic from the Group. Car were up 2.2% (2.8% on a LFL basis). Store will continue to focus on an omni-channel approach, positioning this business for a digitally-led future to serve early The underlying operating loss for Car Store in FY19 was adopters who want to complete the end-to-end customer £(25.2)m (FY18: £(11.9)m). Losses were reduced in line with journey online, showcase the product and drive digital traffic, expectations during the second Half of FY19 to total £6.1m. supported by physical locations of the optimal size and location for customers who want to view and test the product. 23 Pendragon PLC Annual Report 2019BUSINESS REVIEW FRANCHISED UK MOTOR (£m) REVENUE Used Aftersales New Revenue GROSS PROFIT Used Aftersales New Gross Profit Gross margin rate Underlying Operating Expenses Underlying Operating (Loss) / Profit Underlying Operating margin Total Revenue Change Like-for-like Revenue Change Used Units Sold New Units Sold Number of Locations Average Used Selling Price* Average New Selling Price* H1 2019 H2 2019 FY19 H1 2018 H2 2018 FY18 Change (%) FY19** 959.4 168.0 871.8 743.0 158.2 830.4 1,702.4 326.2 1,702.2 984.7 168.4 895.2 811.4 164.8 749.4 1,796.1 333.2 1,644.6 -5.2% -2.1% 3.5% 1,702.4 326.2 1,702.2 1,999.2 1,731.6 3,730.8 2,048.3 1,725.6 3,773.9 -1.1% 3,730.8 47.0 83.7 51.5 182.2 9.1% 58.2 77.8 53.4 189.4 10.9% 105.2 161.5 104.9 371.6 10.0% 68.3 94.3 64.5 227.1 11.1% 73.0 85.5 46.5 205.0 11.9% 141.3 179.8 111.0 432.1 11.4% -25.5% -10.2% -5.5% -14.0% -1.4% 105.2 161.5 104.9 371.6 10.0% (189.9) (168.7) (358.6) (195.3) (183.8) (379.1) -5.4% (369.3) (7.7) (0.4)% 20.7 1.2% 13.0 31.8 21.2 53.0 -75.5% 2.3 0.3% 1.6% 1.2% 1.4% -1.1% 0.1% -2.4% 0.3% -1.1% 2.6% 5.2% 3.8% 76,105 43,085 170 59,102 38,338 166 135,207 81,423 166 78,334 45,060 185 65,475 38,365 177 143,809 83,425 177 -6.0% -2.4% 11,449 11,467 11,457 11,378 11,458 11,415 0.4% 19,880 21,639 20,717 19,257 18,959 19,118 8.4% *Trading dealerships only **Restated on a proforma IAS17 basis to exclude impact of IFRS16 for comparison purposes FRANCHISED UK MOTOR Operating Review The Franchised UK Motor business operated from 161 franchise In the second half of FY19, a number of actions were taken to improve performance including: points and five used cars only retail points. The points represent Improved stock management. As with Car Store, improvements a range of volume and premium products offering both sales to the management of both the quantity and the ageing of stock and service functions. levels resulted in significantly improved used car performance. Used Gross margins increased by 2.9% from 4.9% in H119 to In the first half of 2019, Franchised UK Motor had underlying 7.8% in H219 as a result of the improved stock management. operating losses of £(7.7)m. A significant increase in used car stock at the end of FY18 without an associated increase Cost management. The actions to reduce headcount outlined in sales rates, led to excess used car stock during the first-half with the interim results were completed during the second half, of FY19. The subsequent programme to clear used car stock from excess levels, combined with a reduction in national used and combined with an increased focus on all costs resulted in comparable like for like operating expense reductions of 0.8% car values led to a c.£20m impact on the underlying operating (underlying down 5.6%) in H219 vs H218, compared with a 5.4% performance in the first-half. like for like increase in H119. 24 Pendragon PLC Annual Report 2019New car performance improvements. The division recorded a 16.8% increase in like for like new car revenue in H219, Financial Review Revenue decreased by 1.1% in FY19 (3.8% increase in LFL outperforming the overall market (SMMT data reports 1.1% revenue in FY19). In the first half of FY19 revenue fell by 2.4% H2 decline in new car registrations), which combined with an (2.6% LFL increase) and in the second half of FY19 revenue increase in gross margin of 50 basis points vs the first half increased by 0.3% (5.2% LFL increase). Aftersales revenue fell resulted in new gross profit increasing by £6.9m in H2 2019 by 2.1% (1.6% LFL increase), new revenue increased by 3.5% compared to last year. (8.3% LFL increase) and used revenue fell by 5.2% (flat LFL). The new revenue increase was despite UK new car registrations As a result of these actions, underlying performance improved falling by 2.4% in 2019, with national new retail car registrations significantly, in what remained a challenging market, during the falling by 3.2%. second half resulting in underlying operating profit for H219 of £20.7m (H218: £21.2m). Gross profit fell by 14.0% in FY19 (10.4% reduction in LFL gross profit in FY19) with the principal driver being a 25.5% reduction Overall for the year, the new car market was down 2.4%, with (22.0% LFL reduction) in the used gross profit, largely as a national new car registrations declining by 3.4% in the first half result of the exercise to reduce excess stock during the first of the year and declining by 1.1% in the second half of 2019. half of the year combined with a national fall in used car values The Group outperformed this market overall with like-for-like during the same period. Used car margin rates improved new unit volumes being flat vs FY18. During the second half significantly during the second half following the management of FY19 the business focussed on reducing the reliance on pre- actions set out above. registrations to achieve targets by achieving these targets through earlier sales to the end customer during each target- The reduction in aftersales gross profit of 10.2% (6.7% LFL led period. This resulted in a slight decline in the gross margin reduction) is principally due to the increased cost of service rate to 6.2% (FY18: 6.7%), although for the second half the rate technicians. Finally, new gross profit was down 5.5% (down was marginally ahead year on year at 6.4% (H218: 6.2%) as 1.2% LFL), despite the new revenue increase as a result of performance improved. lower new car margins to achieve natural registrations in a challenging market environment. A total of six Jaguar Land Rover sites were either disposed of or closed in FY19. In addition, five ‘satellite’ Vauxhall dealerships Underlying operating costs have decreased by 5.4% (0.7% were closed in January 2020 as a result of a manufacturer decrease on an LFL basis). On a proforma IAS17 basis, operating review of the estate right-size. The Group will continue to costs were down 2.6% (up 2.3% on a LFL basis). During the monitor the overall size of the portfolio. second half, on a proforma IAS17 comparable basis, operating costs were 0.8% down, compared to a 5.4% increase in the first Aftersales gross profit was impacted by a combination of half as a result of the ongoing focus on the level of underlying technician cost increases following a benchmarking exercise operating costs, with a reduction in headcount and reduced of industry rates of pay exercise in late 2018 and an increased advertising expenditure supporting the overall reductions. mix of lower margin warranty work. The Franchised Motor division will remain an important part profit in FY19 (FY18: £53.0m), with the previously reported first of the Group’s portfolio of operations. During FY20 work will half underlying operating losses of £7.7m (H118: £31.8m) offset continue to improve the performance of the business across by the improved performance of the second half underlying Used, New and aftersales with a number of initiatives in place. operating profit of £20.7m (H218: £21.2m). In total, the division delivered a £13.0m underlying operating There remains significant opportunity for improvement in both the underlying used car and aftersales performance through a series of self-help performance improvement measures, including used margin growth through improved pricing capabilities and process execution, driving aftersales performance through conversion of health checks and more efficient marketing. In addition, the Group will continue to focus on cost control and optimisation. 25 Pendragon PLC Annual Report 2019 BUSINESS REVIEW SOFTWARE Operating Review Pinewood, our software business provides Software as a Service (“SaaS”) in the UK and in a number of countries worldwide. Pinewood is strategically important to the Group and we believe it has potential for further expansion. Pinewood Our core UK business continues to grow with orders from new customers and existing customers extending their user subscriptions.  Financial Review As the Pinewood business expands its global footprint, revenue currently has SaaS users in 16 countries. has grown by 8.3% in FY19. Gross profit has increased by 10.1% as the strong gross margins have been maintained. Pinewood has secured orders for the Pinewood DMS from dealers in both Sweden & Norway and implementations Underlying operating profit was £13.4m, an increase of 14.5% commenced in the second half of 2019.  This is in addition to on FY18. further orders secured by our partners in South Africa, Asia Pacific and The Netherlands.  In total, over 1,000 net new users were added by Pinewood during FY19. SOFTWARE (£m) REVENUE Revenue Gross Profit Gross margin rate Underlying Operating Expenses Underlying Operating Profit Underlying Operating margin rate Revenue Change FY19 18.3 16.4 89.6% (3.0) 13.4 73.2% 8.3% FY18 16.9 14.9 88.2% (3.2) 11.7 69.2% Change (%) 8.3% 10.1% 1.4% -6.3% 14.5% 4.0% 26 Pendragon PLC Annual Report 2019 LEASING Operating Review Pendragon Vehicle Management (PVM), our Leasing business budget announcement detailing zero Benefit in Kind Tax for these vehicles. During FY20 the Group will continue to focus on driving incremental growth in the overall size of the fleet offers a complete range of fleet leasing and contract hire whilst maintaining a sensible approach to the assessment of solutions. Our customers are varied in both fleet size and residual values. business sector. The financing for the leasing business is provided by third parties leading to a high return on capital. The British Leasing and Rental Association reported that Financial Review Revenue has grown by 12.4% in FY19, but there has been a the business contract hire car fleet sector fell 9% whilst light 9.0% decrease in gross profit from a strong comparative, commercial vehicles increased by 2.8% compared to prior which included the benefit of the previously disclosed release year. PVM grew its fleet size (number of cars) by 5.5% during of the provision in respect of loss-making disposals of £2.8m FY19. The overall reduction in the market for new contracts in FY18. Underlying operating costs were up 7.5% to £4.3m put pressure on margins, and regardless of these market (FY18: £4.0m). conditions PVM continued to adopt a responsible approach to future residual values. PVM’s fleet is starting to experience As a result, underlying operating profit decreased by 13.5% to a reduction in the levels of take up of diesel product and £12.8m (FY18: £14.8m). increased uptake in electric vehicles particularly post the June LEASING (£m) Underlying REVENUE Revenue Gross Profit Gross margin rate Underlying Operating Expenses Underlying Operating Profit Underlying Operating margin rate Revenue Change FY19 64.4 17.1 26.6% (4.3) 12.8 19.9% 12.4% FY18 57.3 18.8 32.8% (4.0) 14.8 25.8% Change (%) 12.4% -9.0% -6.2% 7.5% -13.5% -5.9% 27 Pendragon PLC Annual Report 2019BUSINESS REVIEW US MOTOR Operating Review The disposal of the US Motor Group is ongoing with total classification is that these non-current assets are not subject to a depreciation charge during the accounting period, an impairment test being undertaken instead.  As a result, there proceeds expected to be c.£100m before tax. In FY18, the has been a £2.7m adjustment to the reported performance of sale of the Newport Beach Aston Martin business for £3.1m the business as a result of the application of IFRS16 by virtue was completed. During the second half of FY19 the previously of the lease expense for 2019 comprising a £0.8m interest announced transactions at sites in Mission Viejo and Newport expense and no depreciation charge, rather than a £3.5m rent Beach, California, were completed for a combined consideration expense. of £59.3m. Post the year end, the previously announced transaction at Puente Hills, California, also completed on the 10 February 2020 for consideration of £16.5m. Financial Review Revenue is down by 11.7% in the year (1.2% LFL increase) with new falling 9.3% (+7.3% LFL), aftersales falling 5.8% (+2.0% LFL) The process to complete the disposals of the two remaining and used revenue falling by 22.7% (-21.5% LFL). Gross profit Jaguar Land Rover locations in Los Angeles (Beverley Hills) decreased by 5.7% (flat LFL), with aftersales gross profit down and Santa Monica are actively ongoing. 7.0% (up 1.6% LFL), used gross profit up 5.6% (down 3.3% LFL) Impact of IFRS 16 Leases in the US Motor Group are now subject to the application and new gross profit down 6.6% (down 0.6% LFL). Underlying operating costs decreased by 14.6% (down 11.2% LFL). of IFRS16, which replaces the rent expense with depreciation Underlying operating profit was up by £4.1m to £12.7m (2018 : and interest charges.  In the case of the US Motor Group, all £8.6m). Adjusting for the impact of the transition to IFRS 16 as assets are classified as ‘held for sale’ which will include the outlined above, underlying operating profit was up £1.4m on a lease assets capitalised under IFRS 16.  A consequence of this comparable basis to £10.0m. 28 Pendragon PLC Annual Report 2019US MOTOR (£m) REVENUE Used Aftersales New Revenue GROSS PROFIT Used Aftersales New Gross Profit Gross margin rate Underlying Operating Expenses Underlying Operating Profit Underlying Operating margin Total Revenue Change Like-for-like Revenue Change Used Units Sold New Units Sold Number of Locations Average Used Selling Price* Average New Selling Price* H1 2019 H2 2019 FY19 H1 2018 H2 2018 FY18 43.1 22.5 168.3 233.9 3.5 11.7 16.2 31.4 13.4% (28.1) 32.6 18.2 137.6 188.4 2.2 9.4 13.7 25.3 13.4% (15.9) 75.7 40.7 305.9 422.3 5.7 21.1 29.9 56.7 47.3 21.6 163.1 50.6 21.6 174.2 97.9 43.2 337.3 232.0 246.4 478.4 -11.7% 2.9 11.5 15.7 30.1 2.5 11.2 16.3 30.0 12.2% 13.4% 13.0% 5.4 22.7 32.0 60.1 12.6% (51.5) (44.0) (24.5) (27.0) -14.6% (47.5) Change (%) -22.7% -5.8% -9.3% 5.6% -7.0% -6.6% -5.7% 0.8% FY19** 75.7 40.7 305.9 422.3 5.7 21.1 29.9 56.7 13.4% 3.3 9.4 12.7 5.6 3.0 8.6 47.7% 9.2 1.4% 5.0% 3.0% 2.4% 1.2% 1.8% 1.2% 2.2% 0.8% -23.5% -11.7% 8.9% 1,452 3,413 9 -6.0% 1,046 2,662 5 1.2% 2,498 6,075 5 1,630 3,394 10 1,658 3,551 9 3,288 6,945 9 -24.0% -12.5% £19,744 £20,925 £20,293 £19,978 £20,376 £20,183 0.5% £45,209 £47,133 £46,119 £42,781 £44,634 £43,727 5.5% *Trading dealerships only **Restated on a proforma IAS17 basis to exclude impact of IFRS16 for comparison purposes 29 Pendragon PLC Annual Report 2019FINANCIAL REVIEW NON-UNDERLYING ITEMS Non-underlying income and expenses are items that are not incurred in the normal course of business and are sufficiently market conditions on future cash flows and the current market capitalisation of the Group. significant and/or irregular to impact the underlying trends in Pension income of £3.0m represents a £4.8m credit relating the business. During the year the Group has recognised a net to past service costs in respect of pension obligations and an charge of £97.7m of pre-tax non-underlying items against a interest charge on pension scheme obligations of £1.8m for charge of £92.2m in FY18. These include non-cash impairments, FY19. The Group recorded gains on the sale of properties and principally of goodwill and non-current assets amounting to businesses in the period of £33.3m. This included gains on £130.2m. There is £102.4m impairment of goodwill, £23.3m disposal of businesses of £32.1m and gains on the sale of surplus impairment of property assets primarily within Car Store, property during the year of £1.2m. There were termination and £2.6m impairment of property, plant and equipment and £1.9m severance costs of £5.5m in FY19, partially offset by a credit of impairment of assets held for sale. These have been necessary £3.5m on settlement of historic VAT issues in respect of VAT following assessments of the carrying value of those assets reclaims and associated interest. which have been calculated by taking into account trading, Non-underlying Items Settlement of historic VAT issues H1 2019 £m 3.5 H2 2019 £m - 2019 £m 3.5 2018 £m - Impairment of goodwill, property, plant and equipment and assets held for sale (102.5) (27.7) (130.2) (95.8) Termination and severance costs Gains on the sale of businesses and property Car Store closure costs Pension income / (costs) Total non-underlying items before tax Non-underlying items in tax Total non-underlying items after tax (1.4) (1.1) - (0.9) (102.4) (4.1) 34.4 (1.8) 3.9 4.7 (5.5) 33.3 (1.8) 3.0 - 15.7 - (12.1) (97.7) (92.2) (0.3) (3.0) (3.3) 3.0 (102.7) 1.7 (101.0) (89.2) CAPITAL ALLOCATION Net debt* has reduced by £6.4m from £126.1m at 31 December 2018 to £119.7m at 31 December 2019. The net debt to The final two disposals are expected to complete during FY20 with interest in both remaining sites. underlying EBITDA ratio* was 1.5x for the rolling 12 months 6 Jaguar Land Rover franchise sites were either disposed of to FY19. The net debt to underlying EBITDA ratio has moved or closed in FY19. In addition, during January 2020 The Group from 0.9x at FY18 largely due to the trading impact of the announced it would be closing five Vauxhall franchise points. stock clearance as detailed in the operating reviews. All of these are satellite locations and are not expected to materially impact on Group underlying profit. The Group expects gross proceeds from the disposal of the entire US business of around £100m before tax. Proceeds of PROPERTY AND INVESTMENT, £3.1m had already been generated on the disposal of a single Aston Martin US business in July 2018, proceeds of £28.7m ACQUISITIONS AND DISPOSALS Our property portfolio is a key strength for our business. At were generated from the disposal of the Mission Viejo Jaguar FY19, the Group had £238.7m (£396.5m including IFRS16 right Land Rover business in July 2019 and proceeds of £30.6m of use assets) of land and property assets (FY18 : £240.5m). were generated from the disposal of the Newport Beach There was a small reduction in this value as our disposals were Jaguar Land Rover business in December 2019. In February matched by new property acquisitions and developments. 2020, the Puente Hills Chevrolet business was disposed of for Property assets classified as held for sale were £71.8m (FY18 £16.5m. In total to date, total disposal proceeds of £78.8m : £32.8m). have been received. 30 Pendragon PLC Annual Report 2019DIVIDEND The Group is not proposing a final dividend for 2019. extended by one year to 31 March 2022 and the facility size was reduced from £240m to £175, in line with the Group’s PENSIONS The net liability for defined benefit pension scheme obligations has decreased from £68.3m at FY18 to £59.0m at FY19. Movements in the respective assets and liabilities of the requirements going forward. The Group has agreed to pay an increased margin of 0.50%. ADOPTION OF IFRS 16 IFRS 16 Leasing is a new accounting standard that was effective Pension Scheme largely offset each other, reflecting the from 1 January 2019. The new standard replaces existing leases hedging in place. The Group contributed £7.6m to the Pension guidance, principally IAS 17 Leases. IFRS 16 introduces a single, Scheme in the period following the Group commitment to pay on-balance sheet leases accounting model for lessees. A lessee annual contributions of £7.0m from 1 January 2017, increasing recognises a right-of-use (ROU) asset representing its right to by 2.25% thereafter until July 2022. use the underlying asset and a lease liability representing its Following the full actuarial valuation of the company’s pension using the modified retrospective approach. Therefore, the scheme at 31 December 2018 showing a deficit of [£117m], the cumulative effect of adopting IFRS 16 has been recognised as company and trustees agreed to raise its annual contribution an adjustment to the opening balance of retained earnings at 1 to the pension scheme to £12.5 million from 1 January 2020 January 2019, with no restatement of comparative information. from £7.6m of contributions in 2019. Further details of this can be found in note 3. The impact of obligation to make lease payments. IFRS 16 has been applied adopting IFRS 16 on the 2019 consolidated income statement REVOLVING CREDIT FACILITY (RCF) In March 2020 the maturity date of the Group’s RCF was can be seen below: CONSOLIDATED INCOME STATEMENT Year ended 31 December Revenue Cost of sales Gross profit Underlying operating expenses Underlying operating (loss) profit Underlying net finance costs Underlying (loss) / profit before taxation Analysed as: Non-underlying (loss) / profit before taxation Total income tax credit / (expense) Total (loss) / profit for the period Earnings per share Basic earnings per share Diluted earnings per share Non GAAP Measure Underlying basic earnings per share Underlying diluted earnings per share 2019 £m 4,506.1 (4,033.4) 472.7 (446.0) 26.7 (43.1) (16.4) (97.7) (3.3) (117.4) (8.4)p (8.4)p (1.2)p (1.2)p 2018 £m 4,627.0 (4,076.5) 550.5 (474.3) 76.2 (28.4) 47.8 (92.2) (6.1) (50.5) (3.6)p (3.6)p 2.8p 2.8p 20191 £m 4,506.1 (4,033.4) 472.7 (461.4) 11.3 (29.8) (18.5) 31 Pendragon PLC Annual Report 2019FINANCIAL REVIEW BALANCE SHEET AND CASH FLOW The following table summarises the cash flows and net debt of the Group for the twelve-month periods ended 31 December 2019 and 31 December 2018 as follows: SUMMARY CASHFLOW AND NET DEBT (£m) Underlying Operating Profit Before Other Income Depreciation and Amortisation Share Based Payments Non-underlying Items Working Capital and Contract Hire Vehicle Movements* Underlying Operating Cash Flow Tax Received / (Paid) Underlying Net Interest Paid Net Cash Flow From Operating Activities Capital Expenditure – Car Store Capital Expenditure – Franchise Capital Expenditure – Underlying Replacement Capital Expenditure – Property Business and Property Disposals Net Capital Expenditure Income/(Expenditure) Dividends Share Buybacks Lease Payments & Receipts Other Decrease In Net Debt Opening Net Debt1 Closing Net Debt 2019 26.7 44.7 0.6 (5.7) (2.2) 64.1 (3.3) (26.8) 34.0 (3.8) (20.2) (9.3) (16.1) 72.4 23.0 (9.7) (0.5) (39.9) (0.5) 6.4 126.1 119.7 2018 76.2 27.4 0.7 - (16.2) 88.1 (10.9) (24.8) 52.4 (6.8) (12.6) (30.6) (6.5) 30.2 (26.3) (22.5) (6.7) - (0.4) (3.5) 122.6 126.1 20192 11.3 25.5 0.6 (7.3) (5.9) 24.2 (3.3) (26.8) (5.9) (3.8) (20.2) (9.3) (16.1) 72.4 23.0 (9.7) (0.5) - (0.5) 6.4 126.1 119.7 1 On adoption of IFRS 16 on 1 January 2019 the Group has opted to re-define it’s net debt metric to exclude finance lease liabilities. This has resulted in the net debt at 31 December 2018 being adjusted by £1.5m, the finance lease liability at those dates. Net debt has been adjusted from £127.6m to £126.1m respectively at 31 December 2018. 2 Restated to exclude impact of IFRS 16 for comparison purposes. RECONCILIATION TO CONSOLIDATED CASH FLOW STATEMENT Net Cash Flow From Operating Activities Net cash from/(used) in investing activities Financing cash flows as included above Dividend Net finance lease payments Share buyback Shares acquired EBT Financing cash flows not included above relating to loans Repayment of loans Proceeds from issue of loans Net cash outflow from financing activities Net increase/(decrease) in cash and cash equivalents per consolidated cash flow statement Repayment of / proceeds from loans Non-cash movements (other above) Movement in net debt as above 2 Restated to exclude impact of IFRS 16 for comparison purposes. 32 2019 34.0 23.0 (9.7) (39.9) (0.5) - (5.0) 5.4 (49.7) 7.3 (0.4) (0.5) 6.4 2018 52.4 (26.3) (22.5) - (6.7) 0.1 (10.0) 7.1 (32.0) (5.9) 2.9 (0.5) (3.5) 20192 (5.9) 23.0 (9.7) - (0.5) - (5.0) 5.4 (9.8) 7.3 (0.4) (0.5) 6.4 Pendragon PLC Annual Report 2019The underlying operating cash flow was 64.1m in FY19 interest expense of £13.3m is not a component of the operating compared to £88.1m in FY18. This reduction was largely due result and a £19.2m depreciation charge, included in the to the impact of the clearance of used car stock from excess underlying operating loss, has been added back.  Under IFRS levels. 16 the actual net cash paid and received of £39.9m in respect of lease payments and receipts is now presented as a financing Non-underlying cash items of £5.7m comprised of redundancy cash flow. costs of £5.5m in relation to three former Executive Directors, and other senior executive team. In addition, there was a cash outflow of £1.8m in relation to the Car Store closure programme BALANCE SHEET SUMMARY The following table summarises the balance sheet of the Group and a cash inflow of £1.6m in relation to the settlement of at 31 December 2019 and 31 December 2018. There is also a historic VAT issues. restated 2019 balance sheet that illustrates the balance sheet position presented on a proforma IAS 17 basis, excluding the The net capital expenditure inflow of £23.0m (FY18: outflow of impact of IFRS 16 for comparison purposes. £26.3m) was principally due to the £72.4m cash inflow from business and property disposals, which more than offset the Net assets have reduced from £345.6 million at FY18 to £168.9 outgoing capital expenditure in the year. million. The reduction in goodwill and intangibles is principally a result of a goodwill impairment charge of £102.4m recorded Dividends of £9.7m (FY18: £22.5m) reflects the payment of the in the period. The Group has adopted IFRS 16 Leases from 1 FY18 final dividend. No interim dividend was paid for FY19. The January 2019. IFRS 16 introduces a single, on balance model adoption of IFRS 16 on 1 January 2019 has resulted in changes for leases. As a result, the Group as a lessee has recognised a to the way the cash flows in respect of lease rentals paid and right or use asset of £159.2m representing its right to use the received are reported, as, in adopting the modified retrospective underlying asset and a lease liability representing its obligation method of transition the Group have not restated comparative to make lease payments. This lease liability of £240.0m is the information in the cash flow statement. In the prior period the primary reason for the increase in creditors, partially offset by net rental expense was presented in the income statement as a reduction of £89.2m largely as a result of the lower level of an operating expense and subsequently an operating cash flow stocking finance following the reduction in used car stock levels. but for FY19 the equivalent charge into the income statement Stock has been reduced by £120.6m versus FY18, principally as has instead been accounted for as a depreciation charge and a result of the stock reduction exercise previously described. net interest expense.  In terms of cash flow reporting, the net BALANCE SHEET Property Plant & Equipment Goodwill & Intangibles Right of Use Assets Stock Debtors Net Assets Held for Resale Creditors Net Debt2 Shareholders Funds 2019 237.8 231.3 172.3 159.2 839.0 129.9 59.6 2018 240.5 233.4 274.1 - 959.6 114.8 49.0 20191 241.4 231.3 172.3 - 839.0 116.6 56.5 (1,540.5) (1,389.7) (1,300.5) (119.7) 168.9 (126.1) 345.6 (119.7) 236.9 1 Restated to exclude impact of IFRS 16 for comparison purposes 2 On adoption of IFRS 16 on 1 January 2019 the Group has decided to re-define its net debt metric to exclude finance lease liabilities. This has resulted in the net debt at 31 December 2018 being adjusted by £1.5m, the finance lease liability at those dates. Net debt has been adjusted from £127.6m to £126.1m respectively at 31 December 2018. 33 Pendragon PLC Annual Report 2019RISK OVERVIEW & MANAGEMENT POTENTIAL IMPACT OF COVID-19 The Group is closely monitoring the evolution of COVID-19 We have modelled the impact of a severe reduction in vehicle sales over a sustained period on our financial covenants and and to date, we have seen minimal impact on our business. bank facility limits and we are comfortable that we are well However, it is hard to predict with any certainty what may positioned in this regard, with mitigants available in the more happen. severe scenarios where headroom becomes more limited. However, we have taken some additional protective measures Pendragon’s key priority is the health and wellbeing of our such as deferring commitments in our capital expenditure colleagues, customers and business partners, while we programme, increasing the flexibility we have in our marketing maintain our high standards of service to customers. We have spend and closely monitoring inventory levels. clear business continuity plans in place to deal with a range of scenarios and we have taken appropriate preventative steps, such as minimising all non-essential business travel, PRINCIPAL RISKS Recognising that all businesses entail elements of risk, the and implementing contingency plans for alternative working Board maintains a policy of continuous identification and locations. review of risks which may cause our actual future Group results to differ materially from expected results. The Board Our new vehicles are predominantly sourced from the EU and has carried out a robust assessment of the Group’s emerging UK and recently, some manufacturers have announced short and principal risks. The table on pages 36 to 41 is an overview term shut downs to their production facilities. However, we of the principal risks faced by the Group, with corresponding understand that the vehicle manufacturers have inventory controls and mitigating factors. The specified risks are not buffers of several months. Therefore, we currently anticipate intended to represent an exhaustive list of all potential risks and our supply of new vehicles should not be significantly disrupted uncertainties. A thorough risk review , involving company-wide before the Autumn of 2020. participation, has been completed during 2019. A small number of risks and mitigation disclosures have been updated as a As the virus spreads across the UK then this will likely influence result, including those relating to latest external factors such as the willingness of customers to visit our dealerships, which the UK’s exit from the EU and Government announcements in could affect our financial performance. Most of our new car respect of future planned climate change action on diesel, petrol sales and a substantial proportion of used car sales are made and hybrid vehicles. Two existing risks have been segmented through a Purchase Car Plan or similar arrangement which into more detailed disclosures increasing the numbered risks provides an incentive to customers to change their vehicle at by two. The developing situation in relation to the outbreak the expiry of the arrangement. Consumers can purchase both and spread of coronavirus (COVID-19) is constantly under the new and used cars with associated finance over the telephone review as part of our risk management. Our immediate focus or internet without visiting dealerships. We also offer vehicle is the health, safety and well being of our team members and delivery to the customer’s chosen destination. This provides we have convened our crisis management team to co-ordinate underpinning for vehicle sales, although if the situation worsens, our response and introduce new measures such as remote we anticipate there may be some level of deferral. We also working. The risk factors outlined below should be considered note that servicing and repair work is generally undertaken in in conjunction with the Group’s system for managing risk, compliance with manufacturer warranty, extended warranty described below and in the Corporate Governance Report on or service plan arrangements that customers will continue to page 47. observe. 34 Pendragon PLC Annual Report 2019RISK MANAGEMENT AND INTERNAL CONTROLS Accountability The Board is responsible for risk management and internal No material changes have occurred in 2019 which have or are likely to have a material effect on the Group’s internal controls over financial reporting. Controls are designed to control within the context of achieving the Group’s objectives. ensure that the Group’s financial reporting presents a true and The system of control the Board has established covers both fair reflection of the Group’s financial position. The Board has the Group’s financial reporting and the mitigation of business understood that there are certain internal control deficiencies and operational risks. The system is designed to manage, rather which it intends to remediate during 2020. than eliminate, the risk of failure to achieve business objectives, and can provide only reasonable and not absolute assurance against material misstatement or loss. Operational and Other Risks Operational management is charged by the Board with responsibility for identifying and evaluating risks facing the Financial Reporting The Executive Directors oversee the preparation of the Group’s Group’s businesses on a day-to-day basis and is supported by the Risk Control Group (RCG), a Committee formed of the Chief annual corporate plan; the Board reviews and approves it and Operating Officer, Chief Finance Officer, Company Secretary, monitors actual performance against it on a monthly basis. Group Head of Internal Audit and, by invitation, other members Where appropriate, during the year, revised forecasts are of the Group’s senior operational and financial management. prepared and presented for Board review and approval. To ensure that information to be consolidated into the Group’s We maintain risk registers and risks are reviewed as a top down financial statements is in compliance with relevant accounting and bottom up activity at the Group, Division and Functional policies, internal reporting data is comprehensively reviewed. level. The content of the risk registers are considered Reviews of the appropriateness of Group accounting policies and discussed regularly through discussion with senior take place at least twice a year, under the scrutiny of the Audit management and review within our governance committees. Committee, which considers reports on this from the Group’s The approach to risk control and the work of the RCG are Auditor, the application of IFRS and the reliability of the described on page 47. Group’s system of control of financial information. B O A R D D N A G N I T N E M S S E S K R I S T I F I C ID E N A T G AT E R T S R O S A T I G N N O I M O G K N S I R O S A I O N Y A N D BUSINESS O RIS K S E S S M E N T B J E C T I V E S STRATEGIC RISKS FINANCIAL RISKS OPERATIONAL RISKS COMPLIANCE RISKS P L A N R I S K M I T NIN I G A G TIO N CONTROL ACTIONS IMPLEMENT I B U S N E S S A R E A S L E A D E R S & 35 Pendragon PLC Annual Report 2019 RISK OVERVIEW & MANAGEMENT NO. PRINCIPAL RISKS IMPACT BEFORE MITIGATION MITIGATION STRATEGY AND BUSINESS RELATIONSHIPS 1 Strategy: Failure to adopt the right strategy, or Failure of our adopted strategy to deliver the desired outcomes, or Failure to implement our strategy effectively We miss our profit growth and/ or debt management target, alienate key stakeholders and are unable to invest adequately in our business We do not meet our customers’ needs by not achieving a coherent, connected and engaging customer journey, leading to us to be less competitive and losing market share • Our strategy is informed by significant research and market data • We communicate effectively our adopted strategy to our stakeholders • We invest appropriately in the technological, physical and human resources to deliver our strategy, closely monitor performance against our objectives, and adjust our actions to meet our strategic goals • Our sophisticated management information identifies threats to the success of our strategy both during the planning and implementation phases, and informs mitigating actions, both directionally and operationally • We ensure that we monitor our manufacturer and third party customer service measures and take action in the event of low scores • We focus strongly on efficient use of working capital through embedded disciplines, especially in relation to vehicle inventory • We review capital expenditure plans to ensure our ROI objectives are achievable 2 Manufacturer Relationships: Dependence on vehicle manufacturers for the success of our business Failure to maintain sustainable, mutually rewarding relationships with our manufacturers Failure of, or weaknesses in, our vehicle manufacturers’ financial condition, reputation, marketing, production and distribution capabilities (including those arising from the ongoing effect of coronovirus COVID-19) and lack of alignment with manufacturers’ remuneration systems for dealers impairs our investments and prevents us achieving our profit goals Failure to maintain good relations with our franchisors either through day to day activities or our strategic decisions impairs our ability to generate good quality earnings Manufacturers change their business model towards direct sales to customers • Our diverse franchise representation avoids over reliance on any single manufacturer • Our close contact with our vehicle manufacturers seeks to ensure our respective goals and strategic decisions are communicated, understood and aligned, to deliver mutually acceptable performance • Our appropriately targeted investment in franchise assets and our performance maintains our reputation as a quality representative for our brand manufacturers • Our investment in marketing initiatives and our online presence supplement and enhance our market presence and offering over and above manufacturers’ marketing efforts • Our diverse franchise representation ensures new vehicle inventory is supplied from a wide variety of sources • Our model of developing and maintaining revenues from used vehicles, aftersales, and our software and leasing segments reduces our overall reliance on new vehicle franchise 36 Pendragon PLC Annual Report 2019NO. PRINCIPAL RISKS IMPACT BEFORE MITIGATION MITIGATION STRATEGY AND BUSINESS RELATIONSHIPS 3 Competition: Failure to meet competitive challenges to our business model or secton Customers migrate to alternative providers Intermediary companies establish a barrier between us and our customers • Our detailed market and sector monitoring systems assist early identification and effective response to any competitive or intermediary threats • Our scale, expertise and technological capabilities enable rapid and flexible response to market opportunities • Our well-developed customer relationship New forms of competition would have less barriers to their entering the market management capabilities and online customer offer of fulfilment tools aim to drive industry-leading service and attract customer loyalty Revenues and profits could decrease owing to competitor action • We continually seek to develop new methods of customer interaction, particularly online. This enables the business to anticipate changing customer needs TRADE DEALS AND OTHER OUTCOMES ARISING FROM THE UK’S EXIT FROM THE EUROPEAN UNION 4 Dependence on the UK Government trade and other negotiations with the EU. Failure to secure arrangements which maintain the status quo or gain more favourable terms could adversely affect our supply base, and our ability to service our customers This could lead to an adverse effect on our business, financial results and operations as a result of: • • Changes in regulation Consumer confidence and economic activity falls • New vehicle prices rise as a result of exchange rate changes Fewer purchasers of vehicles Lower demand for vehicle servicing • • • Availability and cost base of • We maintain the right level of legal expertise to interpret, assess and respond to proposed changes in regulation, enabling us to adapt to our model and processes to comply with changes in a seamless manner • We constantly monitor used vehicle market trends and adjust our inventory, pricing and procurement accordingly • Our diverse franchise representation ensures new vehicle inventory is supplied from a wide variety of sources • Our strategy to develop and maintain revenues from used vehicles, aftersales and our software and legal segments reduces our overall reliance on new vehicle franchises appropriate team member resources to run our business effectivel • We constantly monitor and evaluate alternative recruitment, training and apprenticeship methods to fulfil our employment needs 37 Pendragon PLC Annual Report 2019RISK OVERVIEW & MANAGEMENT NO. PRINCIPAL RISKS IMPACT BEFORE MITIGATION MITIGATION ENVIRONMENTAL 5 Progression towards greener technologies, autonomous driving, and/ or pay-per-use, rather than owning a vehicle UK taxes change to penalise road use, fuel type, vehicle use and to increase VAT Failure to adapt to the changes arising as a result of the Government’s future ban on sale of petrol, diesel and hybrid powered vehicles Customers choose greener vehicles we cannot supply Overall vehicle parc reduces Vehicle purchase and use declines, adversely affecting revenue opportunities Lower demand for petrol, diesel and hybrid vehicles and potential impact on vehicle residual values Government policy and consumer sentiment in respect of petrol, diesel and/or hybrid vehicles impacts the sale of one or all types of these vehicle • We represent vehicle brands which are responding effectively to the greener technology agenda • We identify trends in demand through our sophisticated management information and analysis tools and tailor our model accordingly • We monitor sales by fuel type to maintain an appropriate inventory profile • Our breadth of relationships with asset finance companies and geographic footprint help us to provide innovative mobility solutions for private and business vehicle users, whatever their needs • We maintain the right level of tax expertise to interpret and assess proposed changes, respond with well-informed advice and effectively assist our strategic planning and the design and implementation of appropriate mitigating action REGULATORY & COMPLIANCE Significant litigation 6 Failure to comply with legal and other requirements and respond to changes which could have a material effect on our business model, such as our ability to provide Finance & Insurance products to our customers, or adverse changes in trade tariffs This could lead to fines, criminal penalties, litigation and an adverse impact on our reputation, financial results, and/ or our ability to do business. We may be restricted from continuing certain business activities, such as those regulated by the FCA Resources are diverted to address urgent remediation, as well as taking proceedings or defending legal or regulatory action • We maintain the right level of legal expertise to interpret, assess and respond to proposed changes in regulation, enabling us to adapt our model and processes to comply with changes in a seamless manner • Our culture focuses strongly on good compliance delivering good performance • We operate a Finance & Insurance Services Regulatory Board with a supporting governance framework and continually invest in systems and processes to minimise the risk of non-compliance to FCA regulations • Our team of compliance specialists design, and we communicate effectively, processes that support our businesses to minimise the risk of non- compliance • In the case of new vehicles, our diverse The ability to obtain appropriate inventory is impeded and/or purchase costs rise representation mitigates the risk and for parts we maintain alternative sources of supply where possible 38 Pendragon PLC Annual Report 2019NO. PRINCIPAL RISKS IMPACT BEFORE MITIGATION MITIGATION TECHNOLOGY AND INFORMATION SYSTEMS 7 8 Failure of our IT infrastructure or key systems, including failure to maintain and build resilience to events such as cyber threat This could lead to an inability to operate and communicate effectively, loss of information and competitive advantage and potential regulator action resulting in fines and penalties • We adopt and regularly update robust business continuity measures, including within our dealer management systems • Our business monitors cyber security threats and has systems and processes in place to deal with incidents • We have cyber liability insurance in place Failure to invest in new technologies and maintain a cohesive and comprehensive technological capability DATA SECURITY AND DATA PRIVACY Failure to comply with legal or regulatory requirements relating to data security or data privacy in the course of our business activities This could lead to data loss or misuse and have a significant effect on our reputation. Fines and criminal penalties could be imposed and disruption to business operations and our ability to serve customers. Financial results could be adversely affected. • We regularly review our data protection policies, controls, team member training and the use of third party systems • Our business monitors cyber security threats and has systems and processes in place to deal with incidents • We have cyber liability insurance in place • We have appointed a Chief Information Officer who is reviewing and updating our cyber security measures • We assess actual outturns of previous estimates to test the robustness of adopted assumptions, and adjust the estimating approach accordingly • We support estimates with reliable external research where available RELIANCE ON ESTIMATES 9 Failure to maintain reliable systems and methods for provision of financial estimates Group’s financial statements will be wrong, affecting vehicle values where we have committed to purchase at a pre-set price, and the discounted cashflows used to test impairment of goodwill, expected profit or loss on sale of our inventory items and the retirement benefit obligation Reputational damage and inability to raise funding for the Group’s business Revenue and profits all suffer damage 39 Pendragon PLC Annual Report 2019RISK OVERVIEW & MANAGEMENT NO. PRINCIPAL RISKS IMPACT BEFORE MITIGATION MITIGATION PEOPLE 10 Failure to attract, motivate, develop and retain the required capability and promote an appropriate culture This could lead to instability, poor communication and decision making and an inability to deliver our strategy and achieve our business objectives. We could lose market share and adversely affect our customers owing to poor service • We invest in online means of attraction and recruitment, targeting the right quality candidates • We set clear competencies and career goals • We have a clear performance management framework in place, linked to competencies and career pathways • We continually review and adapt for the market conditions our employment terms, salaries and performance related pay elements at all levels • We adopt and renew responsive succession plans for all key roles. Within our Motor Division we complete a Talent Review twice yearly • We leverage our scale to afford training opportunities and progression within the Group MICRO-ECONOMIC, POLITICAL AND ENVIRONMENTAL 11 European economic instability and/or UK or Global economic and business conditions deteriorate UK Governmental spending constraints Fewer purchasers of vehicles Vehicle manufacturers oversupply into UK market or alterations to supply terms, damages margins and vehicle values Lower demand for vehicle servicing • Our business model derives revenues from every stage of the vehicle’s life-cycle and has expanded into the older vehicle parc for both vehicle sales and aftersales • We carefully control new vehicle inventory to mitigate effects of overstocking • We invest in and vigorously pursue customer retention initiatives to secure longer term loyalty FINANCE & TREASURY Lack of availability of debt funding 12 Unable to meet debt obligations • Our business model produces strong free cash flow generation Increasing Pension liabilities Unsustainable demand of funding occupational pensions schemes • We maintain adequate committed facilities to meet forecast debt funding requirements • Diversification of funding sources, monitor daily our funding requirements • Regular review by the pension trustees of investment strategy and liability reduction and risk mitigation, taking professional advice 40 Pendragon PLC Annual Report 2019NO. PRINCIPAL RISKS IMPACT BEFORE MITIGATION MITIGATION HEALTH, SAFETY & ENVIRONMENTAL 13 Failure to provide safe working and retail environments This could lead to illness and injury, lost working time, civil claims and clean-up costs. Failure to control the environmental hazards present within our operations Our reputation could be adversely affected and regulatory action could result in fines and criminal penalties Failure to limit the impact of pandemic disaster • We work to the Health & Safety Executive’s ‘Plan, Do, Check, Act’ framework for managing risk in the workplace and our retail spaces • We allocate clear responsibilities for delivery of safe places to work and shop • We adopt process-driven initiatives to mitigate specific risk areas • We measure and review our performance against appropriate benchmarks • We allocate local accountability for sites’ compliance and provide specialist support to responsible leaders • We monitor site conditions and drive corrective action through audit follow-up • In response to COVID-19 we have put in place additional measures to assist our team members in limiting the risk of spread of infection. We have specifically considered and will continue to monitor the potential impact of COVID-19 on our business in accordance with our business continuity plans 41 Pendragon PLC Annual Report 2019VIABILITY STATEMENT VIABILITY STATEMENT In accordance with provision 31 of the UK Corporate Governance Code, published by the Financial Reporting Council in July 2018 (the ‘Code’), taking into account the company’s current position and principal risks, the Directors have assessed the viability and prospects of the company over the three-year period to 31 December 2022. The Directors believe this period to be appropriate as: i) The Group’s planning cycle encompasses this period. The changes in Executive leadership during FY19 meant that a longer- term plan encompassing the 2022 period has been performed on a high-level basis, pending the new Chief Executive Officer to develop these plans accordingly. ii) The time period corresponds to the normal expected duration of the Groups Revolving Credit Facility. The Group’s current facility runs until March 2022, so there remains risk that the terms of any refinancing may be less favourable to the Group. The Group has nominated external advisers to mitigate this risk and identify the most appropriate source of financing. The three-year review considers the Group’s profit and loss, cash flows, debt and other key financial ratios over the period.  These metrics are subject to sensitivity analysis which involves flexing several of the main assumptions underlying the forecast, including the removal of expected proceeds from the sale of the Groups remaining US assets. In addition, this analysis is carried out to evaluate the potential impact of the Group’s principal risks actually occurring via what the Directors consider to be a severe but plausible downside scenario. The three-year review also makes certain assumptions about the normal level of capital recycling likely to occur and considers whether additional financing facilities will be required. Finally, the analysis takes into account the capital plans of the Group and the ability to mitigate downside risk through the cancellation of these plans. Based on the results of this analysis, the Directors have a reasonable expectation that the company will be able to continue in operation, comply with facility covenants and meet its liabilities as they fall due over the three-year period of their assessment.  The Directors consider that the current economic outlook presents significant challenges in terms of sales volume and pricing and both Brexit and the Coronavirus pandemic presents uncertainties to future trading conditions.  Whilst the directors have instituted measures to preserve cash and improve performance, there remains a level of uncertainty over future trading results and cash flows. In addition, further discussion of the principal risks and material uncertainties affecting Pendragon PLC can be found within the Annual Report and Accounts on pages 93 to 193.  The risk disclosures section of the consolidated financial statements set out the principal risks the Group is exposed to, including strategic, operational, economic, market, environmental, credit, technological, regulatory and team member resource, including the impact of the ongoing negotiation of the terms of trade following the UK’s withdrawal from the European Union. The Board has also considered and will continue to monitor the threat and implications of the Coronavirus, but it is too early to fully understand the impact that the virus will have on potential disruption to supply, potential for closures to retail outlets and the wider macro-economic environment. The risk disclosure section also sets out the Group’s policies for monitoring, managing and mitigating its exposures to these risks. The Board considers risks during the year on triannual basis through the Risk Control Group and annually at a Board meeting with ad hoc reporting as required. The principal risks and the mitigation steps that the Board considered as part of this viability statement were as follows: The ability to adopt and implement an appropriate strategy to grow the business in the medium term following the appointment of the new Chief Executive Officer. The Board consider that Bill Berman is the right appointment to improve the performance of the business following the results of FY19 and restore the business to profitable growth. The availability of debt funding, in particular, the successful refinancing of the RCF, when it expires in 2022 is a further uncertainty. The Board intend to seek the right external advice to ensure the most appropriate debt funding sources are identified as part of any refinancing process. It is possible that the terms of any refinancing may be less favourable for the Group than the current RCF. The ability to adapt to changing environments outside our direct control such as macro-economic, political and environmental factors, regulation changes, manufacturer and competitor behaviour. The Board has specifically reviewed the potential impacts and available mitigating actions as a result of a downside trading scenario in the event of economic challenges resulting from either unfavourable trade terms at the end of the EU withdrawal agreement transition period, or a potential impact from the currently unknown effect of the Coronavirus. In particular the Board reviewed the causes and consequences of the reduction in profitability year on year in assessing the risks. We mitigate these risks through the diverse revenue generation from all parts of the vehicle cycle and wide range of franchise representation together with regular monitoring to identify changes quickly. During 2019, the Board carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity.  The Directors believe that the Group is able to manage its business risks successfully, having taken into account the current economic outlook. Accordingly, the Board believes that, taking into account the Group’s current position, and subject to the principal risks faced by the business, the Group will be able to continue in operation and to meet its liabilities as they fall due for the period up to 31 December 2022. Approved by order of the Board Mark Willis Chief Finance Officer 18 March 2020 42 Pendragon PLC Annual Report 2019DIRECTORS REPORT 44 Board of Directors 46 Corporate Governance Report 50 Corporate Social Responsibility Report 52 Committee Reports 60 Directors’ Remuneration Report 79 Directors’ Report 43 Pendragon PLC Annual Report 2019BOARD OF DIRECTORS BILL BERMAN Chief Executive & Interim Chairman Bill joined Pendragon on 18 April 2019 as a non-executive director, and assumed the role of chief executive officer with effect from 19 February 2020. Bill continues to perform the role of interim chairman. Formerly the President and Chief Operating Officer of AutoNation, the largest automotive retailer in America, Bill brings to the Board significant experience in automotive retail, enabling him to provide effective executive leadership of Pendragon’s Board and advise in relation to the Company’s future strategy. BRIAN SMALL Non-Executive Director (A*) (N) (R) (F) Brian joined Pendragon on 10 December 2019, following an extensive executive career in the consumer and retail sector, where most recently he held the position of Chief Finance Officer at JD Sports Fashion Plc between 2004 and 2018. Mr Small is also a non-executive director and chair of the Audit Committee at online retailer, Boohoo.com, and a non-executive deputy chair and chairman of the Audit Committee of Mothercare Plc. Brian qualified as a chartered accountant with Price Waterhouse in 1981, and with industry experience across a range of retailers, he brings additional financial and strategic perspectives to the Board. MIKE WRIGHT Non-Executive Director (A) (N**) (R) Mike joined Pendragon on 2 May 2018, following an executive career in the international automotive sector, retiring as Executive Director at Jaguar Land Rover in 2016. Since then he has developed a strong international portfolio of NED, Chair and Advising roles in FTSE and North American listed businesses, and the education, sports and arts sectors. His previous automotive sector specific executive experience, over a 40 year career enables Mike to contribute the industry perspective, and is of significant value to the Board. Key to memberships, roles and re-election status * Committee chairman ** Acting Committee chairman (A) Audit Committee (N) Nomination Committee (R) Remuneration Committee (F) Audit committee member with recent and relevant financial experience More detailed professional biographies of the Directors are on the company’s website.www.pendragonplc.com 44 Pendragon PLC Annual Report 2019 MARTIN CASHA Chief Operating Officer Having spent his entire career with Pendragon businesses, Martin became operations director in September 1995 and chief operating officer in November 2001. Martin’s extensive knowledge of Pendragon’s operations ensures he continues to be able to advise the Board as to the most appropriate operational action and response to changes in the automotive retail sector. MARK WILLIS Chief Finance Officer Mark joined Pendragon on 08 April 2019 from Ten Entertainment Group PLC where he held the position of Chief Finance Officer since taking it through its IPO in April 2017. Prior to this Mark worked at Home Retail Group PLC, including roles as Argos Finance Director, Director of Group Finance and Investor Relations Director. Since joining Pendragon, Mark’s wealth of accounting, financial and investor relations experience continues to add significant value to the Board. Company Secretary Richard Maloney Registered Office Loxley House 2 Oakwood Court Little Oak Drive Annesley Nottingham NG15 0DR Telephone 01623 725200 Group motor businesses websites www.evanshalshaw.com www.stratstone.com www.carstore.com Group Support business websites www.pinewood.co.uk www.pendragonvehiclemanagement.co.uk www.quickco.co.uk Registered in England and Wales Registered number 2304195 45 Pendragon PLC Annual Report 2019CORPORATE GOVERNANCE REPORT The UK Corporate Governance Code (the Code) applies to reference, set by the Board, reviewed annually and available to the company and is available on the FRC website at https:// view on the company’s website. Details of each committee’s www.frc.org.uk. Other than where expressly stated below, work appear on the next few pages of this Report. Executive throughout the financial year ended 31 December 2019, the Directors can attend Board committees at times, to assist their company complied in full with all relevant provisions of the business, but only with the committee’s prior agreement. Code. The corporate governance statement as required by Rule 7.2.1 of the Disclosure and Transparency Rules is set out below. LEADERSHIP AND BOARD COMPOSITION As at 18 March 2020, the Board is made up of three executive directors and two non-executive directors. The Board is OUR BOARD The Board sets our company’s strategy and ensures we have in actively seeking to recruit a non-executive chairman. The Board continues to recognise the need for an appropriate place the financial and human resources we need to meet our combination of executive and non-executive representation objectives. We take collective responsibility for Pendragon’s on the Board, and a clear division of responsibilities between long term success. The executive directors, led by the chief the leadership of the Board and the executive leadership of executive, are responsible for running the company and our the business. In this regard, the respective responsibilities of Group through the executive committee comprising of the the Board, the chairman and the chief executive are clearly executive directors and members of senior management to defined by the Board in formal responsibilities documents, effect that strategy, and work within prescribed delegated which the Board reviewed and readopted in April 2019. The authority, such as capital expenditure limits. The executives Board remains committed to the progressive refreshing of direct and monitor business performance through regular our membership, so as to maintain the right balance of skills, operational meetings with their respective leadership teams experience, independence and knowledge of the company to and set and regularly review the effectiveness of key operating enable us to continue to operate effectively. controls, reporting to the Board on these and any variances. The Board as a whole reviews management performance. In April 2019, Gillian Kent stood down from the Board as a non-executive director and Bill Berman joined the Board as Although the Board delegates to the chief executive and chief an additional non-executive director. Subsequently, following finance officer responsibility for briefing key stakeholders, the decision of Chris Chambers to step down as non-executive major shareholders and the investor community, the interim chairman on 01 October 2019, and pending the Company chairman holds himself available to engage with shareholders, appointing a permanent chief executive officer following and the Senior Independent Director, when appointed, will the departure of Mark Herbert on 30 June 2019, Bill Berman perform a similar role, where appropriate. Information from assumed the newly created role of interim executive chairman engagement with shareholders is shared with the entire Board with effect from 01 October 2019. In this respect, the company and taken into account in financial planning and strategy. recognises that for the final three months of 2019 and since, PENDRAGON PLC BOARD NOMINATION COMMITTEE REMUNERATION COMMITTEE AUDIT COMMITTEE EXECUTIVE COMMITTEE MAIN BOARD COMMITTEES RISK CONTROL GROUP OPERATIONAL MEETINGS the company did not comply with provision 9 of the Code, in that in performing the role of Interim executive chairman and, latterly, Interim chairman, Bill Berman was effectively exercising both the role of chairman and chief executive. However, the company considers that, given the exceptional circumstances in which the company found itself, the creation of, and appointment of Bill Berman to this role at that time was in the company’s best interests and the board considered it remained fully justified. The company acted both swiftly and responsively to ensure suitable leadership was in place at the time of Chris Chambers’s departure, recognising that the process of finding, assessing and recruiting the right executive The Board has three committees: Audit, Nomination and and non-executive directors requires careful consideration, to Remuneration, each made up entirely of non-executive ensure that candidates with the requisite capabilities, attributes, directors. The Risk Control Group (RCG) is a committee of the Executive Directors, the Company Secretary and Group skills and experience are appointed. Following Mr Chambers’ departure, the Board instructed Longwater Partners, an Head of Internal Audit. Other members from the senior independent external search consultancy, in connection with management of the Group’s operating group functions are the recruitment of a separate chairman and chief executive. co-opted onto the RCG as required from time to time. Each committee operates within delegated authority and terms of The Board continues to remain fully committed to ensuring that 46 Pendragon PLC Annual Report 2019the company observes and maintains at all times the highest company policies and ensured all matters of internal control standards of corporate governance, and is now working to received adequate Board scrutiny and debate. At Board ensure that the appropriate combination of executive and meetings, and informally via the chairman, all directors had non-executive directors will be in place in accordance with the the opportunity to raise matters of particular concern to Code as soon as practicable. them. There were no unresolved concerns in 2019. The Board considers that the Group’s systems provide information With effect from 30 December 2019, Richard Laxer stepped which is adequate to permit the identification of key risks down as a non-executive director, senior independent director to its business and the proper assessment and mitigation of and chair of the Audit Committee, and Brian Small joined the those risks. Based on the Audit Committee’s and the RCG’s Board as a non-executive director, assuming the role of chair of work, the Board has performed a high level risk assessment, the Audit Committee in January 2020. Other than the changes to ensure that (i) the principal risks and uncertainties facing described above, no other changes to Board membership the Group’s business have been identified and assessed, taking occurred in 2019. into account any adaptations made to the Group’s business strategies, and (ii) that appropriate mitigation is in place. On 19 February 2020, Bill Berman was appointed chief executive officer of the Company, and continues to perform Our company policies on managing financial risk and application the role of Chairman on an interim basis while the process of hedging are set out in note 4.2 to the financial statements. for the recruitment of a permanent non-executive chairman The principal risks and uncertainties we have identified are on continues.  page 153 and our viability statement is on page 42. In March 2020, Nikki Flanders joined the Board as an additional non-executive director. WORK OF THE RISK CONTROL GROUP The accountability framework described on page 35 is designed to ensure comprehensive management of risk As noted below, in accordance with the Code, all directors across the Group’s businesses. Following a detailed review will be subject to annual re-election (or election in the case of of our approach to risk management, in October 2019, an newly joined Directors) at the AGM of the company. Details of overarching Risk Management Policy was introduced, setting the directors offering themselves for election in 2020, together out the principles and approaches by which we will continue with directors’ brief biographical details appear on pages 44 to implement effective enterprise risk management. The RCG, and 45, and gender balance details are on page 50. made up of the Chief Operating Officer, Chief Finance Officer, Company Secretary, Group Head of Internal Audit and, by HOW THE BOARD MANAGES RISK The Board and our Committees each operate to a set meeting invitation, other members of the Group’s senior operational and financial management, meets regularly to consider the agenda which ensures that all relevant risks are identified and detailed work on risk assessment performed by leaders and addressed by appropriate controls. We review management key business areas, and oversees the effective implementation information which helps us to prescribe operating controls and of new measures designed to mitigate or meet any specific monitor performance against our strategy and business plans. risks or threats. The Chair of the Audit Committee, and a The non-executive directors have particular responsibility for representative of the external auditor attend by invitation. The monitoring financial and performance reporting, to ensure that RCG reports to the Audit committee on its work. The Board progress is being made towards our agreed goals. The Board’s and any of its committees is able to refer specific risks to the responsibilities also include assessing the effectiveness of RCG for evaluation and for controls to be designed or modified; internal controls and the management of risk. Specific areas of this occurs in consultation with operational management. risk assessment and control fall within the remit of committees The executive directors are responsible for communicating of the Board; details of their work in 2019 appear below and in and implementing mitigating controls and operating suitable the Directors’ Remuneration Report on pages 60 to 78. systems of check. The RCG met twice in 2019. In addition to THE BOARD’S REVIEW OF RISKS AND CONTROLS IN 2019 During the year, the Board considered all strategic matters, reviewing and refining the Group’s corporate risk register, for Board review and adoption, the RCG continues to monitor and review the Group’s anti-bribery controls, including the information on operating, received key performance financial and compliance matters and reviewed the results of development of e-learning, gifts and hospitality training, Consumer Rights Act 2015 training, Modern Slavery Act 2015 corresponding controls and risk management. We received awareness and further initiatives to reduce incidences of theft from the Audit committee and from the Risk Control Group and fraud. The Board has understood that there are certain (‘RCG’) timely information and reports on all relevant aspects internal control deficiencies which it intends to remediate of risk and corresponding controls. We reviewed all our key during 2020. 47 Pendragon PLC Annual Report 2019CORPORATE GOVERNANCE REPORT NON-EXECUTIVE DIRECTORS AND INDEPENDENCE 2019 has been a year of transition for the Board, presenting Between January and March 2019, recruitment of both an additional Non-Executive Director and Chief Executive Officer its own unique challenges. For 9 months of 2019, the non- was ongoing. executive chairman Chris Chambers (who on appointment to that role, fulfilled the requirement to be independent) ensured • For the six month period between January 2019 and that the Board performed effectively through a well-functioning June 2019, the Board consisted of seven Directors, combination of Board and committee meetings and other consisting of three Executive and four Non-Executive appropriate channels for strategic input and constructive Directors, including the Non-Executive Chairman, and challenge from non-executive directors. Since his appointment was considered to be of the correct size and balance to to the role of interim executive chairman on 01 October 2019, function effectively. and subsequently Interim Chairman following his appointment • For the period between July 2019 and October 2019, as Chief Executive Officer on 19 February 2020, Bill Berman the Board consisted of six Directors, consisting of two has continued with the approach adopted by his predecessor, Executive and four Non-Executive Directors, including the whilst remaining vigilant of the need to avoid any conflict of Non-Executive Chairman. During this period, the Board interest in such situations where exercising the responsibilities was actively seeking to recruit an additional Executive or functions ordinarily carried out by the Chairman may Director to fulfil the Chief Executive Officer role. conflict with the responsibilities or functions ordinarily carried • For the three month period between October 2019 and out by the chief executive officer. In this respect, the Board December 2019, the Board consisted of five Directors, and interim chairman, as advised by the company secretary, consisting of two Executive Directors, two Non-Executive has operated conflict management procedures with increased Directors and the Interim Executive Chairman. vigilance, in particular ensuring that the Mr Berman does not participate in any meetings or discussions in which he was As announced on 18 September 2019 and as noted above, being considered for the appointment to certain roles. These during the final quarter, the Board was actively seeking to procedures were deemed effective. As outlined above, it recruit both an additional executive director to fulfil the chief remains the Board’s intention to revert to a Board structure executive officer role, and a new non-executive chairman. On where the roles of non-executive chairman and chief executive 19 February 2020, Bill Berman was appointed chief executive officer are performed by separate individuals as soon as officer and will continue to perform the role of chairman on practically possible. Through the conflict management an interim basis whilst the process of recruiting a permanent procedures outlined above, and the evaluations which are non-executive chairman continues. The Board considers that described below, we have concluded that:- Bill Berman has provided strategic leadership whilst fulfilling the role of interim executive chairman, and the Company • the Board’s collective skills, experience, knowledge of considers that the Board has been able to function effectively, the company and independence allow it and balance of notwithstanding ongoing recruitment activity designed to independant and non-independant directors allows it redress the size and balance of the same. During 2019, the and its committees to discharge their respective duties Board received informal briefings from company executives properly; to familiarise Directors with strategic developments and key • subject to the recruitment of a non-executive chairman, aspects of the Group’s business. Formal presentations to the the Board and each of its committees is of the right size Board by senior group executives focussed on matters of and balance to function effectively; strategic importance. • we have satisfactory plans for orderly succession to Board roles; • the interim executive chairman and respective committee BOARD EVALUATION The Board and its committees conducted formal evaluations chairmen are performing their roles effectively; of their effectiveness in 2019, facilitated by the interim • all non-executive directors are independent in character executive chairman, addressing questions based closely on and judgment; the Code, applicable good governance topics and drawn • no Director has any relationships or circumstances which from best corporate practice. The results were reviewed by could affect their exercising independent judgement; and the interim chairman, the Committee chairmen and the Board • the interim executive chairman and each of the non- executive directors is devoting the amount of time as a whole and the interim chairman has factored suggested improvements into our 2020 Board programme. More details required to attend to the company’s affairs and their on the Board’s approach to individual and Board evaluation duties as a Board member. are on the company’s website. 48 Pendragon PLC Annual Report 2019Current Directors William Berman 1 (B) Martin Casha Brian Small 2 (I) (A) Mark Willis 3 Mike Wright (I) (R) (N) 4 Former Directors Chris Chambers 5 Trevor Finn 6 Mark Herbert 7 Tim Holden 8 Gillian Kent 9 Richard Laxer 10 Board Audit Nominationº Remuneration 11/12 19/19 1/1 15/15 16/19 1/1 N/A N/A N/A 2/3 1/1 N/A N/A N/A 7/7 1/1 N/A N/A N/A 4/4 Board Audit Nominationº Remuneration 11/11 4/4 4/4 4/4 4/6 19/19 N/A N/A N/A N/A 1/1 3/3 5/5 N/A N/A N/A 2/2 7/7 2/2 N/A N/A N/A 1/1 4/4 (B) Chairman of the Board (I) Considered by the Board to be independent (A) Committee chairman (N) Committee chairman (R) Committee chairman 1 Appointed as non-executive director on 18 April 2019, and subsequently Interim Executive Chairman on 01 October 2019, and subsequently chief executive officer on 19 February 2020. 2 Appointed as non-executive director on 10 December 2019 and chair of the audit committee on 02 January 2020. 3 Appointed Chief Finance Officer on 08 April 2019. 4 Acting Nomination Committee chairman since 08 November 2019. 5 Resigned from the Board as Non-Executive Chairman on 01 October 2019. 6 Retired on 31 March 2019. 7 Left on 30 June 2019. 8 Resigned from the Board as Finance Director on 31 March 2019. 9 Resigned from the Board as Non-Executive director on 18 April 2019. 10 Resigned from the Board as Non-Executive Director, Senior Independent Director and Chair of Audit Committee on 31 December 2019. Shows the number of meetings attended out of the total a director was eligible to attend RE-ELECTION OF DIRECTORS In accordance with the Code, all Directors will be subject to COMMUNICATION We aim to meet the challenges presented by our size and annual re-election or election (in the case of new Directors) at geography through innovation in internal communications. the Annual General Meeting. INFORMATION AND SUPPORT To ensure that our decisions are fully informed and debated, the Internal website messaging, video and face to face presentations as well as electronic newsletters and social media content keep team members up-to-date with the company’s strategy and performance. Team members’ views on our performance interim chairman ensures our Board’s business agenda is set in a and services are actively gathered via targeted electronic timely manner so as to allow appropriately detailed information surveys. Regular briefings for all team members, held at each to be circulated to all directors before meetings. The company location, provide a forum for sharing both company and local secretary facilitates the flow of information within the Board, information. At all levels, communications aim particularly to attends all Board meetings and is responsible for advising the recognise the achievements of individual team members and Board and its committees, through their respective chairmen, celebrate outstanding personal and business performance, on corporate governance and matters of procedure. All through peer recognition and widely publicised awards. Each directors have access to support from the company secretary year we review our incentive and recognition programmes on matters of procedure, law and governance and in relation aligned to the Group’s business objectives. to their own induction and professional development as Board members. All directors are entitled to take independent advice at the company’s expense, and to have the company and other Board members provide the information required to enable them to make informed judgements and discharge their duties effectively. 49 Pendragon PLC Annual Report 2019CORPORATE SOCIAL RESPONSIBILITY REPORT Number of Group Employees by category Director Senior Manager All Employees as at 31 December 2019 as at 31 December 2018 Female Male Total Female Male Total 0 0 5 5 5 5 1 0 6 5 7 5 2,084 5,841 7,925 2,438 6,756 9,194 DIVERSITY AND EQUALITY OF OPPORTUNITY We are an equal opportunity employer, committed to ensuring ACCIDENTS AT WORK Historically, we have assessed our health and safety record that our workplaces are free from unfair discrimination, within against relevant published benchmarks. Last year, as a the framework of the law. We aim to ensure that our team result of changes to the Health & Safety Executive sector members achieve their full potential and that, throughout all categorisations, we determined that the natural sector our attraction, recruitment, selection, employment and internal comparator for our Group is Wholesale and Retail Trade and promotion processes, all employment decisions are taken Repair of Motor Vehicles and Motorcycles. There has been a without reference to irrelevant or discriminatory criteria. The decrease in RIDDOR1 reported accidents in 2019, falling to 34 company’s diversity and equal opportunities policy is available per 10,000 employees (2018: 38 per 10,000 employees). Whilst at www.pendragonplc.com this remains higher than the relevant sector average 22 per 10,000 employees), this is primarily as a result of our improved GENDER BALANCE We describe our approach to Board composition diversity in reporting system for accidents, the increased accuracy of our reporting of accidents and improved classification of RIDDOR the Nomination Committee’s report on page 58. and non-RIDDOR accidents. We continue to target specific GENDER PAY GAP REPORTING The company’s annual report containing data on our gender hazards and risks for improved results through additional monitoring and promotion of safe working processes and in particular how behavious are impacting on the safety culture pay gap will be published in full on our website www. of our business. The company’s health and safety policy is pendragonplc.com in accordance with the statutory timescale. available at www.pendragonplc.com . HEALTH AND SAFETY We take seriously our responsibility to our team members, COMMUNITY We are predominantly a retail operator, with a tangible customers and the public. We aim to ensure that all team presence in the many communities our businesses serve. members in the course of their roles, and all who work in or During 2019, our monthly fundraising events supported a visit our facilities or receive our services, so far as is reasonably range of national charities, including Alzheimer’s Research practicable, experience an environment and practices which UK, Alzheimer’s Society, MS Society, Loganberry Trust, Jerry are safe and without risk to their health. Green Dog Rescue, Save the Children and Children in Need. Our Academy and retail businesses also generate community Our policy is to identify and assess all potential risks and involvement through local engagement, contributing to their hazards presented by our activities and to provide systems and local areas in a variety of ways. Individuals and businesses procedures which allow all team members in their daily work to organise charity events to support schools, hospitals and take responsible decisions in relation to their own and others’ local children’s and medical charities as well as the Group health and safety. We publish a clear hierarchy of responsibility wide monthly nominated charity. The company supports and to team members and reinforce this through regular encourages these activities and we welcome the opportunities monitoring by a variety of means. We promote awareness they present for team-building within our businesses, of potential risks and hazards and the implementation of engagement with the communities they serve and recognition corresponding preventative or remedial actions through our of charitable causes with whom our team members and their on-line health and safety systems, operations manuals and regular communications on topical issues. Our health and families have connections. safety management system provides our UK leadership and team members with detailed access to information, guidance RESPONSIBLE SOURCING All our Group’s sites are situated within the UK or US and and control measures. at each of them we operate in strict compliance with all applicable labour relations laws. We have no presence, either 1RIDDOR: the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 2013. 50 Pendragon PLC Annual Report 2019 directly or via sub-contractors, in any areas which present any risk of the exploitation of men, women or children in the workplace. We work with vehicle manufacturers and other suppliers who manage their supply chains in a responsible way, free from the exploitation of labour. We have adopted an Anti- Slavery and Human Trafficking Policy, available to view on our website, together with our Anti-Slavery and Human Trafficking Statement for the year ended 31 December 2019. ENVIRONMENT AND GHG REPORTING Although the retails sector is not generally regarded as a high environmental impact sector, motor retailing and its associated after sales service activities carries with it a range of responsibilities relating to protection of the environment. Our policy is to promote and operate processes and procedures which, so far as is reasonably practicable, avoid or minimise the contamination of water, air or the ground; and to manage responsibly the by-products of our activities, such as noise, waste packaging and substances and vehicle movements. We report our emissions data using an operational control During the year, we have continued to be registered with and approach to define our organisational boundary. We have have complied with our obligations under the Department reported all material emission sources for which we deem for Environment, Food and Rural Affairs’ (DEFRA) carbon ourselves to be responsible, including both our UK businesses reduction commitment scheme. We also actively co-operate and estimated usage for our US businesses. We also include with our manufacturing partners in relation to the move to emissions from driving activity, comprising data verified green technologies, such as supporting the introduction internally, including estimates of distances travelled during test of infrastructure designed to promote electric and battery drives, transportation of vehicles and parts between sites, and powered vehicle technologies. The company’s statement of business travel (excluding commuting by means which are not environment policy is available at www.pendragonplc.com owned/controlled by us). Global Greenhouse Gas Emissions Data Source Tonnes of CO2 01.01.19 – 31.12.19 01.01.18 – 31.12.18 C02 emitted from facilities C02 emitted from driving activities Intensity ratio (tonnes of CO2 per £k) 9,630 7,934 3.9 11,461 9,179 4.5 GREENHOUSE GAS EMISSIONS This section includes our mandatory reporting of greenhouse REDUCING CARBON AND WASTE During the year, we have continued to assess and monitor our gas emissions for the period 1 January 2019 to 31 December energy use and, where practicable, to implement measures 2019, pursuant to the Companies Act 2006 (Strategic Report designed to reduce our activities’ environmental impact, which, and Directors’ Report) Regulations 2013. over time, we anticipate will help reduce our carbon footprint. The Group has undertaken mandatory energy assessments of Our methodology to calculate our greenhouse gas emissions our sites in accordance with the ESOS Regulations 2014. We is based on the ‘Environmental Reporting Guidelines: including continue to use the results of this assessment to identify further mandatory greenhouse gas emissions reporting guidance’ energy saving opportunities. To conserve energy, we continue, (June 2013) issued by DEFRA using DEFRA’s 2019 conversion factors. where practicable, to install LED lights at our sites, limit the duration of periods when full lighting is used on our sites out of hours, keep external doors closed when not in use, and fit In some cases, we have extrapolated total emissions by utilising insulators to limit the escape of heat. We continue to seek to available data from part of the reporting period, and extending limit our paper consumption and waste, through increasingly it to apply to the full reporting period. paperless communications and systems. 51 Pendragon PLC Annual Report 2019AUDIT COMMITTEE REPORT The Audit Committee is a committee of the Board and has been chaired by Brian Small since January 2020, made up entirely of independent non-executive directors. Their names and qualifications are on pages 44 and 45 and attendance at meetings in the table on page 49. BOARD COMPOSITION With effect from 30 December 2019 Richard Laxer stepped THE COMMITTEE’S WORK IN 2019 The Audit Committee met three times in 2019 and this report down as chair of the Audit Committee. Brian Small assumed describes its work and conclusions. the role of chair of the Audit Committee in January 2020 when there was a comprehensive induction and handover with Richard Laxer, Mark Willis (Chief Executive Officer) and FINANCIAL STATEMENTS REVIEW The Committee received the auditor’s memorandum on Richard Maloney (Company Secretary) the company’s 2018 financial statements and the auditor’s memorandum on the unaudited 2019 interim results. In each KEY RESPONSIBILITIES OF THE AUDIT COMMITTEE • monitors the integrity of the financial statements and case, it discussed the auditor’s findings with the auditor, satisfied itself of the integrity of the financial statements formal announcements and recommended the financial statements for approval by • reviews and approves the Annual Report and Accounts the Board. Key aspects of those discussions and relevant for adoption by the Board considerations and conclusions are below:- • recommends to the Board the selection of the external auditor and its terms of appointment and monitors its effectiveness and independence AUDIT RISK CONSIDERED BY THE COMMITTEE The table on pages 54 and 55 sets out the key audit risks • governs policy for the allocation of non-audit work to the and judgments applied, for the 2019 year results, which the audit firm Committee considered and discussed with the auditor, and the • reviews internal controls and risk management Committee’s conclusions. • monitors the effectiveness of the internal audit function • reviews and monitors whistleblowing arrangements Its terms of reference detail its key responsibilities and appear, with relevant background information, on the company’s website www.pendragonplc.com . 52 Pendragon PLC Annual Report 2019 Pendragon PLC Annual Report 2019 53 AUDIT COMMITTEE REPORT Audit risk considered by the Committee Evidence considered and conclusion reached GOING CONCERN losses Given the incurred within FY19, the committee Directors, and further scenarios which had been sensitised The committee reviewed both the forecasts presented by the considered the Group’s ability to continue as a going concern to reflect severe but plausible downside scenarios. Those which included reviewing cash flow forecasts as prepared by forecasts indicate that the group can continue to operate with the Directors for the period to 31 December 2021 against the the existing facilities. The base and sensitised forecasts which Groups available borrowing facilities. include a combined Brexit and COVID-19 sensitivity indicate that the group will remain in compliance with the relevant covenants, though headroom is limited in the period ended 31 December 2021 in the case of the sensitised forecasts after considering mitigants available to the Group such as deferral of capital expenditure. The committee concluded it remains appropriate to prepare the financial statements on a going concern basis. Further details can be found within the viability statement on page 42 and within the going concern statement on page 99. CGU ASSET VALUATION The estimates in relation to asset impairment of the carrying The Committee considered the risk that goodwill could be materially overstated in the context of the sensitivity analysis, value of goodwill, intangiable assets, property, plant and also set out in note 3.1. The Committee addressed these matters equipment and right of use assets largely related to the through receiving reports from management outlining the achievability of the assumptions underlying the calculation basis for the assumptions used, assessing the range and depth of the recoverable amount of the business being tested for of information underpinning the assumptions and calculations impairment, set out in note 3.1 to the financial statements. and discussing this with the auditors. Key assumptions used are the FY20 budget, growth rate and discount rate as well as the EBIDTA multiples applied or fair The Committee concluded that the judgements applied were value of individual assets. appropriate. DEFERRED TAX ASSET The Group recognises deferred tax assets if they believe their The Group has considered the business plans for 2020 and 2021 and determined that deferred tax assets of £25.5m can recovery can be justified. be recovered. VALUATION OF PARENT COMPANY INVESTMENT This is the risk that the company has investments in its Work continues to restructure the company’s balance sheet as between PLC and it subsidiaries, and the Committee remains subsidiary companies, which could be overstated when supportive of this ongoing work. considered with current market capitalisation of the company and could impact the ability of the company to pay dividends To assess the valuation of parent company investment and should the investment be impaired. The value of investments impairments to the value of subsidiary assets, analysis has been is underpinned by expectation of discounted future profits and performed in conjunction with the work done to establish CGU net assets of the subsidiary companies. There is an inherent asset impairment as described above. The Committee were uncertainty in forecasting future profits. satisfied with management’s conclusion book impairment in the value of subsidiary assets, and therefore to ascertain the carrying value of the parent company investment. 54 Pendragon PLC Annual Report 2019VEHICLE INVENTORY VALUATION This is the risk that the value of inventory set out in note 3.4 The Committee received a report from management which set out factors relevant to an assessment of used inventory to the financial statements could be materially overstated and valuation, including the level of inventory held across the whether or not an appropriate provision had been calculated. business, the ageing of the inventory, the stock turn of the The risk for used vehicles is seen as the most relevant, for inventory and an analysis of market factors including the parc scrutiny. Used vehicle prices can vary depending on a number of used vehicles, the used vehicle market sales rate and historic of factors, including general economic conditions and the movements in used vehicle prices. levels of new vehicle production. The Committee discussed the report from management with the auditors together with all audit findings. The Committee was satisfied that a comprehensive assessment of inventory valuation had been undertaken and concluded that the judgements applied were appropriate. Overall, the level of used inventory risk remained the same as in the prior year. PENSION SCHEME LIABILITIES The amounts reflected in the financial statements in respect of The Committee ascertained that judgements made on pension scheme were all based on advice from the Group’s pension pension scheme liabilities involve judgements made in relation adviser. The final calculations in respect of the Group’s actuarial assumptions, long-term interest rates, inflation, defined benefit pension scheme liability were performed by longevity and investment returns. The liabilities are set out in our pension scheme actuary. The Committee discussed with note 5.1 to the financial statements. There is a risk that the value the auditor the assumptions applied, in particular the findings of the pension scheme liabilities could be materially under or of the auditor’s own pension specialist. over stated in the context of the sensitivity analysis in that note. Following a court ruling in 2018 regarding equalisation of The Committee concluded that the judgements applied were GMP between men and women an additional pension liability appropriate. has been recorded. UK EXIT FROM THE EUROPEAN UNION (BREXIT) Currency devaluation of Sterling following the 2016 referendum The Committee received a report from the Risk Control Group, which had carried out an initial assessment of potential Brexit result has continued in subsequent years, and remains as an risk to the Group in early December 2018, and has continued to upward pressure on new vehicle prices and associated finance monitor any potential impacts since. offers. Continued uncertainty in terms of the UK’s future trading relationship with the EU following the UK’s withdrawal from The Committee considered that the Group retained sufficient the EU on 31 January 2020 may cause further upward pressure financial liquidity and operational facility headroom to cover on vehicle prices due to import tariffs imposed and Sterling’s any short-term financial stress scenarios resulting from the expected devaluation. Share prices of all UK car dealers fell impacts of Brexit. after the EU Referendum and have only partly recovered. A decline in consumer confidence has continued to reduce UK The Committee noted that in the event that Brexit caused new sales since April 2017 and the expectation is that this a significant short term financial impact on the Group’s will continue into 2020. Other factors such as changes in operations, elements of our strategy could be accelerated to regulation and the availability and cost base appropriate team mitigate the impact. member resource could also impact the company’s operations. 55 Pendragon PLC Annual Report 2019AUDIT COMMITTEE REPORT EXTERNAL AUDITOR APPOINTMENT AND PERFORMANCE EVALUATION The Committee considered Auditor effectiveness and independence of the audit, during the year. whether in regard to its appointment, fees, the evaluation of its performance, any decision as to competitive tender for audit services, or any other matter. The Committee arrived at its recommendation to the Board on EU legislation on audit firm rotation the current Auditor could the Auditor’s appointment by: not be reappointed after 2023. The Committee also took into account that under the current • • applying exclusively objective criteria; evaluating the ability of the audit firm to demonstrate its independence; REVIEW OF NON-AUDIT SERVICES The Committee reviewed the company’s policy on its use of its audit firm for non-audit work. Its main principles are that the • assessing the effectiveness of the audit firm in the auditor is excluded from providing certain non-audit services performance of its audit duties; and the performance of which is considered incompatible with • assessing the audit firm’s adherence to applicable its audit duties, but is eligible to tender for other non-audit professional standards. work on a competitive basis and can properly be awarded such work if its fees and service represent value for money. The Committee chairman oversaw the company’s evaluation The policy can be viewed on the company’s website. The of the auditor’s performance, using questionnaires covering all Committee considered reports on the extent and nature of aspects of the company and auditor relationship and reviewed non-audit work available, the allocation during the year of that the results with the Committee members and the company’s work to accountancy and audit firms, including KPMG LLP, management. The Committee noted that the current auditor, and the associated fees. Details of audit and non-audit work KPMG LLP had issued to the company all requisite assurances performed by KPMG LLP and the related fees appear annually of its independence. The Committee reported its conclusions in the notes to the company’s financial statements. A full to the Board, namely, that there are no existing or historical statement of the fees paid to KPMG LLP for work performed relationships or other matters which adversely affect the during the year is set out in note 2.5 to the financial statements independence of KPMG LLP as the company’s auditor, and no on page 122. Having satisfied itself on each item for its review, performance shortcomings or unresolved issues relating to fee the Committee reported to the Board that:- levels. The lead audit partner, John Leech, has held the position for has been adhered to throughout the year, and is operating • the company’s existing policy continues to be appropriate, four years. effectively to provide the necessary safeguards to independence of the external auditor; POLICY ON AUDIT TENDERING KPMG was appointed as auditor in September 1997, since • there are no facts or circumstances relating to the award or performance of non-audit work that affect the when, audit services have not been tendered competitively. independence of KPMG LLP as auditor or justify putting The Committee has concluded that a competitive tender of the out audit work to competitive tender at this time; audit service is not necessary at this time, but acknowledged • no contract for non-audit services has been awarded to that circumstances could arise where a competitive tender for KPMG LLP in any circumstance of perceived or potential audit services is desirable. It recommended the re-appointment conflict of interest or non-compliance with the company’s of KPMG as the company’s auditor. The Board accepted the policy; and Committee’s recommendation and concluded that:- • the fees KPMG LLP have earned from non-audit services there are no matters warranting a competitive tender exercise their amount or otherwise, such as might impair its in relation to the provision of audit services, but this position independence as auditor. The ratio of non-audit to audit would change if there were to arise at any time any concerns fees was [0.15:1] in 2019 (2018: 0.15:1). as to the continuing independence or performance of the current audit firm (no such concerns have arisen as at the date The Board accepted these findings. provided during the year are not, either by reason of of this report); • none of the directors’ independence in considering this REVIEW OF INTERNAL AUDIT PERFORMANCE The Committee chairman oversaw the Committee’s evaluation matter is impaired in any way and none has a potential of the internal auditor’s performance, using questionnaires or actual conflict of interest in relation to KPMG LLP, covering all aspects of the internal auditor work and 56 Pendragon PLC Annual Report 2019relationship to the audit and received the auditor’s view on statements and associated controls. The Committee that performance. He reviewed the results with the Committee considered reports on known instances of alleged wrongdoing members and company management and reported the and matters reported on the company’s third party operated Committee’s conclusions to the Board. confidential reporting line and their investigation, reviewed the adequacy of whistleblowing procedures and commissioned REVIEW OF RISK MANAGEMENT follow-up action and improvements in risk-related controls. AND INTERNAL CONTROLS The Committee reviewed the effectiveness of the company’s Our current anti-bribery value statements and our policies system of internal control and financial risk management. It on the control of fraud, theft and bribery risks appear on received reports from the auditor on each of these areas and the company’s website and are drawn to the attention of all from the RCG, whose work is described on page 47) on the parties seeking to transact with the Group. Our whistleblowing company’s risk register, emerging risks and corresponding procedures are published internally on our intranet and internal controls. It scrutinised the key risks register, as revised their existence is regularly reinforced in our team member by the RCG, and approved it for adoption by the Board. Its communications. The policy is available at www.pendragonplc. work informed and supported the Board’s assessments com detailed under “How the Board manages risk” on page 47. REVIEW OF ANTI-BRIBERY CONTROLS APPROVAL This report was approved by the Committee and signed on it’s AND WHISTLEBLOWING The Committee reviewed the company’s anti-bribery processes behalf by:- and controls and evaluated and approved these and the company’s bribery risk assessment. On its recommendation, Brian Small Chairman of the Audit Committee the Board readopted the company’s anti-bribery policy 18 March 2020 57 Pendragon PLC Annual Report 2019NOMINATION COMMITTEE REPORT The Nomination Committee has been chaired by Mike Wright, on an interim basis, since November 2019, and is made up entirely of independent non-executive directors. Their names and qualifications are on pages 44 and 45 and attendance at meetings in the table on page 49 above. KEY RESPONSIBILITIES OF THE NOMINATION COMMITTEE • reviews the Board’s size, structure and composition and a replacement chief executive officer and non-executive directors, further to the decision of Richard Laxer to step down • • leads recruitment to Board positions as non-executive director and audit committee chairman on undertakes annual Board performance evaluation 31 December 2019, and the assumption by Bill Berman of satisfies itself on the company’s refreshing of Board the interim executive chairman role in September 2019. The membership and succession planning Committee also reviewed the structure of the Board in relation to its size, composition and potential vacancies in the light of Its terms of reference detail its key responsibilities and appear, recent changes. with relevant background information, on the company’s website www.pendragonplc.com . THE COMMITTEE’S WORK IN 2019 The Nomination Committee met seven times in 2019. This In December 2019, the Committee met for the purposes of recruitment and selection of a replacement non-executive director and audit committee chairman. Following the Nomination Committee’s recommendation, Brian Small was report describes its work and conclusions. appointed non-executive director on 10 December 2019, and REVIEW OF BOARD COMPOSITION AND BALANCE In February 2019, the Committee reviewed the structure of the Board, in relation to its size, composition and potential assumed the role of audit committee chairman on 02 January 2020. In February 2020, the Committee recommended that Bill Berman be appointed chief executive officer. vacancies. At this stage, as part of the annual review of the In March 2020, the company announced that Nikki Flanders workings of the Board and its annual valuation, the Committee would join the Board as additional non-executive directors. concluded that at this point, a cohort of four, made up of The process of recruiting a new non-executive chairman the non-executive Chairman and three independent non- continues, in conjunction with an executive search agency, executive directors was sufficient for the Board and its and the Nomination Committee continues to lead this process. committees to function effectively. The Committee also met Details of the annual evaluation of the Board are set out below. for the purposes of recruitment and selection of a replacement chief executive officer and non-executive director. Following recommendations of the Nomination Committee, Mark Herbert EVALUATION The annual evaluations of the Board and its members were was appointed chief executive officer in April 2019. conducted by the Board and are described on page 48. As part of that process, the Committee conducted an evaluation In June 2019, the Committee met to consider the discontinuation of its own performance. in office of Mark Herbert as Chief Executive Officer; Mark Herbert left the company with effect from 30 June 2019. DIVERSITY All appointments made, including those of Board members, In September 2019, the Committee met for the purposes of adhere to the company’s diversity and equal opportunities discussing the appointment of non-executive director Bill policy, which can be viewed on the company’s website. For Berman to the role of interim executive chairman, and following non-executive director appointments, where executive search the Committee’s recommendation to the Board, Bill Berman was duly appointed to the role of interim executive chairman consultants are instructed, they are done so in a manner in a manner consistent with this policy. The company engaged with effect from 1 October 2019. an executive search agency for the purposes of recruitment activities to fill Board vacancies in 2019, having considered it In November 2019, the Committee met for the purposes of appropriate to do so. The company has not adopted a gender discussing progress as to the recruitment and selection of balance target for its Board. 58 Pendragon PLC Annual Report 2019REMUNERATION COMMITTEE REPORT The Remuneration Committee is a committee of the Board, and has been chaired by Mike Wright since March 2018. It is made up entirely of independent non-executive directors. Their names and qualifications are on pages 44 and 45 and attendance at meetings in the table on page 49. KEY RESPONSIBILITIES OF THE REMUNERATION COMMITTEE • has delegated responsibility for determining the policy for THE COMMITTEE’S WORK IN 2019 The Remuneration Committee met four times in 2019. The Directors’ Remuneration Report, beginning at page 60, executive director remuneration and setting remuneration describes its work and conclusions. for the chairman, executive directors, the company secretary and senior management • reviews workforce remuneration and related policies and the alignment of incentives and rewards with culture, taking these into account when setting executive director remuneration • ensures that executive directors are provided with appropriate incentives which align their interests with those of shareholders, and encourage enhanced performance in the short and medium term, as well as achievement of the company’s longer term strategic goals • determines targets for any performance related pay schemes • seeks shareholder approval for triannual renewal of remuneration policy and any long-term incentive arrangements The terms of reference of the Remuneration Committee are available at www.pendragonplc.com. 59 Pendragon PLC Annual Report 2019DIRECTORS REMUNERATION REPORT REMUNERATION COMMITTEE CHAIRMAN’S LETTER TO SHAREHOLDERS Dear Shareholder On behalf of the Remuneration Committee, I am pleased to present the Director’s Remuneration Report for the financial year ending 31 December 2019. This report has been prepared by the Remuneration Committee and approved by the Board. This remuneration report is split into two sections: • • the new Directors’ Remuneration Policy; which we propose will apply for financial years 2020-2023; and the Annual Report on Remuneration. The proposed directors’ remuneration policy will be subject to a binding vote at the AGM on 23 April 2020. This new policy, if approved by shareholders, will last for a period of three years from the date of the AGM or until another policy is approved in a general meeting. The Annual Report on Remuneration describes annual remuneration and the amounts paid in respect of 2019 performance, and remains subject to an advisory only shareholder vote at the forthcoming AGM. Unquestionably, 2019 has been a challenging year for the business, both in terms of company performance and challenges caused by changes to, and the refreshing of, our Board of Directors. Set alongside these challenges, the Remuneration Committee has continued to closely follow the ongoing debate on executive remuneration, fairness and corporate culture. This has clearly been given more impetus by the implementation of the new UK Corporate Governance Code on 01 January 2019, Investment Association focus and expected action on executive pensions, the expectation of protecting against reward for failure and the expanded Remuneration Committee remit in terms of reviewing workforce remuneration and related policies. Despite the combination of all these challenges, the Remuneration Committee has worked diligently throughout the year in the development of a new remuneration policy for both Executive Directors and our senior management for the next period of our remuneration policy cycle. New Directors’ Remuneration Policy The Remuneration Committee believes that the proposed remuneration policy continues the focus on an approach to pay which we believe is both in our shareholders’ best interests but can also be categorised as providing executive remuneration packages which are competitive, flexible and transparent. We continue to maintain the bias in our remuneration policy towards long term incentives, supported through interlinked share ownership and deferral requirements within the annual bonus plan. Whilst the overall principles of the 2017 remuneration policy remain appropriate, the proposed 2020 remuneration policy provides greater flexibility in taking into account the challenges faced given the current uncertain macroeconomic climate. The main areas of change in the proposed Policy are: Increase to the maximum opportunity under the annual bonus to 150% of salary with maximum available only for true out- performance of budget. Moving away from the VCP to an LTIP which overall, the remuneration committee intends to be in line with best practice, with a three-year performance period and two-year holding period, but which retains a discretion for the remuneration committee to mkae awards with a one-year performance period and overall 3-year vesting period in exceptional circumstances. 60 60 Pendragon PLC Annual Report 2019 Pendragon PLC Annual Report 2018 Notwithstanding the above, the Committee is proposing several best practice changes to ensure that the Policy is aligned from a corporate governance perspective: Improved malus & clawback provisions including the addition of reputational risk and corporate failure to the triggers; Introduction of a post-cessation shareholding requirement equal to the in-employment shareholding requirement for 2 years after cessation of employment; and Changes to the pension policy to bring executive director pensions in line with the average employee rate over time by ensuring that new executive directors are appointed with a pension contribution which is not above the level available to the wider workforce. The CFO and CEO are entitled to a pension contribution which is in line with the wider workforce. Furthermore, the COO’s pension contribution (currently 26% of salary) will be reduced to be in line with the wider workforce by 1 January 2023. Annual bonus With regards to the 2019 annual bonus, the Committee notes that the executive directors would have received a payment based on the formulaic outcome of 100% of salary each. However, as a result of the overall performance of the Group and the challenges faced across the business, the executive directors decided to waive their entitlement to the bonus. For the annual bonus under the Policy, the proposal is to increase the opportunity from 100% of salary to 150% of salary and recalibrate targets such that the maximum pay-out is only possible where the Company’s budget has been significantly out-performed. The rationale for this increase is that the Committee has discovered during recruitment efforts that the annual bonus opportunity was not sufficiently attractive to be able to recruit the level of executive sought to lead the Company, particularly in a global market for talent. Furthermore, the Company believes that the additional stretch introduced to the targets will ensure that the executive directors are only rewarded the maximum amount for delivering over and above budgeted figures. Long-term incentives Our current VCP remains underwater and the last time value was realisable under the previous LTIP was in 2017: the Company therefore currently lacks a workable or meaningful long-term incentive plan with the ability to attract, retain or motivate our executive team. In order to address this issue, and ensure we have an effective and workable long-term incentive plan in place, we are proposing to introduce a new form of long-term incentive plan (“LTIP”), which we consider will align reward with performance and delivery of our business strategy. As a core policy, it is the Committee’s intention to be in line with best practice in the long-term, and on this basis, we intend to introduce a new form of LTIP with a three-year performance period and two-year holding period as our core LTIP framework. However, given the uncertain climate in the automotive sector and the macro-economic challenges in the UK, exacerbated by internal challenges faced by the company, the Committee intends to retain a discretion to make awards with a one-year performance period and overall three-year vesting period in such exceptional circummstances. It is currently anticipated that the committee will only exercise this discretion for initial awards. The proposal ensures the company will have a flexible long-term incentive structure which can be used as a tool to incentivise, motivate and attract executives. 61 Pendragon PLC Annual Report 2019DIRECTORS REMUNERATION REPORT In outline, the proposed LTIP will be:- • • • • Flexible: providing a discretion for a 1-year performance period in exceptional circumstances with the potential to change performance measures and targets for subsequent grants; Promote Retention: after performance is measured, an additional vesting period of 2 years is proposed before awards may be exercised, therefore there will be a total vesting period of 5 years for the core policy where discretion is not exercised; Incentivising: by offering the opportunity to be awarded up to 150% of salary for executive directors, with 1-year performance periods for initial grants in exceptional circumstances and annual grants, executives will be more motivated if there is greater certainty of accruing value sooner. Sustainable: the proposed LTIP will contain a number of features to ensure that the delivered performance is sustainable, including Remuneration Committee discretion to override formulaic outcomes where these do not reflect appropriately overall group performance. For the 2020 award it is proposed that exceptional grants be made to the CEO and the CFO. When the CEO and CFO joined the business, there was no long-term incentive arrangement in place under the current Policy which could have been used to incentivise them. As such, the enhanced award in 2020 is proposed to support the continued recovery of the business. The Committee would like to ensure that the CEO is appropriately incentivised at this crucial time for the Company. The COO will receive an award at the normal level as he had received an award under the VCP in 2017. The proposed award levels are therefore 250% of salary for the CEO and for the CFO. The proposed opportunity for the COO is 150% of salary. 2019 Outturn In August 2019, in recognition of the particular and unique challenges faced by the Executive Directors throughout the year, including in particular the continued and effective implementation of the Company’s strategy, the Remuneration Committee exercised its discretion to adjust targets and/or set different measures and weightings for the annual bonus plan which differed from those previously published (underlying (adjusted) profit and year end net debt). In the alternative, in order to ensure that the Executive Directors remained fully incentivised, qualitative criteria were introduced in which performance would be assessed against the ongoing execution, performance and delivery of the Company’s stated strategy objectives. The Remuneration Committee would be solely responsible for assessing progress against such strategic qualitative criteria, and determining whether any annual bonus (which remained capped at a maximum of 100% of salary) would be payable at its assessment at year end. Despite the exercise of this discretion, it has not been necessary for the Remuneration Committee to assess performance against the qualitative criteria, as all Executive Directors elected to voluntarily waive any entitlement to 2019 annual bonus which was supported by the Remuneration Committee. At last year’s AGM, 91.83% of shareholders voted in favour of the Directors’ Remuneration Report. Details of the votes cast are set out on page 78. I hope that you find the information in this report helpful and I look forward to your continued support at the Company’s AGM. Yours sincerely Mike Wright Chairman of the Remuneration Committee 62 Pendragon PLC Annual Report 2019REMUNERATION DISCLOSURE • clearly explain the range of possible values of rewards This report complies with the requirements of The Large and to individual directors including any other limits or Medium-sized Companies and Groups (Accounts and Reports) discretions; Regulations 2008, The Large and Medium-sized Companies • provide proportionate awards linked to delivery of and Groups (Accounts and Reports) (Amendment) Regulations strategy and long-term performance and ensuring poor 2013, the Companies (Miscellaneous Reporting) Regulations performance is not rewarded; 2018 and The Companies (Directors’ Remuneration Policy • ensure incentive schemes drive behaviours consistent and Directors’ Remuneration Report) Regulations 2019 (the with company purpose, values and strategy; Regulations) and has been prepared in accordance with the • attract and retain directors of the calibre necessary to run UK Corporate Governance Code and the UKLA Listing Rules. the business effectively with levels of remuneration that The parts of the report which have been audited in accordance are arrived at responsibly and also reflect their individual with the Regulations have been identified. contribution to the value of the company; • weight remuneration towards variable pay; REMUNERATION POLICY • encourage executives to build significant levels of share The remuneration policy set out in this section of the ownership, through the retention of vested share awards. remuneration report will replace the existing policy which was approved by shareholders at the 2017 AGM and will take Consistent with market practice, the Remuneration Committee effect for all payments made to directors from the date of the will retain full discretion over all elements of variable 2020 AGM. The Remuneration Committee has nevertheless remuneration, both in terms of annual bonus awards made and taken the opportunity to conduct a detailed review of the long term incentive awards granted and vesting. The extent of policy, both in light of developments in remuneration policy this discretion is more particularly described on page 61. and market practice, and also, following consultation with our major shareholders, to ensure their feedback is reflected REMUNERATION POLICY into the design of, and any modifications to, the policy going The new remuneration policy is detailed in this section. This forward. The remuneration principles and overarching aim of policy will be put to shareholders for approval at the AGM to our remuneration policy continues to be framed in such a way be held on 23 April 2020. The policy is intended to apply, as to provide and maintain the link between executive pay and subject to shareholder approval, for three years from the 2020 strategy, aiming to: AGM. Where a material change to this policy is considered, the company will consult major shareholders prior to submitting to • ensure remuneration arrangements are clear and all shareholders for approval. transparent, promoting effective engagement with shareholders and our team members; The remuneration policy will be displayed on the company’s • ensure remuneration structures avoid complexity, with an website (www.pendragonplc.com), following the 2020 AGM. easy to understand rationale and operation; • avoid reputational and other risks arising from excessive The table below summarises the individual elements of rewards, and avoiding or otherwise mitigating behavioural remuneration provided to the executive directors. risks that may arise from target-based incentive plans; 63 Pendragon PLC Annual Report 2019DIRECTORS REMUNERATION REPORT BASE SALARY PURPOSE AND LINK TO STRATEGY Provide competitive remuneration that will attract and MAXIMUM OPPORTUNITY Salary levels are eligible for increases during the three-year retain executives of the calibre required to take forward the period that the remuneration policy operates. During this time, company’s strategy. salaries may be increased each year. Salary increases are usually determined after taking due account of market conditions and typically, any increases awarded will be in line with the increase of that of the wider workforce. Significant changes in role scope may require further adjustments to bring salaries into line with new responsibilities. For recent joiners or promotions whose pay was initially set below market rate, higher than usual increases may be awarded to bring them into line with the market over a phased period as they develop in their role. OPERATION Base salaries are reviewed annually, effective from 1 January. PERFORMANCE METRICS Both individual and company performance is taken into The Committee sets base salaries taking into account: account when determining whether any salary increases are • the performance and experience of the individual appropriate. • • concerned; any change in responsibilities; appropriate executive remuneration benchmarking, reflecting the size and sector of the company PROPOSED CHANGES No changes proposed. Base salaries are paid monthly in arrears. BENEFITS MAXIMUM OPPORTUNITY Benefit levels are set to be competitive relative to companies PURPOSE AND LINK TO STRATEGY Cost-effective, market competitive benefits are provided to of a comparable size. The cost of some of these benefits is not pre-determined and may vary from year to year based on assist executive directors in the performance of their roles. the overall cost to the company of securing these benefits for a population of employees (particularly health insurance and death in service cover). OPERATION Life assurance, private health cover, professional subscriptions, PERFORMANCE METRICS Not applicable. home telephone costs and (at executive’s option) company cars. Relocation benefits may also be provided in certain circumstances if considered appropriate by the Remuneration Committee. PROPOSED CHANGES None. 64 Pendragon PLC Annual Report 2019FUTURE REMUNERATION POLICY FOR EXECUTIVE DIRECTORS PENSION ELEMENT AND PURPOSE Provide cost-effective long-term retirement benefits that will MAXIMUM OPPORTUNITY The maximum opportunity for newly appointed Executive form part of a remuneration package that will attract and Directors will be in line with pension contributions prevailing in retain executives who are able to take forward the company’s the wider workforce, and this is the case for the CEO and CFO strategy. were they to elect to take up a pension contribution. The COO currently receives a pension contribution of 26% of salary which is the maximum under the Policy. However, the following reductions are planned over the next four years:- Current 26% of salary; Effective 1 June 2020 – 23% of salary; 01 January 2021 – 20% of salary; 01 January 2022 – 15% of salary; 01 January 2023 – in line with wider workforce which will become 5% of salary; Further adjustments may be considered in subsequent years to maintain alignment. OPERATION Post-2009 executives: participation in a defined contribution PERFORMANCE METRICS No performance metrics apply. pension scheme. Pre-2009 executives: deferred membership of defined benefit pension scheme. PROPOSED CHANGES Pension contributions for new executive directors will be in line with wider workforce. 65 Pendragon PLC Annual Report 2019DIRECTORS REMUNERATION REPORT ANNUAL BONUS PURPOSE AND LINK TO STRATEGY Incentivises achievement of annual objectives which support MAXIMUM OPPORTUNITY Maximum available bonus is equivalent to 150% of base salary, the short-term goals of the company, as reflected in the annual which is available only for material outperformance of the business plan. company’s annual business plan. OPERATION Annual bonuses are earned over the year and are paid annually PERFORMANCE METRICS Annual bonus is earned based on performance against in arrears after the end of the financial year to which they stretching company financial performance measures as set relate, based on performance against targets over the year. and assessed by the Committee. A minimum of 25% of after tax bonus earned is subject to compulsory deferral into the company’s shares until such time 25% will be payable for threshold performance under each as the company’s share ownership guidelines are met. In such measure with 50% payable for target performance and 100% situations where bonus is deferred into shares, an executive for maximum performance. The specific measures, targets and director may be entitled to receive dividend payments on such weightings may vary from year to year in order to align with shares. the company’s strategy and the measures will be dependent on the company’s goals over the year under review. PROPOSED CHANGES Enhanced malus and clawback provisions. Increase in maximum opportunity from 100% of salary to 150% of salary in order to aid retention and recruitment of the calibre of executive required. LONG TERM INCENTIVE PLAN PURPOSE AND LINK TO STRATEGY Promotes retention and incentivisation over the longer term. MAXIMUM OPPORTUNITY Maximum opportunity will be 150% of base salary. In Aligns executive directors’ interests with the company’s share exceptional circumstances, the Committee may award up to price and its shareholders. 250% of salary. Prior to making any exceptional award, the Company will consult with its major shareholders. OPERATION The core design of the LTIP will be that awards are subject PERFORMANCE METRICS Stretching performance conditions will be set by the to performance conditions measured over three years and a Committee each year. At least 50% of each award will be service requirement for a further 2 years. The Committee may based on financial metrics, such as underlying EPS. 25% of the refine the choice of performance metrics each year in line with award will vest for threshold performance with 100% of awards developments in the company’s strategy. In the event of a being achieved for maximum performance. There is a straight significant or material change of approach, the Committee will line vesting between performance points. engage in dialogue with shareholders. The Committee may also apply a 2-year post-vesting holding period during which shares may not be sold. PROPOSED CHANGES New LTIP will replace the VCP under the previous remuneration policy. However, the Committee will retain a discretion to make awards with a one-year performance period and overall three- year vesting period in exceptional circumstances. 66 Pendragon PLC Annual Report 2019FUTURE REMUNERATION POLICY FOR EXECUTIVE DIRECTORS ALL EMPLOYEE SHARE SCHEME (SHARESAVE) PURPOSE AND LINK TO STRATEGY The Sharesave is an all employee share ownership plan which MAXIMUM OPPORTUNITY The maximum levels of participation set by legislation from has been designed to encourage all employees to become time to time. shareholders in the company and thereby align their interests with shareholders. OPERATION Executive directors are eligible to participate in Sharesave. PERFORMANCE METRICS No performance conditions. The executive directors are entitled to participate in any other all employee arrangements implemented by the company. CHANGES Introduction of the scheme. POLICY ON EXECUTIVE DIRECTOR SHARE OWNERSHIP The company continues to recognise the importance of Until such time as the policy is met, Executive Directors will executives building significant holdings of the company’s be required to hold any vested deferred bonus shares and shares to align the long-term interests of management and LTIP awards that vest (after sale of shares to cover associated shareholders in the success of the company. personal tax liabilities). The minimum shareholding requirement for the CEO is 200% Post-cessation shareholding requirement of 100% of the in- of salary (100% for all other Executive Directors), to be built up employment requirement for 2 years following cessation of within 5 years of appointment to the board. In circumstances employment. This provision supports sustained share price where the company is operating under an LTIP structure with performance and encourages strong succession processes. an overall three-year vesting period, this requirement will be reduced to 3 years. 67 Pendragon PLC Annual Report 2019DIRECTORS REMUNERATION REPORT POLICY ON NON-EXECUTIVE DIRECTORS’ REMUNERATION The company’s policy on non-executive directors’ remuneration in kind, typically the provision of a motor vehicle for their use. The company considers that the remuneration of the is reviewed annually by the Board. Remuneration for non- non-executive directors remains consistent with the time executive directors is confined to fees alone, without a commitments associated with individual positions and wider performance related element. Non-executive directors may market practice among companies of a comparable size. elect to receive all or part of their fees in the form of benefits Fee Type Chairman fee Basic fee: Supplementary fees: Senior Independent Director Audit Committee Chairman Remuneration Committee Chairman Nomination Committee Chairman Fee Level £150,000 £40,000 £4,000 £10,000 £5,000 Nil Change in 2019 None None None None None None Notes accompanying the future Remuneration Policy table:- 1. Malus and clawback – 1. malus and clawback may operate in respect of the annual bonus and long term incentive plan. This approach applies to all Executive Directors and senior management immediately below Board level. Malus will typically be an adjustment to the cash award or number of shares before an award has been made or released. Clawback requires the executive to make a cash repayment to the company or the surrender of shares or other benefits provided by the company. The overall intention is that, in exceptional circumstances, malus will apply before awards are paid or vest. Clawback will apply under the annual bonus scheme, for up to three years from when the cash payment is made, and malus will apply to any deferred shares (awarded at the same time as the cash payment) for three-year period of the deferral. Under the LTIP, clawback will continue to apply for up to two years following the three-year vesting period. As a minimum, the events in which malus and clawback may apply are as follows: • Material misstatement of financial statements. • Gross misconduct/fraud of the participant. • Where there has been an error in the calculation of performance outcomes, the value of awards, or the number of shares under an award. • Participant has caused reputational damage to the Company. • Participant has wholly or in part caused the corporate failure of the Company. Malus and clawback provisions are kept under review, in the light of prevailing Financial Reporting Council guidance. 2. Salary – base salaries are set by reference to the criteria specified in the table above. If a salary is initially set below the market rate, a phased realignment may be made over time. 3. Annual bonus – a target of underlying (adjusted) profit was selected as this measure directly correlates to company’s overall business plan. The specific measures, targets and weightings may vary from year to year in order to align with the company’s strategy and the measures will be dependent on the company’s goals over the year under review. Performance measures are determined by the Remuneration Committee who seek external guidance on the appropriateness of any performance targets set relative to the market. 4. Long term incentive plans – LTIP: under the company’s proposed long term incentive plan, performance shares are awarded up to a maximum of 150% of salary if significantly challenging performance targets are attained. The Remuneration Committee selected EPS as this remains the key internal measure of long term financial performance, as well as being well understood by the executives and our investors as providing a clear incentive to deliver the company’s long term growth prospects. The vesting schedule outlines the vesting percentages in relation to EPS performance targets, which were set after taking into account internal scenario analysis, current market expectations and the current trading environment. 5. Pensions – The Chief Operating Officer ceased to be an active member of the Pension Plan in 2006. In accordance with Investment Association (IA) guidelines, the company is proposing to effect a phased reduction in the salary supplement in lieu of pension contribution received by the Chief Operating Officer such that, by 01 January 2024, his salary supplement in lieu of pension contribution will be aligned to the employer pension contribution received by the majority of team members. 6. Benefits: - benefit levels are set to be competitive relative to companies of a comparable size. 7. Annual Bonus and LTIP Policy - Remuneration Committee Discretions: -The Committee will operate the annual bonus plan and LTIP in accordance with their respective rules and in accordance with the Listing Rules, where relevant. Consistent with market practice, the Committee retains discretion in a number of respects with regard to the operation and administration of these plans. These include the following (albeit with quantum and performance targets restricted to the descriptions detailed in the future policy table above):- who participates in the plans; • the timing of grant of award and/or payment; • the size of an award and/or payment; • the determination of vesting and/or meeting targets; • discretion required when dealing with a change of control (e.g. the timing of testing performance targets) or restructuring of the Group; • determination of good/bad leaver cases for incentive plan purposes based on the rules of each plan and the appropriate treatment chosen; • adjustments required in certain circumstances (e.g. rights issues, corporate restructuring events, share buybacks and special dividends); and • the annual review of performance measures and weighting, and targets for the annual bonus plan and LTIP from year to year or on award. The Committee also retains the ability to adjust the targets and/or set different measures and alter weightings for the annual bonus plan and to adjust targets for the LTIP if events occur (such as a material divestment of Group business) which cause it to determine that the conditions are no longer appropriate and the amendment is required so that the conditions achieve their original purpose and are not materially less difficult to satisfy. The company retains the authority to honour any commitments entered into with current of former directors that have been disclosed to shareholders in previous remuneration reports (e.g. all historic awards that were granted under any LTIPs that remain outstanding, as detailed in the company’s latest Annual Report), and which remain eligible to vest based on their original award terms. Details of any payments to former directors will be set out in the Annual Report on remuneration as they arise. With regard to any promotions to executive director positions, the company will retain the ability to honour payments agreed prior to executives joining the Board, albeit any payments agreed in consideration of being promoted to the Board will be consistent with the policy on new appointments as an executive director detailed in the Remuneration Policy at www.pendragonplc.com 68 Pendragon PLC Annual Report 2019ILLUSTRATION OF OUR REMUNERATION POLICY FOR 2020 The table below illustrates the operation of the remuneration policy and provide estimates of the potential future remuneration that Executive Directors would receive, in the scenarios shown, in accordance with the directors’ remuneration policy for 2020. Potential outcomes based on different performance scenarios are provided for each Executive Director. A significant percentage of remuneration is linked to performance, particularly at maximum levels. The chart illustrates the remuneration that could be paid to each of the executive directors, based on salaries at the start of the financial year 2020. Fixed + Annual Bonus + LTIP = Total Element Fixed Description Minimum On Target Maximum Fixed (comprises base salary, benefits, pension) Included Included Included Annual Bonus Annual bonus Long Term Incentive Plan 25% 25% 50% of the maximum bonus1 100% of the maximum bonus1 50% of maximum LTIP2 100% of the maximum LTIP2 1The maximum bonus available for executive directors is equivalent to 150% of base salary. 2Awards made under the long term incentive plan (LTIP) will be on an annual basis with a one year measurement period. The maximum LTIP award available for executive directors is equivalent to the award of nil-cost options at 150% of base salary pursuant to the core policy.. 3Impact of share price growth on equity based incentives – In accordance with The Companies (Miscellaneous Reporting) Regulations 2018, indications of maximum remuneration available do not allow for any share price growth. (£m) 2.5m 2.0m 1.5m 1.0m 0.5m 0 2.200m 1.374m 0.550m 1.504m 0.940m 1.237m 0.773m 0.376m 0.309m Minimum On Target Maximum Minimum On Target Maximum Minimum On Target Maximum CHIEF EXECUTIVE OFFICER CHIEF OPERATING OFFICER CHIEF FINANCE OFFICER Fixed Elements Annual Bonus LTIP 69 Pendragon PLC Annual Report 2019DIRECTORS REMUNERATION REPORT POLICY ON NEW APPOINTMENTS AS AN EXECUTIVE DIRECTOR The table below sets out the principles which would be applied by the company when agreeing the components of a remuneration package for a newly appointed executive director. New appointments as executive director Reward Element Base Salary Base salary in accordance with policy detailed within the remuneration policy table at page 64. Benefits LTIP Pension Annual Bonus SAYE Buy Outs Will be provided in accordance with the policy within the remuneration policy table at page 64. Eligible to participate in the LTIP, as described in the remuneration policy table at page 66. Pension contributions for new executive directors will not exceed the rate available to the wider workforce. Eligible to participate in the annual bonus plan in operation as described in the remuneration policy table at page 66. Eligible to participate in the SAYE, as described in the remuneration policy table at page 67. In order to facilitate the external recruitment of executive directors, it may be necessary for the Committee to consider buying out existing incentive awards which would be forfeit on the individual leaving their current employment. The Committee would seek, where possible, to provide a buy out structure which was consistent with the forfeited awards in terms of quantum, vesting period and performance conditions. POLICY ON NEW APPOINTMENTS changes to our below board compensation and reward AS NON-EXECUTIVE DIRECTOR The company’s policy on non-executive director remuneration packages, including consideration of changes to bonus structures, pension arrangements and leave entitlements, is detailed in the remuneration policy table. New appointments as well as general in-work benefits. Having taken into of non-executive directors will be made consistent with this consideration team member views, proposals to change below policy. board compensation structures were reviewed by a working party consisting of the executive directors and Head of Human HOW EMPLOYEES’ PAY IS TAKEN INTO Resources, and subsequently by the Remuneration Committee ACCOUNT IN EXECUTIVE REMUNERATION Pay and conditions elsewhere in the Group were considered in order to ensure that team member views and interests were fully considered prior to any changes being made. In when finalising the current remuneration package for executive addition to the above, the Company is also proposing the directors, and the Remuneration Committee reviewed re-introduction of an all employee sharesave scheme, when workforce remuneration and related policies to ensure rewards economic conditions allow, to encourage team member and incentives were aligned with the culture when developing involvement in the Company’s performance through share and setting the policy for executive director remuneration. ownership. The Company continues to ensure team members The Committee continues to be updated throughout the year have regular access to updates and information concerning on salary increases and the levels of annual bonus awards, and the financial performance of the Company through various proposed changes to remuneration policy and practice for the communication channels, as described on page 49. wider Group, ensuring that changes to remuneration policy below board level remain consistent and transparent with HOW ARE SHAREHOLDERS’ VIEWS TAKEN INTO those implemented or proposed for executive directors. In ACCOUNT WHEN DETERMINING EXECUTIVE addition, the Committee continues to oversee participation in long term incentives for below Board level team members. As COMPENSATION PACKAGES? The Board considers shareholder feedback received in relation a result, the Committee is aware of how typical employee total to the AGM each year at a meeting immediately following the remuneration compares to the potential total remuneration of AGM and any action required is built into the Remuneration executive directors. No across the board pay increases have been awarded to the Committee’s business for the ensuing period. This, and any additional feedback received from shareholders from time to time, is then considered by the Committee as part of the wider workforce in recent years, and this is also the case for Company’s annual review of remuneration policy. executive directors’ salaries. During 2019, the company consulted with team members in undertook a review of remuneration policy, taking into account order to take into account team member’s views on proposed developments in remuneration policy, as well as prevailing During late 2019 and early 2020, the Remuneration Committee 70 Pendragon PLC Annual Report 2019market practice and considering the views of our major shareholders. The Remuneration Committee Chairman SERVICE CONTRACTS AND EXIT PAYMENTS Executive directors are appointed under service contracts of continues to make himself available to shareholders to discuss indefinite duration (with a 12 month notice period), whereas our specific matters arising from our remuneration policy non-executive directors each have a fixed term appointment proposals. The outcome of this exercise forms the basis of the letter renewable upon expiry at the company’s discretion. remuneration policy detailed in the future policy table above, Appointments of new non-executive directors and renewals of and which we intend will form the basis of our remuneration existing appointments are on three-year fixed terms. When policy for the period 2020-2023. The Chairman of the considering the re-appointment of a non-executive director, Remuneration Committee aims to maintain regular contact the Board reviews their attendance at, and participation in, with our major shareholders at key points during the year to meetings and their overall performance, and also takes into ensure we are fully aware of their prevailing thinking on our account the balance of skills and experience of the Board as remuneration policies. a whole. Name Mike Wright Brian Small Commencement Expiry/cessation Unexpired at date of report (months) 02.05.18 10.12.19 31.12.21 31.12.22 21 33 As noted at page 46, the company is actively seeking to recruit notice. The company would expect any future executive and appoint a non-executive chairman. The service contract of director appointments to contain the same terms as to executive director Martin Casha commenced on 20 December notice periods. Executive director appointment terms do not 1999, and was refreshed in December 2019. The service contain any entitlement to any predetermined compensation contract of Mark Willis commenced on 08 April 2019, and was or severance payments in the event of cessation in office or also refreshed in December 2019. The service contract of Bill employment as a consequence of a takeover. Service contracts Berman commenced on 01 October 2019 for the purposes of and letters of appointment are kept for inspection at the performing the role of interim executive chairman, and was company’s registered office. With regard to the circumstances also refreshed in December 2019. On appointment to the role under which the current executive directors might leave of chief executive officer on 19 February 2020, Bill Berman was service, the possible payments that may be anticipated are issued with a new service contract. Each executive service described in the table below:- contract may be terminated by the company giving one year’s NATURE OF BENEFIT REASON FOR LEAVING “Bad” leaver (e.g. resignation) “Good” leaver (e.g. ill health or retirement) Departure on Agreed Terms Salary in lieu of notice period No salary in lieu of notice paid on resignations unless in the interests of the company to do so. Up to a maximum of 100% of salary (e.g. redundancy). Normal practice would be for phased payment. Pension and benefits Provided for period of notice period served. No benefits provided for periods after actual cessation of service unless in the interests of the company to do so. Up to one year’s worth of pension and benefits (e.g. redundancy). Possible payment of pension and insured benefits triggered by the leaver event (this would be governed by the terms of the benefits provided). Treatment will de- pend on the circum- stances of the leaver event, subject to the discretion of the Remuneration Com- mittee, and the terms of any termination agreement. Bonus Long-term incentive entitlements None Lapse Yes (discretion to pay pro-rata based on company’s performance) Discretion to allow up to full vesting, based on company’s performance, with normal practice to be for pro rata vesting based on the proportion of the performance period served. Other payments None Disbursements such as contribution to legal costs FEES FROM EXTERNAL DIRECTORSHIPS None of the executive directors holds office as a non-executive director may keep fees gained from holding an external non- executive directorship or similar. This would be decided on a director of other companies. Accordingly, the company does case by case basis. not have a formal policy on whether or not an executive 71 Pendragon PLC Annual Report 2019ANNUAL REPORT ON REMUNERATION THE COMMITTEE’S WORK IN 2019 • determined annual bonus awards in respect of 2018 ADVISERS During 2019, the Committee received external advice from • • • • • performance PwC, who received fees of £118,000 in respect of the same. The set and revised the annual bonus plan terms for 2019 Company Secretary also acts as secretary to the Committee reviewed performance to target under the Value Creation and provided additional advice. Plan set 2019 executive director salary levels noted remuneration trends across the Group reviewed remuneration policy and proposed introduction of a new Long Term Incentive Plan SINGLE TOTAL FIGURE OF REMUNERATION FOR EXECUTIVE DIRECTORS AND THE INTERIM EXECUTIVE CHAIRMAN 2019 (AUDITED INFORMATION) Base Salary £000 Taxable benefits1 £000 Pension2 £000 Bonus3 £000 LTIP & VCP4 £000 Single total figure £000 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 248 292 223 116 168 55 - 292 - 464 - 221 - 9 2 4 1 9 - 8 - 4 - 6 - 76 - 30 - 6 - 76 - 121 - 22 - - - - - - - - - - - - - - - - - - - - - - - - 248 377 225 150 169 70 - 376 - 589 - 250 Current Directors William Berman Martin Casha Mark Willis Former Directors Trevor Finn Mark Herbert Tim Holden 1. Benefits in kind include life assurance, private health cover, professional subscriptions, contribution to home telephone costs and the provision of up to two cars (at the Director’s election), one of which is fully expensed. 2. Salary supplement in lieu of pension contribution, or in the case of former director Tim Holden, company contribution to defined benefit contribution scheme of 10% of basic salary (£6,000 in 2019, £22,083 in 2018). In 2006, Martin Casha and former director Trevor Finn ceased to be active members of the Pendragon defined benefit pension plan. Former director Trevor Finn elected to take early retirement benefits from 08.02.08 and is therefore a pensioner member. Martin Casha also elected to take early retirement benefits from 01.07.16 and is therefore also a pensioner member. In April 2016, former director Tim Holden elected to receive a payment of 10% of salary rather than continue to receive pension contributions. In accordance with Investment Association (IA) guidelines, the company is proposing to effect a phased reduction in the salary supplement in lieu of pension contribution received by Martin Casha such that, by 01 January 2024, his salary supplement in lieu of pension contribution will be aligned to the employer pension contribution received by the majority of team members. 3. Bonus Award in 2019 equivalent to 0% of base salary. 2018 total equivalent to 0% of base salary. 4. There are no outstanding rewards remaining under the previous company Long Term Incentive Plan. The performance conditions for the LTIP awarded in 2016 have not been achieved, and consequently these awards lapsed in their entirety in 2018. The performance period for the Value Creation Plan (“VCP”) awarded in 2017 is 01.01.17 to 31.12.20: no awards vest during this performance period, with entitlement to awards due to be assessed at the measurement date of 31 December 2020, subject to the satisfaction of the performance condition outlined on page 66. 72 Pendragon PLC Annual Report 2019SINGLE TOTAL FIGURE OF REMUNERATION FOR NON-EXECUTIVE DIRECTORS 2019 (AUDITED INFORMATION) Basic Fee £000 Taxable benefits £000 SID/Committee Chair Fee £000 Single total figure £000 2019 2018 2019 2018 2019 2018 2019 2018 40 3 150 40 12 17 30 - 150 9 40 - - - 1 - - - - - 1 4 - - 5 - - 14 - - - - - - - - 45 3 151 54 12 17 45 - 151 9 40 - Current Directors Mike Wright Brian Small1 Former Directors Chris Chambers2 Richard Laxer3 Gillian Kent4 William Berman4 1. Brian Small was appointed to the Board on 10.12.19. Accordingly, his fees are for the period 10.12.19 to 31.12.19 2. Chris Chambers stood down from the Board on 01.10.19, although it was agreed that he would continue to receive fees until 31.12.19. 3. Richard Laxer stood down from the Board on 31.12.19. 4. Gillian Kent stood down from the Board on 18.04.19. Accordingly, her fees are for the period 01.01.19 to 18.04.19 5. William Berman was a non-executive director for the period 18.04.19 to 01.10.19. Accordingly, his fees as a non-executive director are for this period. PAYMENTS TO PAST DIRECTORS AND PAYMENTS and he received the sum of £221,000 as a contractual payment FOR LOSS OF OFFICE (AUDITED INFORMATION) Termination Payments: Trevor Finn’s employment with the in lieu of 12 months’ notice, the sum of £80,000 on an ex gratia basis as compensation for the termination of his employment company terminated on 31.03.19 and he received the sum and the sum of £2,500 as a contribution towards the cost of £463,500 as a contractual payment in lieu of 12 months’ of legal fees incurred in connection with the cessation of his notice, the sum of £125,000 in respect of 12 month’s loss of employment. Mr Holden’s participation in the VCP ceased on pension contributions and benefits and the sum of £10,000 the termination date of his employment and he has no further as a contribution towards the cost of legal fees incurred in rights or benefits under the VCP. Mark Herbert’s employment connection with the cessation of his employment. Mr Finn with the company terminated on 30.06.19 and he received the continues to hold an option under the Company’s Value sum of £463,500, paid in two equal instalments at the half year Creation Plan (“VCP”). Mr Finn’s VCP Award will be retained and year end as a contractual payment in lieu of 12 months’ and vest in accordance with the VCP rules on its normal notice, such payment including the sum of £46,350 in respect vesting date on the basis of the performance conditions which of 12 month’s loss of pension contributions and benefits. In have been set for the VCP Award, save that the number of addition, the company paid Mark Herbert the sum of £5,000 plan shares which vest will be reduced pro rata to reflect the as a contribution towards the cost of legal fees incurred in number of whole months from the award date of the VCP connection with the cessation of his employment. Mr Herbert Award to the termination date of Mr Finn’s employment. Tim was not a participant in the VCP and accordingly has no rights Holden’s employment with the company terminated on 31.03.19 or benefits under the same. 73 Pendragon PLC Annual Report 2019DIRECTORS REMUNERATION REPORT IMPLEMENTATION OF THE REMUNERATION POLICY IN THE FINANCIAL YEAR ENDING 31 DECEMBER 2020 he Committee envisages that there will be a number of changes arising from the implementation of the remuneration policy during financial year ending 31 December 2020. The policy in respect of the executive directors will be applied as follows: Element of Pay Implementation of Policy BASE SALARY Other than potential adjustments to take account of market conditions and changes in role scope to reflect additional responsibilities undertaken, base salary will continue to be set in accordance with the remuneration policy. Base salaries for 2020: Chief Executive Officer: £550,000 Chief Finance Officer: £302,500 Chief Operating Officer: £301,182 BENEFITS PENSION No changes are expected to be made to these elements of remuneration within the financial year ending 31 December 2020. The Chief Operating Officer receives a pension contribution of 26% of salary. In accordance with the remuneration policy, it is the intention to ensure that all executive directors receive a pension contribution or salary supplement in lieu thereof in line with the pension contribution received by the wider workforce. It is proposed to effect a reduction in the Chief Operating Officer’s salary supplement in lieu of pension contribution to 23% of salary by 01 June 2020, as the first step in a phased reduction over a four year period. Any new executive director will have their pension contribution aligned to that available to the majority of UK-based team members. ANNUAL BONUS The bonus opportunity for the executive directors has been increased to a maximum opportunity of 150% of base salary, payable at the maximum level only for significant (50%) outperformance against the corporate plan. LONG TERM INCENTIVE PLAN The targets for the 2020 annual bonus will be disclosed retrospectively in the 2021 Director’s Remuneration Report as the Committee deems them to be commercially sensitive. The bonus metric for 2020 will be based on achieving underlying (adjusted) profit against the corporate plan. 25% of after tax bonus earned will be subject to compulsory deferral into the company’s shares until such time as the company’s share ownership guidelines are met. For the 2020 LTIP award and first award under the policy, the Remuneration Committee intends to use its discretion to make an award of 250% for the chief executive officer and chief finance officer and operate a shorter performance period of one year. Vesting of awards is determined based on the achievement of stretching EPS targets over a 1 year performance period. 25% of the award will vest for threshold performance with 100% of awards being achieved for maximum performance. There is a straight line vesting between performance points. ALL EMPLOYEE SHARE SCHEME (SHARESAVE) In the event that the Company elects to make an award under the All Employee (Sharesave) Scheme, executive directors will be invited to participate. SHAREHOLDING GUIDELINES The minimum shareholding requirement for the CEO is 200% of salary (100% for all other Executive Directors), to be built up within 5 years of appointment to the board; 3 years where LTIP operates to a 3 year vesting period Until such time as the policy is met, Executive Directors will be required to hold any vested deferred bonus shares and LTIP awards that vest (after sale of shares to cover associated personal tax liabilities). MALUS AND CLAWBACK Malus and clawback will continue to operate in respect of the annual bonus and long-term incentive plan, in accordance with the parameters detailed in the remuneration policy. PENSIONS The Pendragon Pension Plan (Pension Plan) is established for Martin Casha ceased to be an active member of the Pension Plan in 2006. The non-executive directors are not eligible the benefit of the Group’s eligible employees. The Pension to participate in the Pension Plan. New executive directors Plan operates through a trustee company which holds and administers its assets entirely separately from the Group’s are invited to participate in the Pension Plan, should they so wish, with any pension contributions being in line with wider assets. There is no direct investment in Pendragon PLC. workforce. 74 Pendragon PLC Annual Report 2019PERFORMANCE RELATED PAY FOR 2019: ANNUAL BONUS There were no annual bonuses earnt in 2019. For 2019, three months ending on the Measurement Date plus the cumulative dividends paid per share over the Performance the Remuneration Committee exercised its discretion, in Period. The starting share price was set at £0.3016 (“Initial accordance with the remuneration policy, to reset the Price”), being the three month average share price prior to performance conditions for the 2019 annual bonus such that 01 January 2017. The hurdle price was set at £0.442, being a maximum annual bonus opportunity of 100% of base salary the Initial Price plus 10% compounded annual growth over the would be payable provided that certain pre-determined Performance Period (“Hurdle”). The total participation pool for strategic performance objectives were achieved. It has not the VCP will be 10% of the total value created above the Hurdle been necessary for the Remuneration Committee to assess (“Pool”). The number of shares under the nil cost option will performance against the qualitative criteria, as both executive be determined at the end of the Performance Period on the directors elected to voluntarily waive any entitlement to 2019 Measurement Date and will be calculated by reference to the annual bonus. executive director’s percentage entitlement to growth in value below. Any awards which vest after the four year Performance LONG TERM INCENTIVES VESTING IN 2019 There were no outstanding long-term incentive due to vest Period will be subject to a further one year holding period. [Executive director Martin Casha has voluntarily elected based on performance to full year 2019. to waive his VCP award entitlement]. Former director Tim VALUE CREATION PLAN (VCP) AWARDS No VCP awards were made in 2019. The executive directors Holden’s participation in the VCP ceased on the termination of his employment. Former director Trevor Finn retained his VCP award which will vest in accordance with the VCP rules on were granted a nil cost option over ordinary shares of the its normal vesting date provided the performance conditions company on 26 May 2017. Vesting is based on the growth outlined above have been achieved, save that the number of absolute total shareholder return generated over the VCP of plan shares which vest will be reduced pro rata to reflect performance period. The performance period for the award the number of whole months from the award date of the comprises the four years (“Performance Period”) commencing VCP Award to the termination date of his employment as a on 01 January 2017. The VCP award gives the executive proportion of the original vesting period. directors the opportunity to share in a proportion of the total value created for shareholders above a hurdle (“Threshold Total Shareholder Return”) measured at the end of the Performance DIRECTORS’ SHAREHOLDINGS (AUDITED) The shareholdings of all Directors, including the shareholdings Period on 31 December 2020 (“Measurement Date”). The price of their connected persons as at 31 December 2019, are set out used for this measurement (“Measurement Total Shareholder below. There have been no changes in the Directors’ interests Return”) will be the sum of the average share price for the from 31 December 2019 to the date of this report. DIRECTORS’ SHAREHOLDINGS (AUDITED) Legally owned as at 31.12.2019 Legally owned as at 31.12.2018 William Berman Martin Casha Mark Willis Brian Small Mike Wright Nil 9,559,780 Nil 400,000 Nil n/a 9,559,780 n/a n/a Nil Directors’ Shareholdings (Audited Information) Executive requirement to build up a shareholding of 200% of salary and director Martin Casha fulfils the requirement of the company 100% of salary respectively within 5 years from appointment share ownership policy applicable to them (i.e. building a stake as executive directors. There is no company policy on non- equivalent to 100% of base salary. The CEO and CFO have a executive director share ownership. 75 Pendragon PLC Annual Report 2019DIRECTORS REMUNERATION REPORT TOTAL SHAREHOLDER RETURN1 The graph below shows the total shareholder return (“TSR”)2 period, in the market price of the shares, assuming that any dividends paid are reinvested on the ex-dividend date. The on the company’s shares in comparison to the FTSE Small relevant period is the ten years ending 31 December 2019. Cap Index (excluding investment companies).3 TSR has been The notes at the foot of the graph provide more detail of the calculated as the percentage change, during the relevant TSR calculation. PENDRAGON PLC TSR 2010 - 2019 300 200 100 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 PENDRAGON PLC - TOTAL RETURN INDEX FTSE SMALL CAP EX INV. TRUSTS - TOTAL RETURN INDEX 1. This report is required, pursuant to the Large and Medium sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, regulation 18, Performance Graph. 2. Total Shareholder Return (“TSR”) is calculated over the ten years ended on 31 December 2019 and reflects the theoretical growth in the value of a shareholding over that period, assuming dividends (if any) are reinvested in shares in the company. The price at which dividends are reinvested is assumed to be the amount equal to the closing price of the shares on the ex- dividend date plus the gross amount of annual dividend. The calculation ignores tax and reinvestment charges. For each company in the index, the TSR statistics are normalised to a common start point, which gives the equivalent to investing the same amount of money in each company at that time. The percentage growth in TSR is measured over the chosen period. To obtain TSR growth of the relevant index over the chosen period, the weighted average of TSR for all the companies in the index is calculated. In this case, it is the FTSE Small Cap Index (excluding investment companies) as explained in Note 3. The weighting is by reference to the market capitalisation of each company in the index in proportion to the total market capitalisation of all the companies in the index at the end of the chosen measurement period. 3. The FTSE Small CAP index has been selected as it represents the equity market in which the Company was a constituent member for the majority of the relevant seven year period ending 31 December 2019 detailed above. HISTORY OF CHIEF EXECUTIVE REMUNERATION Chief Executive 20191 2018 2017 2016 2015 2014 2013 2012 2011 2010 Total Remuneration £m (single figure) 464 589 727 1,605 1,775 3,472 2,961 857 946 944 Annual bonus award (% of maximum that could have been paid) 0% 0% 30% 87% 100% 100% 100% 54% 75% 75% Percentage of LTIP2 vesting 0% 0% 0% 100% 56% 100% 100% 0% 0% 0% 1. Total remuneration for the chief executive role in 2019 has been calculated based on total remuneration paid to the holder of the role of chief executive officer for the period from 01.01.2019 to 30.06.2019, with the total remuneration payable for full reporting period based on extrapolated data assuming the last holder of the role of chief executive officer had continued in the role at the same level of remuneration to the end of the full reporting period. 2. Percentage of shares vesting under the Pendragon Long Term Incentive Plan against the maximum number of shares that could have been received. 76 Pendragon PLC Annual Report 2019 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 PERCENTAGE CHANGE IN CHIEF EXECUTIVE REMUNERATION The table below illustrates the percentage change in the remuneration awarded to the chief executive between the preceding year and the reported year and that of the group’s employees across its entire UK business. % change in salary 2019 compared to 2018 % change in in benefit 2019 compared to 2018 % change in bonus 2019 compared to 2018 Chief Executive Employees of Company as a whole 0% 0% 0% 7.14% 17.07% -16.26% 77 Pendragon PLC Annual Report 2019 DIRECTORS REMUNERATION REPORT CHIEF EXECUTIVE OFFICER PAY RATIO The table below shows our chief executive officer pay ratio at 25th, median and 75th percentiles of our UK team members. The ratios have been calculated based on the single total figure of remuneration for the chief executive officer and the total pay for the team members based on our gender pay gap data under Option B of The Companies (Miscellaneous Reporting) Regulations 2018. We have used Option B as the Company has already completed comprehensive data collection and analysis for the purposes of gender pay gap reporting, and continues to do so on a monthly basis. The gender pay gap data used was collated on 31 December 2019. Financial year Method 25th percentile pay ratio (lower quartile) Median pay ratio (median) 75th percentile pay ratio (upper quartile) 2019 Option B 29:1 25:1 19:1 1. Total pay for the percentile employees taken from our gender pay gap data includes the following pay elements: base salary, holiday pay, hourly pay, national minimum wage top ups, car allowance, acting up allowance, monthly advances, team member vouchers subject to national insurance, benefit schemes, statutory sick pay, maternity pay and paternity pay. Team members who have not received pay (in terms of salary and adjustments) but has still received other salary payments are excluded from our gender pay gap data. RELATIVE IMPORTANCE OF SPEND ON PAY The table below illustrates the year-on-year change in total team member pay (being the aggregate of staff costs as set out in note 2.4 to the financial statements and distributions to shareholders (being declared dividends). Team member pay Distribution to shareholders 2019 (£m) 2018 (£m) %change 2019 2018 %change £297.6m £297.2m -0.13% £9.7m £22.5m -56.89% SHAREHOLDERS’ VOTE ON REMUNERATION AT THE 2019 AGM 2019 Directors’ Remuneration Report Number Proportion of votes cast Votes cast in favour Votes cast against Total votes cast in favour or against Votes withheld 976,064,550 86,865,776 1,062,930,326 0 91.83 8.17 100% SHARE PRICE INFORMATION AND PERFORMANCE Other than those detailed above, there are no share option or long term incentive schemes in which the directors are eligible to participate. The middle market price of Pendragon ordinary shares at 31 December 2019 was 13 pence and the range during the year was 9 pence to 28.45 pence. APPROVAL This report was approved by the Committee and signed on its behalf by:- Mike Wright Chairman of the Remuneration Committee 18 March 2020 78 Pendragon PLC Annual Report 2019DIRECTORS REPORT STRATEGIC REVIEW AND PRESCRIBED REPORTING Our Strategic Review at pages 4 to 19 contains the information, By resolutions passed at company general meetings, the shareholders have authorised the directors: (i) to allot and prescribed by the Companies Act 2006, required to present issue ordinary shares; (ii) to offer and allot ordinary shares in a fair review of the company’s business, a description of the lieu of some or all of the dividends; and (iii) to make market principal risks and uncertainties it faces, and certain of the purchases of the company’s ordinary shares (in practice, information on which reports and statements are required by exercised only if the directors expect it to result in an increase the UK Corporate Governance Code. The Board approved the in earnings per share). Details of movements in the company’s Strategic Review set out on pages 4 to 19 and the Viability share capital are given in note 4.4 to the financial statements. Statement set out on page 42. Additional information on which the directors are required by law to report is set out below and From time to time, Pendragon provides financial assistance in the following:- Corporate Governance Report Board of Directors • • • to its independent employee benefits trust to facilitate the market purchase of ordinary shares in the company for use in connection with various of the company’s employee incentive schemes. The company did not purchase any shares in this Corporate Social Responsibility Report way in 2019. • Audit Committee Report • Nomination Committee Report • Directors’ Remuneration Report • Directors’ Report BUSINESS AT THE AGM At the AGM, a separate shareholders’ resolution is proposed for each substantive matter. We will issue with shareholders • Directors’ Responsibility Statement the company’s annual report and financial statements together with the notice of AGM, giving not less than the requisite period In the interests of increasing the relevance of the Report and of notice. The notice sets out the resolutions the directors are reducing the environmental impacts of over-lengthy printed proposing and has explanatory notes for each. At the AGM, reports, we have placed on our website at certain background directors’ terms of appointment are available for inspection information on the company the disclosure of which, in this and, as well as dealing with formal AGM business, the Board Report, is not mandatory. takes the opportunity to give an update shareholders on the company’s trading position. The Chairman and each We monitor reaction to the publication of shareholder committee chairman are available to answer questions put by information on our website, to help shape our shareholder shareholders present. communication and future improvements. RISK ASSESMENT The board has carried out a robust assessment of the Group’s DIRECTORS AND THEIR INTERESTS IN SHARES Current directors are listed on pages 44 to 45. Details of the terms of appointment and notice period of each of the current emerging and principal risks. Please see pages 34 to 41. directors, together with executives directors’ respective RESULTS AND DIVIDENDS The results of the Group for the year are set out in the financial interests in shares under the company’s long term incentive plan (non-executive directors have none), appear in the Directors’ Remuneration Report on pages 60 to 78. Directors statements on pages 93 to 181. No interim dividend was who served during 2018 and their respective interests in the paid during the year, and the directors are not proposing to company’s issued ordinary share capital are shown in the table recommend a final dividend for the year ended 31 December below. All holdings shown are beneficial. None of the directors 2019. APPOINTMENT AND POWERS OF THE COMPANY’S DIRETORS Appointment and removal of directors is governed by the company’s articles of association (the Articles), the UK Corporate Governance Code (the Code), the Companies Acts and related legislation. Subject to the Articles (which shareholders may amend by special resolution), relevant holds options over company shares. Each executive director fulfils the requirements of the company’s share ownership policy applicable to them. There is no company policy requiring non-executive directors to hold a minimum number of company shares. DIRECTORS’ ROTATION The UK Corporate Governance Code (July 2018) imposes an obligation that all Directors should be subject to annual re- legislation and any directions given by special resolution, the election. company and its group is managed by its board of directors. 79 Pendragon PLC Annual Report 2019DIRECTORS REPORT Directors’ shareholdings William Berman Martin Casha Mark Willis Mike Wright Brian Small Chris Chambers (exited 01.10.19) Trevor Finn (exited on 31.03.19) Tim Holden (exited on 31.03.19) Richard Laxer (exited 31.12.19) Gillian Kent (exited 18.04.19) Mark Herbert (exited 30.06.19) Number at 31.12.19 Number at 31.12.18 nil 9,559,780 nil nil 400,000 2,500,000 19,127,976 2,131,331 nil nil n/a 9,559,780 n/a nil n/a 2,000,000 19,127,976 2,131,331 nil nil 500,000 nil INDEMNITIES TO DIRECTORS In line with market practice and the company’s Articles, each director has the benefit of a deed of indemnity from VOTING RIGHTS, RESTRICTIONS ON VOTING RIGHTS AND DEADLINES FOR VOTING RIGHTS Shareholders (other than any who, under the Articles or the the company, which includes provisions in relation to duties terms of the shares they hold, are not entitled to receive such as a director of the company or an associated company, notices) have the right to receive notice of, and to attend and qualifying third party indemnity provisions and protection to vote at, all general and (if any) applicable class meetings of against derivative actions. Copies of these are available for the company. A resolution put to the vote at any general or shareholders’ inspection at the AGM. class meeting is decided on a show of hands unless (before or on the declaration of the result of the show of hands or SHARE CAPITAL As at 31 December 2019, Pendragon’s issued share capital on the withdrawal of any other demand for a poll) a poll is properly demanded. At a general meeting, every member comprised a single class: ordinary shares of 5 pence each. The present in person has, upon a show of hands, one vote, and on Articles permit the creation of more than one class of share, a poll, every member has one vote for every 5 pence nominal but there is currently none other than ordinary shares. Details amount of share capital of which they are the holder. In the of the company’ share capital are set out in note 4.4 to the case of joint holders of a share, the vote of the member whose accounts. All issued shares are fully paid. The company did name stands first in the register of members is accepted to not issue any new shares during the period under review. The the exclusion of any vote tendered by any other joint holder. rights and obligations attaching to the company’s ordinary Unless the Board decides otherwise, a shareholder may not shares are set out in the Articles. The Company is currently vote at any general or class meeting or exercise any rights in authorised to issue up to two-thirds of its current issued share relation to meetings whilst any amount of money relating to his capital pursuant to a resolution passed at its 2019 AGM. shares remains outstanding. SIGNIFICANT DIRECT OR INDIRECT SHAREHOLDINGS At 1 March 2020 the directors had been advised of the following A member is entitled to appoint a proxy to exercise all or any of their rights to attend and speak and vote on their behalf at a interests in the shares of the company:- general meeting. Further details regarding voting can be found Shareholder Teleios Capital Partners (Zug) Odey Asset Mgt (London) Anders Hedin Invest AB (Regional (Sweden) Schroder Investment Mgt (London) Hosking Partners (London) Dimensional Fund Advisors UBS Group AG Legal & General Group Blackrock Inc 80 Number of shares Percentage of voting rights of the issued share capital 317,943,656 209,713,895 189,188,563 90,043,993 69,492,838 42,912,071 42,450,839 27,317,853 27,149,392 22.76 15.01 13.54 6.45 4.97 3.07 3.04 1.96 1.94 Pendragon PLC Annual Report 2019in the notes to the notice of the AGM. Details of the exercise of voting rights attached to the ordinary shares held by the WORKFORCE ENGAGEMENT Throughout 2019, our team members were kept up to date company’s Employee Benefit Trust are set out below. None with matters of concern to them as employees through of the ordinary shares, including those held by the Employee regular communications and updates on our intranet and Benefit Trust, carries any special voting rights with regard to the Pendragon PLC website, as well as being provided with control of the company. information via our employee relations (ER) platforms. Our team members are made aware of financial and economic To be effective, electronic and paper proxy appointments factors affecting the performance of the company with and voting instructions must be received by the company’s communication of the company’s full year and half year results registrars not later than 48 hours before a general meeting. The statements, primarily through our intranet platforms. Team Articles may be obtained from Companies House in the UK or members are also consulted on matters of concern to them via upon application to the company secretary. Other than those the forum of regular divisional best practice meetings, where prescribed by applicable law and the company’s procedures for leaders have the opportunity to report issues of concern to ensuring compliance with it, there are no specific restrictions senior management. Going forward, following the appointment on the size of a holding nor on the transfer of shares, which of Bill Berman as Chief Executive Officer, roadshows to foster are governed by the Articles and prevailing legislation. The communication between team members at dealership level directors are not aware of any agreement between holders are envisaged, in order to ensure directors have fully engaged of the company’s shares that may result in restrictions on the with as many team members as possible, and have taken transfer of securities or the exercise of voting rights. No person account of their interests. In addition, as part of our proposed has any special rights of control over the company’s share remuneration policy framework, we are seeking approval of an capital. all employee sharesave scheme at our 2020 AGM. SHARES HELD BY THE PENDRAGON EMPLOYEE BENEFIT TRUST As at 31 December 2019, the company’s Employee Benefit Trust with Accuro Trustees (Jersey) Limited (the Trustee) held It is the Board’s intention to appoint a non-executive director with designated responsibility for engagement with our workforce going forwards. 6,420,093 shares, representing 0.46% of the total issued share capital at that date (2018: 6,420,093; 0.46%). The Trustee has ENGAGEMENT WITH SUPPLIERS The directors meet and engage regularly with all our key waived its voting rights attached to these shares. It holds these suppliers, frequently taking time to ensure that the interests of shares to enable it to satisfy entitlements under the company’s our manufacturer and supplier partners are taken into account share schemes. During the year, the Trustee did not transfer on a regular basis, and using the information received to inform any shares to satisfy such entitlements (2018: 1,160,935). our principal decision making processes. CONTRACTS None of the directors had an interest in any contract with the POLITICAL DONATIONS The company and its group made no political donations (2018: Group (other than their service agreement or appointment £ nil). terms and routine purchases of vehicles for their own use) at any time during 2019. The company and members of its group are party to agreements relating to banking, properties, employee share plans and motor vehicle franchises which alter or terminate if the company or group company concerned undergoes a change of control. None is considered significant in terms of its likely impact on the business of the Group as a whole. AUDITOR The directors who held office at the date of approval of this directors’ report confirm that: so far as they are each aware, there is no relevant audit information of which the Group’s auditors are unaware; and each director has taken all the steps that they ought to have taken as a director to make themself aware of any relevant audit information and to establish that the Group’s auditors are aware of that information. By order of the Board Richard Maloney Company Secretary 18 March 2020 81 Pendragon PLC Annual Report 2019 FINANCIAL STATEMENTS 83 Statement of Director’s Responsibilities in Respect 99 Notes to the Financial Statements of the Annual Report and the Financial Statements 182 Company Balance Sheet 84 Independent Auditor’s Report 93 Consolidated Income Statement 183 Company Statement of Comprehensive Income 184 Company Statement of Changes in Equity 94 Consolidated Statement of Comprehensive Income 185 Notes to the Financial Statements of the Company 95 Consolidated Statement of Changes in Equity 194 Advisors, Banks and Shareholder Information 96 Consolidated Balance Sheet 97 Consolidated Cash Flow Statement 98 Reconciliation of Net Cash Flow to Movement in Net Debt 195 5 Year Group Review 82 Pendragon PLC Annual Report 2019 STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS  The Directors are responsible for preparing the Annual Report at any time the financial position of the parent company and and the Group and parent company financial statements in enable them to ensure that its financial statements comply accordance with applicable law and regulations.   with the Companies Act 2006.  Company law requires the Directors to prepare Group and They are responsible for such internal control as they determine parent company financial statements for each financial is necessary to enable the preparation of financial statements year.  Under that law they are required to prepare the Group that are free from material misstatement, whether due to fraud financial statements in accordance with International Financial or error, and have general responsibility for taking such steps Reporting Standards as adopted by the European Union as are reasonably open to them to safeguard the assets of the (IFRSs as adopted by the EU) and applicable law and have Group and to prevent and detect fraud and other irregularities.   elected to prepare the parent company financial statements in accordance with UK accounting standards, including FRS 101 Under applicable law and regulations, the Directors are also Reduced Disclosure Framework.  responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Under company law the Directors must not approve the Statement that complies with that law and those regulations. financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and The Directors are responsible for the maintenance and parent company and of their profit or loss for that period.  In integrity of the corporate and financial information included preparing each of the Group and parent company financial on the company’s website.  Legislation in the UK governing statements, the Directors are required to:  the preparation and dissemination of financial statements may • select suitable accounting policies and then apply them consistently;   Responsibility statement of the Directors in respect of the • make judgements and estimates that are reasonable, annual financial report    differ from legislation in other jurisdictions.  relevant, reliable and prudent;  • for the Group financial statements, state whether they We confirm that to the best of our knowledge:   have been prepared in accordance with IFRSs as adopted by the EU;   • the financial statements, prepared in accordance with the • for the parent company financial statements, state applicable set of accounting standards, give a true and fair whether applicable UK accounting standards have been view of the assets, liabilities, financial position and profit followed, subject to any material departures disclosed and or loss of the company and the undertakings included in explained in the parent company financial statements;    the consolidation taken as a whole; and   • assess the Group and parent company’s ability to continue • the strategic report includes a fair review of the as a going concern, disclosing, as applicable, matters development and performance of the business and the related to going concern; and   position of the issuer and the undertakings included in the • use the going concern basis of accounting unless they consolidation taken as a whole, together with a description either intend to liquidate the Group or the parent company of the principal risks and uncertainties that they face.   or to cease operations, or have no realistic alternative but to do so.   We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the The Directors are responsible for keeping adequate accounting information necessary for shareholders to assess the Group’s records that are sufficient to show and explain the parent position and performance, business model and strategy. company’s transactions and disclose with reasonable accuracy Approved by order of the Board Mark Willis Chief Finance Officer 18 March 2020 83 Pendragon PLC Annual Report 2019   INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PENDRAGON PLC 1. Our opinion on the financial statements is unmodified We have audited the financial statements of Pendragon PLC (“the Company”) for the year ended 31 December 2019 which comprise the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity, Consolidated Balance Sheet, Consolidated Cash Flow Statement, Company Statement of Comprehensive Income, Company Statement of Changes in Equity, Company Balance Sheet and the related notes, including the accounting policies in note 1. In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 December 2019 and of the Group’s loss for the year then ended; • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; • the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial 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 sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the audit committee. We were first appointed as auditor by the shareholders on 28 April 1997. The period of total uninterrupted engagement is for the 23 financial years ended 31 December 2019. We have fulfilled 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. 2 Key audit matters: including our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified 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 financial 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. 84 Pendragon PLC Annual Report 2019INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PENDRAGON PLC (CONTINUED) 2. Key audit matters: including our assessment of risks of material misstatement continued The impact of uncertainties due to the UK exiting the European Union on our audit Risk vs 2018: Refer to page 55 Audit Committee report, page 37 Risk Overview and Management, page 42 Viability Statement The risk – Unprecedented levels of uncertainty All audits assess and challenge the reasonableness of Our response – We developed a standardised firm-wide approach to the consideration of the uncertainties arising from estimates, in particular as described in the going concern, Brexit in planning and performing our audits. Our procedures valuation of assets, including goodwill, in relation to the following CGUs: Aston Martin, BMW, Citroen, JLR, Mercedes, Mini, Hyundai, Nissan, Renault, Vauxhall and Car Stores (“the included: • Our Brexit knowledge: We considered the directors’ assessment of Brexit-related sources of risk for the specified CGUs”) and recoverability of parent’s investments Group’s business and financial resources compared with in subsidiaries and loans to subsidiary undertakings, and our own understanding of the risks. We considered the valuation of used vehicles inventory in the UK key audit matters below, and related disclosures and the appropriateness of the • going concern basis of preparation of the financial statements directors’ plans to take action to mitigate the risks; Sensitivity analysis: When addressing going concern, valuation of assets, including goodwill, for the specified (see below). All of these depend on assessments of the future CGUs and recoverability of parent’s investments in economic environment and the Group’s future prospects and subsidiaries and loans to subsidiary undertakings, performance. and valuation of used vehicles inventory in the UK and other areas that depend on forecasts, we compared the In addition, we are required to consider the other information directors’ analysis to our assessment of the full range presented in the Annual Report including the principal of reasonably possible scenarios resulting from Brexit risks disclosure and the viability statement and to consider uncertainty and, where forecast cash flows are required to the directors’ statement that the annual report and be discounted, considered adjustments to discount rates financial statements taken as a whole is fair, balanced and for the level of remaining uncertainty; understandable and provides the information necessary for shareholders to assess the Group’s position and performance, • Assessing transparency: As well as assessing individual disclosures as part of our procedures on going concern, business model and strategy. valuation of assets, including goodwill, for the specified CGUs and recoverability of parent’s investments in Brexit is one of the most significant economic events for subsidiaries and loans to subsidiary undertakings, and the UK its effects are subject to unprecedented levels of valuation of used vehicles inventory in the UK, we uncertainty of consequences, with the full range of possible considered all of the Brexit related disclosures together, effects unknown. including those in the strategic report, comparing the overall picture against our understanding of the risks. Our results: As reported under the key audit matters for valuation of assets, including goodwill, for the specified CGUs and recoverability of parent’s investments in subsidiaries and loans to subsidiary undertakings, and valuation of used vehicles inventory in the UK, we found the resulting estimates and related disclosures in relation to the key audit matters 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. 85 Pendragon PLC Annual Report 2019 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PENDRAGON PLC (CONTINUED) 2. Key audit matters: including our assessment of risks of material misstatement continued Going Concern Risk vs 2018: Refer to page 54 Audit Committee report, page 42 Viability Statement, page 99 Section 1 Basis of preparation The risk – Disclosure quality The financial statements explain how the Board has formed a judgement that it is appropriate to adopt the going concern basis of preparation for the group and parent company. We consider the risk has increased compared to 2018 due to the requirement for the Group to refinance, the performance of the Group in the year and the challenging economic climate. That judgement is based on an evaluation of the inherent risks to the Group’s and Company’s business model, including the impact of Brexit and the Coronavirus, and how those risks might affect the Group’s and Company’s financial resources or ability to continue operations over a period of at least a year from the date of approval of the financial statements. The risks most likely to adversely affect the Group’s and Company’s available financial resources over this period were: • • • The impact of Coronavirus (COVID-19) on consumer spend; The impact of Brexit on consumer confidence; and The continued downward trend in the market for new and used car sales.. There are also less predictable but realistic second order impacts, such as the impact of Brexit and COVID-19 on the Group’s supply chain, which could result in a rapid reduction of available financial resources. The risk for our audit was whether or not those risks were such that they amounted to a material uncertainty that may have cast significant doubt about the ability to continue as a going concern. Had they been such, then that fact would have been required to have been disclosed. Given the increased risk the Group is facing, complete and detailed disclosure of the risks and the judgement applied for the use of the going concern assumption is a key financial statements disclosure to allow readers to understand fully the key risks and uncertainties. Our response – Our procedures included: • Funding assessment: We agreed current facilities available to the relevant facility agreements and recent lender correspondence. We inspected the existing and new loan agreements in order to determine the covenants attached to the loan and we considered compliance with the financial covenants in the context of the cash flow forecasts; • • • Historical comparisons: We assessed historical accuracy of directors’ forecasting by comparing the actual cash flows for the year ended 31 December 2019 to the forecast cash flows over the same period; Key dependency assessment: We engaged our restructuring specialist expertise in order to identify the critical assumptions in the cash flow forecasts and challenged the directors by applying additional specific sensitivities to the calculation; Sensitivity analysis: 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. In particular, we assessed the Group’s downside forecasts based on the risks resulting from Brexit and the Coronavirus, and the potential impact these risks may have on new and used sales; the assumptions: We Benchmarking assumptions behind the Group’s cash flow forecasts for key variables, such as expected used car gross profit per unit, to externally derived data including market forecasts on future new and used car sales as well as macroeconomic data on projected growth and cost inflation; the Evaluating directors’ achievability of the actions the Directors consider they would take to improve the position should the risks materialise. We considered the extent to which the intent and ability of the Directors to pursue mitigating actions and implement these in the time frame required, should such be required, were reasonable by assessing whether the actions were entirely within the Directors’ control and consistent with Board approved plans; intent: We evaluated compared • • • Assessing transparency: We assessed the completeness and accuracy of the matters covered in the going concern disclosure by considering whether they accurately reflected the Group’s financing arrangements and the risks associated with Group’s ability to continue as a going concern. Our results: We found the going concern disclosure, without any material uncertainty, to be acceptable (2018 result: acceptable). 86 Pendragon PLC Annual Report 2019 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PENDRAGON PLC (CONTINUED) 2. Key audit matters: including our assessment of risks of material misstatement continued Valuation of assets, including goodwill, in relation to following CGUs: Aston Martin, BMW, Citroen, JLR, Mercedes, Mini, Hyundai, Nissan, Renault, Vauxhall and Car Stores and recoverability of parent’s investments in subsidiaries and loans to subsidiary undertakingss Risk vs 2018: (Carrying value of assets in relation to the specified CGUs: £239.9m, Group impairment of £128.3m (2018: £94.6m); Parent company investment in subsidiaries £804.0m (2018: £912.4m), impairment £108.4m (2018: £10.2m); loans to subsidiary undertakings £90.0m (2018: £90.0m).Refer to page 54 Audit Committee report, pages 130 and 187 (accounting policy) and pages 131-135 and 189-190 (financial disclosures) The risk – Forecast-based valuation The carrying amount of assets, including goodwill, in the group in relation to the following cash-generating units (“CGUs”): Aston Martin, BMW, Citroen, JLR, Mercedes, Mini, Hyundai, Nissan, Renault, Vauxhall and Car Stores (“ the specified CGUs”) and the carrying amount of the parent company’s investments in subsidiaries and loans to subsidiary undertakings are significant and at risk of irrecoverability. Market conditions have been challenging in the specified CGUs. During the prior year the Group impaired goodwill across a number of CGUs and an impairment was recognised against the parent company investment in subsidiaries, as a result there is limited headroom when testing for impairment and the headroom is sensitive to the assumptions adopted. During the year further Group impairments of £128.3m (2018: £94.6m) in relation to the CGUs and £108.4m (2018: £10.2m) for parent company investment in subsidiaries have been recognised. Therefore we consider the risk has increased compared to 2018 due to this, and the trading performance of the Group in 2019. The estimated recoverable amount of these balances is subjective due to the in forecasting and discounting future cash flows, and relatively small changes in these assumptions could give rise to material changes in the assessment of the carrying value of these balances. inherent uncertainty involved The effect of these matters is that, as part of our risk assessment, we determined that the valuation of the assets in relation to these specified CGUs and the recoverable amount of the cost of parent company’s investment in subsidiaries and loans due to subsidiary undertakings 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 3.1 for the Group and note 5 for the Company) disclose the sensitivity estimated by the Group. Our response – Our procedures included: • compared the assumptions: We Benchmarking assumptions behind the Group’s cash flow forecasts for key variables, such as expected used car gross profit per unit, to externally derived data including market forecasts on future new and used car sales as well as macroeconomic data on projected growth and cost inflation; • Historical comparison: We assessed the historical accuracy of the forecasts used in the impairment models by comparing forecast cash flows on a CGU level to those achieved in 2019, including an assessment of the consistency of key variables including forecast gross profit per vehicle in new and used car; • Our sector experience: We evaluated the underlying assumptions by challenging where forecasted cash flows were significantly higher than current trading levels or did not reflect known or probable changes in the business environment; • Our valuation experience: We challenged, assisted by our own valuation specialists, the key inputs used in the calculation of the discount rate by comparing it against external data sources and comparator group data; Sensitivity analysis: We performed breakeven analysis on the assumptions noted above for CGUs with headroom and sensitivity analysis to identify the CGUs most sensitive to further impairment; • • Assessing transparency: We assessed whether the Group’s disclosures about the sensitivity of the outcome of the impairment assessment to changes in key assumptions reflected the risks inherent in the valuation of assets in relation to these CGUs. Our results: We found the valuation of assets, including goodwill, in relation to the Aston Martin, BMW, Citroen, JLR, Mercedes, Mini, Hyundai, Nissan, Renault, Vauxhall and Car Stores CGUs, and the group’s assessment of the recoverable amount of the parent company’s investments in subsidiaries and loans to subsidiary undertakings, and the resulting impairment charges to be acceptable (2018 result: acceptable). 87 Pendragon PLC Annual Report 2019INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PENDRAGON PLC (CONTINUED) 2. Key audit matters: including our assessment of risks of material misstatement continued Carrying amount of used vehicle inventory in the UK (£330.3 million (2018: £563.2 million)) Risk vs 2018: Refer to page 55 Audit Committee report, page 141 (accounting policy) and page 141 (financial disclosures). The risk – subjective valuation The Group holds significant levels of used vehicle inventory in the UK. Used vehicle selling prices vary depending upon a number of factors including general economic conditions, falling diesel sales and the levels of new vehicle production. Accounting standards require inventory to be held at the lower of cost and net realisable value. History has shown that the average price of a used vehicle may decline significantly over a short period of time, and therefore the estimation of the net realizable value of used vehicles is a significant judgement area. The risk increases as the age of the used vehicle inventory increases. The effect of these matters is that, as part of our risk assessment, we determined that the carrying amount of used vehicles in the UK has a high degree of estimation uncertainty, with a potential range of reasonable outcomes which approximates to our materiality for the financial statements as a whole. The financial statements (note 3.4) disclose the sensitivity estimated by the Group. • in the used vehicle Our response – Our procedures included: • Historical comparisons: We challenged the assumptions inventory provision by made comparison to the Group’s historical trading patterns, including performing an analysis of the ageing of the vehicles. We also assessed the Group’s methodology for calculating the provision by comparing sales prices achieved during the year to the prior year provision; Benchmarking assumptions: We compared the Group’s expectations for used car prices to the expectations of market data and various commentators; Sensitivity analysis: We performed sensitivity analysis on input assumptions noted above; Independent reperformance: We considered alternative methodology for assessing the valuation of used inventory, with reference to the age, fuel type and brand of the vehicles within used vehicle inventory in the UK at the year end. Tests of details: We assessed the appropriateness of the related inventory provision by comparing the losses incurred on used car sales subsequent to the year end to the level of the year end provision; • • • • Assessing transparency: We assessed the adequacy of the Group’s disclosures about the degree of estimation involved in arriving at the UK used vehicle inventory provision. Our results: We found the group’s estimate of the carrying value of UK used inventory to be acceptable (2018 result: acceptable). We continue to perform procedures over the post-retirement benefits obligation (£531.2 million (2018: £486.3 million)). However in the context of the increased risk identified this year for key audit matters outlined above, we have not assessed this as one of the most significant risks in our current year audit and, therefore, it is not separately identified in our report this year. 88 Pendragon PLC Annual Report 2019INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PENDRAGON PLC (CONTINUED) 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 £4.0 million (2018: £2.3 million) determined with reference to a benchmark of Group revenue of which it represents 0.1% (2018: 5.1% of the prior year benchmark of Group loss before tax normalised to exclude the impairment charge). The benchmark used has changed to total revenue, which we consider to be the most appropriate benchmark as it provides a more stable measure year on year than group profit or loss before tax. As a result this has led to a change in materiality as a percentage of the benchmark. If the same benchmark had been applied in 2018, materiality would have represented 0.1% of 2018 total revenue. Materiality for the parent company financial statements as a whole was set at £2.2million (2018: £1.6million), determined with reference to component materiality. This is lower than the materiality we would otherwise have determined by reference to a benchmark of the company’s net assets, of which it represents 0.6% (2018: 0.4%). We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £0.2 million (2018: £0.1 million), in addition to other identified misstatements that warranted reporting on qualitative grounds. We subjected thirteen (2018: twenty four) of the Group’s twenty four reporting components (2018: twenty four) to full scope audits for Group purposes. For the 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. The components within the scope of our work accounted for 90% (2018: 100%) of the Group’s revenue, 90% (2018: 100%) of total profits and losses that made up Group loss before tax and 89% (2018: 100%) of Group total assets. The Group audit team approved the component materialities, which ranged from £0.4 million to £2.2 million (2018: £0.1 million to £1.6 million), having regard to the mix of size and risk profile of the Group across the components. The Group audit team performed all of the audit work in relation to the thirteen (2018: twenty four) components, including the audit of the parent company. Group Revenue £4,600m Group materiality £4.0m (2018:£2.3m) £4.0m Whole financial statements materiality (2018:£2.3m) £2.2m Range of materialities at 13 components (£0.1m to £1.6m) (2018: 24 components) £0.2m Misstatements reported to the audit committee (2018: £0.1m) 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 or the company will continue in operation. We identified going concern as a key audit matter (see section 2 of this report). Based on the work described in our response to that key audit matter, we are required to report to you if: • we have anything material to add or draw attention to in relation to the directors’ statement in Note 1 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements; or • the related statement under the Listing Rules set out on page 42 is materially inconsistent with our audit knowledge. We have nothing to report in these respects. 89 Pendragon PLC Annual Report 2019INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PENDRAGON PLC (CONTINUED) 5. We have nothing to report on the other information in the Annual Report 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 the viability statement on page 42 that they have carried out a robust assessment of the emerging and principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity; the Principal Risks disclosures on pages 34 to 41 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 judgments 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 Report does not properly disclose a departure from the provisions of the UK Corporate Governance Code specified by the Listing Rules for our review. We have nothing to report in these respects. 90 Pendragon PLC Annual Report 2019INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PENDRAGON PLC (CONTINUED) 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 83, 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 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 or 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. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. 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 general commercial and sector experience, through discussion with the directors and other management (as required by auditing standards), and from inspection of the group’s regulatory and legal correspondence 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. 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, pension 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 or the loss of the group’s licence to operate. We identified the following areas as those most likely to have such an effect: compliance with the treating customers fairly requirements of the Financial Conduct Authority and compliance with General Data Protection Regulation. 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. Through these procedures, we became aware of actual or suspected non-compliance and considered the effect as part of our procedures on the related financial statement items. The identified actual or suspected non-compliance was not sufficiently significant to our audit to result in our response being identified as a key audit matter. 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 remained a higher risk of non-detection of irregularities, 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. 91 Pendragon PLC Annual Report 2019INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PENDRAGON PLC (CONTINUED) 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 John Leech (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants One Snowhill, Snowhill Queensway, Birmingham B4 6GH 18 March 2020 92 Pendragon PLC Annual Report 2019CONSOLIDATED INCOME STATEMENT Year ended 31 December 2019 Revenue Cost of sales Gross profit Continuing operations £m Discontinued operations* £m 2019 IFRS 16 £m Continuing operations £m Discontinued operations* £m Notes 2018 IAS 17 £m 2.1 4,083.8 422.3 4,506.1 4,148.6 478.4 4,627.0 (3,667.8) (365.6) (4,033.4) (3,658.2) (418.3) (4,076.5) 416.0 56.7 472.7 490.4 60.1 550.5 Operating expenses 2.2 (533.1) (44.0) (577.1) (529.1) (51.5) (580.6) Operating (loss)/profit before other income (117.1) 12.7 (104.4) (38.7) Other income - gains/(losses) on the sale of businesses and property 2.6 0.3 33.0 33.3 13.0 Operating profit/(loss) (116.8) 45.7 (71.1) (25.7) Analysed as: Underlying operating profit Non-underlying operating (loss)/profit 14.0 (130.8) 12.7 33.0 26.7 (97.8) 67.6 (93.3) 8.6 2.7 11.3 8.6 2.7 (30.1) 15.7 (14.4) 76.2 (90.6) Finance expense Finance income Net finance costs Analysed as: 4.3 4.3 (42.9) 3.0 (39.9) (3.1) (46.0) (27.5) (2.5) (30.0) - 3.0 - - - (3.1) (43.0) (27.5) (2.5) (30.0) Underlying net finance costs (40.0) (3.1) (43.1) Non-underlying net finance costs 0.1 - 0.1 (25.9) (1.6) (2.5) (28.4) - (1.6) (Loss)/profit before taxation (156.7) 42.6 (114.1) (53.2) 8.8 (44.4) Analysed as: Underlying (loss)/profit before taxation Non-underlying (loss)/ profit before taxation Income tax expense (Loss)/profit for the year Earnings per share Basic earnings per share Diluted earnings per share Non GAAP measure: Underlying basic earnings per share Underlying diluted earnings per share 2.7 2.8 2.8 2.8 2.8 (26.0) (130.7) 7.8 (148.9) 9.6 33.0 (11.1) 31.5 (16.4) (97.7) 41.7 (94.9) (3.3) (117.4) (3.8) (57.0) (10.7p) (10.7p) 2.3p 2.3p (8.4p) (8.4p) (4.1p) (4.1p) (1.8p) (1.8p) 0.6p 0.6p (1.2p) (1.2p) 2.5p 2.5p 6.1 2.7 (2.3) 6.5 0.5p 0.5p 0.3p 0.3p 47.8 (92.2) (6.1) (50.5) (3.6p) (3.6p) 2.8p 2.8p The Group adopted IFRS 16 Leases with effect from 1 January 2019 using the modified retrospective approach on transition and has accordingly not restated prior periods. As a conse- quence, the results for the year ended 31 December 2019 are not directly comparable with those of the prior period which were prepared using the accounting standard IAS 17 Leases. * The discontinued operations are in respect of the Group’s US business which is currently classified as held for sale (see note 3.3). The notes on pages 99 to 181 form part of these financial statements 93 Pendragon PLC Annual Report 2019 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December 2019 Loss for the year Other comprehensive income Items that will never be reclassified to profit and loss: Defined benefit plan remeasurement gains and (losses) Income tax relating to defined benefit plan remeasurement (gains) and losses Items that are or may be reclassified to profit and loss: Foreign currency translation differences of foreign operations Notes 5.1 2.7 Other comprehensive income for the year, net of tax Total comprehensive income for the year Total comprehensive income for the period attributable to equity shareholders of the company arises from: Continuing operations Discontinued operations - see note 3.3 2019 IFRS 16 £m (117.4) (1.3) 0.2 (1.1) (0.2) (0.2) (1.3) (118.7) (150.0) 31.3 (118.7) 2018 IAS 17 £m (50.5) (0.9) - (0.9) - - (0.9) (51.4) (57.9) 6.5 (51.4) The Group adopted IFRS 16 Leases with effect from 1 January 2019 using the modified retrospective approach on transition and has accordingly not restated prior periods. As a consequence the results for the year ended 31 December 2019 are not directly comparable with those of the prior period which were prepared using the accounting standard IAS 17 Leases. The notes on pages 99 to 181 form part of these financial statements 94 Pendragon PLC Annual Report 2019 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2019 Share capital £m Share premium £m Capital redemption reserve £m Other reserves £m Translation differences £m Retained earnings £m Total £m Balance at 1 January 2019 70.0 56.8 5.5 12.6 (0.8) 201.5 345.6 Adjustment on initial application of IFRS 16 (net of tax) (see note 1) - - - - - (48.4) (48.4) Adjusted balance at 1 January 2019 70.0 56.8 5.5 12.6 (0.8) 153.1 297.2 Total comprehensive income for 2019 Loss for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Dividends paid (note 4.5) Own shares purchased for cancellation Share based payments - - - - (0.1) - - - - - - - Balance at 31 December 2019 69.9 56.8 - - - - 0.1 - 5.6 - - - - - - - (117.4) (117.4) (0.2) (1.1) (1.3) (0.2) (118.5) (118.7) - - - (9.7) (0.5) 0.6 25.0 (9.7) (0.5) 0.6 168.9 12.6 (1.0) Balance at 1 January 2018 71.2 56.8 4.3 12.6 (0.8) 281.3 425.4 Total comprehensive income for 2018 Loss for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Dividends paid (note 4.5) Own shares purchased for cancellation Own shares issued by EBT Share based payments - - - - (1.2) - - - - - - - - - Balance at 31 December 2018 70.0 56.8 - - - - 1.2 - - 5.5 - - - - - - - - - - - - - - (50.5) (50.5) (0.9) (0.9) (51.4) (51.4) (22.5) (22.5) (6.7) 0.1 0.7 (6.7) 0.1 0.7 12.6 (0.8) 201.5 345.6 The Group adopted IFRS 16 Leases with effect from 1 January 2019 using the modified retrospective approach on transition and has accordingly not restated prior periods. As a consequence, the results for the year ended 31 December 2019 are not directly comparable with those of the prior period which were prepared using the accounting standard IAS 17 Leases. The notes on pages 99 to 181 form part of these financial statements 95 Pendragon PLC Annual Report 2019 CONSOLIDATED BALANCE SHEET At 31 December 2019 Non-current assets Property, plant and equipment Goodwill Other intangible assets Finance lease receivables Deferred tax assets Total non-current assets Current assets Inventories Trade and other receivables Finance lease receivables Current tax assets Cash and cash equivalents Assets classified as held for sale Total current assets Total assets Current liabilities Lease liabilities Trade and other payables Deferred income Current tax payable Provisions Liabilities directly associated with the assets held for sale Total current liabilities Non-current liabilities Interest bearing loans and borrowings Lease liabilities Trade and other payables Deferred income Retirement benefit obligations Provisions Total non-current liabilities Total liabilities Net assets Capital and reserves Called up share capital Share premium account Capital redemption reserve Other reserves Translation reserve Retained earnings Total equity attributable to equity shareholders of the Company Approved by the Board of Directors on 18 March 2020 and signed on its behalf by: W Berman Chief Executive M S Willis Chief Finance Officer Notes 3.2 3.1 3.1 2.7 3.4 3.6 4.2 3.3 3.7 3.9 3.8 3.3 4.2 3.7 3.9 5.1 3.8 4.4 4.4 4.4 4.4 4.4 2019 IFRS 16 £m 628.3 162.8 9.5 20.6 25.5 846.7 839.0 106.9 2.4 - 55.7 150.1 1,154.1 2,000.8 (23.9) (1,084.6) (50.9) (2.8) - (90.5) (1,252.7) (175.4) (237.8) (60.4) (46.6) (59.0) - (579.2) (1,831.9) 168.9 69.9 56.8 5.6 12.6 (1.0) 25.0 168.9 2018 IAS 17 £m 463.9 265.9 8.2 - 9.8 747.8 959.6 114.8 - 4.3 51.4 137.6 1,267.7 2,015.5 - (1,175.4) (49.7) - (0.7) (88.6) (1,314.4) (177.5) (1.5) (54.4) (52.2) (68.3) (1.6) (355.5) (1,669.9) 345.6 70.0 56.8 5.5 12.6 (0.8) 201.5 345.6 The Group adopted IFRS 16 Leases with effect from 1 January 2019 using the modified retrospective approach on transition and has accordingly not restated prior periods. As a consequence the balance sheet as at 31 December 2019 is not directly comparable with that of the prior period which was prepared using the accounting standard IAS 17 Leases. The notes on pages 99 to 181 form part of these financial statements Registered Company Number: 02304195 96 Pendragon PLC Annual Report 2019 CONSOLIDATED CASH FLOW STATEMENT Year ended 31 December 2019 Notes 2019 IFRS 16 £m Cash flows from operating activities Loss for the year Adjustment for taxation Adjustment for net financing expense Depreciation and amortisation Share based payments Pension past service costs (Profit)/loss on sale of businesses and property Impairment of goodwill Impairment of assets held for sale Impairment of property, plant and equipment Contribution into defined benefit pension scheme Changes in inventories Changes in trade and other receivables Changes in trade and other payables Changes in provisions Movement in contract hire vehicle balances Cash generated from operations Taxation paid Interest paid Net cash from operating activities Cash flows from investing activities Proceeds from sale of businesses Purchase of property, plant, equipment and intangible assets Proceeds from sale of property, plant, equipment and intangible assets Net cash from/(used) in investing activities Cash flows from financing activities Dividends paid to shareholders Repurchase of own shares Disposal of shares by EBT Payment of lease liabilities Receipt of lease receivables Repayment of loans Proceeds from issue of loans Net cash outflow from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 January Effects of exchange rate changes on cash held Cash and cash equivalents at 31 December The notes on pages 99 to 181 form part of these financial statements (117.4) 3.3 43.0 (71.1) 44.7 0.6 (4.8) (33.3) 102.4 1.9 25.9 (7.6) 186.7 1.7 (127.4) - (55.6) 64.1 (3.3) (26.8) 34.0 67.4 (115.0) 70.6 23.0 (9.7) (0.5) - (43.2) 3.3 (5.0) 5.4 (49.7) 7.3 51.4 (3.0) 55.7 3.4 3.5 6.2 3.1, 3.2 3.1, 3.2 4.2 2018 IAS 17 £m (50.5) 6.1 30.0 (14.4) 27.4 0.7 10.5 (15.7) 88.8 1.2 5.8 (7.5) (23.6) (7.6) 61.6 (7.2) (31.9) 88.1 (10.9) (24.8) 52.4 10.9 (133.2) 96.0 (26.3) (22.5) (6.7) 0.1 - - (10.0) 7.1 (32.0) (5.9) 53.3 4.0 51.4 97 Pendragon PLC Annual Report 2019 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT Net increase/(decrease) in cash and cash equivalents Repayment of loans Proceeds from issue of loans (net of directly attributable transaction costs) Non-cash movements Decrease/(increase) in net debt in the year Opening net debt Adjustment for finance lease liabilities (see note below) Closing net debt 2019 £m 7.3 5.0 (5.4) (0.5) 6.4 (126.1) - (119.7) 2018 £m (5.9) 10.0 (7.1) (0.5) (3.5) (124.1) 1.5 (126.1) The Group adopted IFRS 16 Leases with effect from 1 January 2019 using the modified retrospective approach on transition and has accordingly not restated prior periods. As a con- sequence, the cash flows for the year ended 31 December 2019 are not directly comparable with those of the prior period which were prepared using the accounting standard IAS 17 Leases. The reconciliation of net cash flow to movement in net debt is not a primary statement and does not form part of the consolidated cash flow statement but forms part of the notes to the financial statements. On adoption of IFRS 16 on 1 January 2019 the Group has decided to re-define it’s net debt metric to exclude finance lease liabilities. This has resulted in the net debt at 31 December 2018 being adjusted by £1.5m, the finance lease liability at that date from. £127.6m to £126.1m. The notes on pages 99 to 181 form part of these financial statements. 98 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 1 - BASIS OF PREPARATION Presented below are those accounting policies that relate to the financial statements as a whole and includes details of new accounting standards that are or will be effective for 2019 or later years. To facilitate the understanding of each note to the financial statements those accounting policies that are relevant to a particular category are presented within the relevant notes. Pendragon PLC is a company domiciled in the United Kingdom. The consolidated financial statements of the Group for the year ended 31 December 2019 comprise the company and its subsidiaries and the Group’s interest in jointly controlled entities, together referred to as the ‘Group’ The Group financial statements have been prepared and approved by the directors in accordance with international accounting standards, being the International Financial Reporting Standards as adopted by the EU (‘adopted IFRSs’). The company has elected to prepare its parent company financial statements in accordance with FRS 101. These are presented on pages 183 to 193. The financial statements are presented in millions of UK pounds, rounded to the nearest £0.1m. They have been prepared under the historical cost convention and where other bases are applied these are identified in the relevant accounting policy in the notes below. Going concern The financial statements are prepared on a going concern basis notwithstanding that the Group has reported an operating loss of £104.4m for the year to 31 December 2019 (2018: loss of £30.1m).  Further, the directors consider that the current economic outlook presents significant challenges in terms of sales volume and pricing and both Brexit and the Coronavirus outbreak presents uncertainties to future trading conditions.  Whilst the directors have instituted measures to preserve cash and secure additional finance, there is uncertainty over future trading results and cash flows. The Group meets its day-to-day working capital requirements from a revolving credit facility of £175m and senior note of £60m (see note 4.2) together with manufacturer stocking facilities and cash balances. The revolving credit facility is due for renewal in March 2022 and includes covenants, a breach of which would result in the amounts drawn becoming repayable on demand.  The directors have prepared base cash flow forecasts for the 21 month period to 31 December 2021 which assume the disposal of US dealerships which have been previously announced.  The directors have also prepared sensitised forecasts which consider the impacts of certain severe but plausible downside scenarios and which remove the disposal of US dealerships and also include the impact of a reasonably possible downside contraction in sales volumes and margins. The have also considered the mitigations which are available to them and wholly within their control through which they could offset those downside scenarios should they arise, principally the deferral of uncommitted capital expenditure. The sensitised cases include the impact of a combined, severe but plausible Coronavirus and Brexit scenario and these forecasts include mitigations, principally the deferral of capex. Those forecasts indicate that the group can continue to operate for at least the next 12 months from the date of approval of these financial statements with the existing facilities. The base and sensitised forecasts indicate that the group will remain in compliance with the relevant covenants, though headroom is limited in the period ended 31 December 2021 in the case of the sensitised forecasts. Based on the above, the directors believe it remains appropriate to prepare the financial statements on a going concern basis. 99 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 1 - BASIS OF PREPARATION Judgements The Group applies judgement in how it applies its accounting policies, which do not involve estimation, but could materially affect the numbers disclosed in these financial statements. The key accounting judgements, without estimation, that have been applied in these financial statements are as follows: Key judgements Effect on Financial Statements Alternative accounting judgement that could have been applied Effect of that alternative accounting judgement Deferred tax assets: No recognition of certain deferred tax assets as the Group believes their recovery to be too uncertain. No recognition of potential assets of £8.3m relating to unutilised tax losses of £13.8m and unrecognised net capital losses of £35.2m. If the Group had determined that the utilisation of the losses was more certain then full or partial recognition of deferred tax assets would have taken place. Recognition of assets within the range £0- £8.3m. 100 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 1 - BASIS OF PREPARATION Accounting Estimates The preparation of financial statements in conformity with adopted IFRSs requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Although these estimates are based on management’s best knowledge of the amount, events or actions, actual results ultimately may differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The directors consider the following to be the key estimates applicable to the financial statements, which have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year or in the long term: Key estimate area Key assumption CGU asset impairment Inventory fair value (UK used inventory of £285.0m) Retirement benefit obligations To determine any possible impairment of our goodwill, intangible assets, property, plant and equipment we undertake an exercise to estimate the recoverable amount for each Cash Generating Unit (CGU). We have key assumptions on the growth, discount rates and multiples applied to the financial year 2020 budget as well as the fair value of individual assets. The Group assessment of fair values of used inventory involves an element of estimation. The key assumption is estimating the likely sale period and the expected profit or loss on sale for each of our inventory items that are held at the year end point. We conduct this analysis by looking at stock by age category and comparing historical trends and our forward expectations on these assumptions. The main assumptions in determining the Group’s Retirement Benefit Obligations are: discount rate, mortality and rate of inflation. Full detail is included in the pension note, 5.1. Potential impact within the next financial year Potential impact in the longer term Note reference 3 3 3 3 3.1 3.4 3 5.1 101 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 1 - BASIS OF PREPARATION Basis of consolidation The consolidated financial statements include the financial statements of Pendragon PLC, all its subsidiary undertakings and investments. Consistent accounting policies have been applied in the preparation of all such financial statements. Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from 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. Transactions eliminated on consolidation Intragroup balances and any unrealised gains or losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains and losses arising from transactions with joint ventures are eliminated against the investment to the extent of the Group’s interest in the entity. Foreign currencies Transactions in foreign currencies are translated to the respective functional currency of Group entities at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to the functional currency at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to sterling at foreign exchange rates ruling at the dates the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated to sterling at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated to sterling at rates approximating to the foreign exchange rates ruling at the dates of the transactions. Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in a foreign operation are recognised directly in equity, in the foreign currency translation reserve, to the extent the hedge is effective. To the extent the hedge is ineffective, such differences are recognised in profit or loss. When the hedged net investment is disposed of, the cumulative amount in equity is transferred to profit and loss on disposal. In respect of all foreign operations, any differences that have arisen after 1 January 2004, the date of transition to IFRS, are presented as a separate component of equity. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise deposits with banks and financial institutions, bank and cash balances, and liquid investments, net of bank overdrafts. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. In the balance sheet, bank overdrafts are included in current borrowings. 102 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 1 - BASIS OF PREPARATION Impairment The carrying amounts of the Group’s assets, other than inventories (see note 3.4) and deferred tax assets (see note 2.7), are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For goodwill the recoverable amount is estimated at each balance sheet date. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from other groups of assets (‘the cash generating unit’). The goodwill acquired in a business combination, for the purpose of impairment testing is allocated to cash generating units. Management have determined that the cash generating units of the Group are the motor franchise groups and other business segments. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash generating units and then, to reduce the carrying amount of the other assets in the unit on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. The impact of the current year impairment review can be seen in note 3.1. Adoption of new and revised standards and new standards and interpretations not yet adopted In 2019 the following amendments had been endorsed by the EU, became effective and therefore were adopted by the Group: • IFRS 16 ‘Leases’ • IFRIC 23 ‘Uncertainty over Income Tax treatments’ • Amendments to IFRS 9 ‘Financial Instruments’ • Amendments to IAS 28 ‘Long-term Interests in Associates and Joint Ventures’ • Annual Improvements to IFRSs – 2015-2017 Cycle • Amendments to IAS 19 ‘Employee Benefits’ The impact of IFRS 16 on the Group’s results for the year is set out below. IFRIC 23 and the other amendments have not had a material impact on the financial statements. 103 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 1 - BASIS OF PREPARATION IFRS 16 Leases The Group has adopted IFRS 16 Leases from 1 January 2019. IFRS 16 introduces a single, on balance model for leases. As a result, the Group as a lessee has recognised a right or use asset representing it’s right to use the underlying asset and a lease liability representing it’s obligation to make lease payments. The Group also acts as a Lessor, and whilst Lessor accounting remains similar to that under the Group’s previous accounting policies, where the substantial risks and rewards of ownership of the asset has been passed to it’s Lessee then the underlying asset of the Group becomes that of a finance lease receivable. Under the previous accounting policy the Group previously classified leases as either an operating lease or a finance lease depending upon whether it was deemed that substantially all of the risks and rewards of ownership had transferred. Under IFRS 16 the Group recognises a right of use asset for all leases with the exception of those deemed to be of low value or short term in nature, in which case lease payments are expensed on a straight line basis over the lease term. In its transition to IFRS 16 the Group has applied a modified retrospective approach, under which the cumulative effect of initial application is recognised in retailed earnings at 1 January 2019. Accordingly, the comparative information for 2018 has not been restated. The revised accounting policy is: Significant accounting policies - Leases. The Group recognises a right of use asset and a lease liability at the lease commencement date. The right of use asset is initially measured at cost, and subsequently at cost less accumulated depreciation and impairment losses, and adjusted for certain remeasurements of the lease liability. Depreciation is recognised on a straight line basis over the period of the lease the right of use asset is expected to be utilised. The lease liability is initially measured at the present value of lease payments that are not paid at the commencement date, discounted by the interest rate implicit in the lease or when this is not readily attainable the Group’s incremental borrowing rate. Generally the Group uses it’s incremental borrowing rate as the discount rate. The lease liability is subsequently increased by the interest cost on the lease liability and reduced by payments made. It is remeasured when there is a change in future lease payments arising from a change of index or rate, a variation in amounts payable following contractual rent reviews and changes in the assessment of whether an extension/termination option is reasonably certain to be exercised. The Group has applied judgement in determining the lease term for some lease contracts which include renewal and termination options. The assessment of whether the Group is reasonably certain to exercise such options impacts the lease term and the subsequent recognition of the lease liability and right of use asset. When the Group acts as a lessor, it determines at lease inception whether each lease is a finance lease or an operating lease. To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. As part of this assessment, the Group considers certain indicators such as whether the lease is for the major part of the economic life of the asset. When the Group is an intermediate lessor, it accounts for its interests in the head lease and the sub-lease separately. It assesses the lease classification of a sub-lease with reference to the right-of-use asset arising from the head lease, not with reference to the underlying asset. Where the Group acts as a Lessor of an operating lease, receipts of lease payments are recognised in the income statement on a straight line basis over the period of the lease. Where the Group acts as a Lessor of a finance lease the Group will, rather than recognise a right of use asset, recognise a finance lease receivable, this being the present value of future lease receipts discounted at the interest rate implicit in the lease or if this is not specified the Group’s incremental borrowing rate. The finance lease receivable will be increased by the interest received and reduced by payments made by the lessee. Transition The Group has a significant leasehold property portfolio which, in the most part, where previously accounted for as operating 104 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 1 - BASIS OF PREPARATION IFRS 16 Leases continued leases under IAS 17. The leases have a variety of lease terms and some include scheduled rent reviews, break options or provide for rent increases based upon future UK price indices. At transition, for leases classified as operating leases under IAS 17, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Group’s incremental borrowing rate as at 1 January 2019. Right of use assets as measured at either: their carrying amount as if IFRS 16 had been applied since the lease commencement date, discounted by the Group’s incremental borrowing rate as at 1 January 2019. The Group has applied this methodology to the majority of it’s property leases where sufficient historical information has been available to facilitate this. An amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments. This has been applied to a small number of property leases where it was not possible to ascertain sufficient historical data to enable a retrospective calculation. This method has also been applied to the Group’s small number of non property leases, comprising of motor vehicles and items of plant and equipment. The Group used the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17. Applied the exemption not to recognise right of use assets and liabilities with less than 12 months of the lease term remaining at 1 January 2019. Excluded initial direct costs from measuring the right of use asset at date of initial application. Used hindsight when determining the lease term if the contract contains options to extend or terminate the lease. Used the option to grandfather the assessment of which transactions are leases by applying IFRS 16 only to contracts that were previously identified as a leases under IAS 17. Used previous assessments of whether leases are onerous instead of performing an impairment review. The Group previously classified two properties as finance leases. These leases have been reassessed under IFRS 16 and reclassified as right of use assets. As a Lessor the Group has sub-let a number of surplus properties with some of these matching the term of the under lease. In these instances the Group has deemed that it has none of the risks and rewards of ownership of the properties and has recognised a finance lease receivable based on expected lease receipts from the date of application, discounted at the same interest rate as applied to the head lease. There are no residual values applicable to these leases. The Group, during the period between 2005 and 2006 entered into sale and leaseback arrangements on some of it’s properties. At the time it was deemed that the consideration received for these properties and the subsequent rents attached to the leases were in excess of their equivalent fair values at the time. An adjustment was made at the time of these transactions to reduce the profit on disposal of these properties and defer this over the remaining lease terms to offset the excess rentals payable in the future. This credit was held as deferred income in the financial statements. On transition to IFRS 16 the residual deferred income credit relating to these properties at 1 January 2019 has been allocated to the right of use asset. Provision had previously recognised a provision for vacant properties which related to sub-let properties where the rental income was insufficient to cover the lease costs paid. Where these relate to leases in which the Group retain the risks and rewards of ownership of the property the provision previously recognised has been credited to the right of use asset. Where these relate to leases in which the Group do not retain the risks and rewards of ownership of the property the provision previously recognised has been credited to reserves on transition (see note 3.8) . 105 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 1 - BASIS OF PREPARATION IFRS 16 Leases continued Impacts of transition The impacts of the transition to IFRS 16 is summarised below; Property, plant and equipment Assets classified as held for sale Lease liabilities Lease liabilities classified as held for sale Finance lease receivables Trade and other receivables Trade and other payables Deferred income Provisions Deferred tax Retained earnings 1 January 2019 £m 193.1 39.4 (279.7) (39.4) 24.7 (9.2) 0.3 11.4 2.3 8.7 48.4 When measuring lease liabilities for leases that were classified as operating leases, the Group has discounted lease pay- ments using either it’s incremental borrowing rate for shorter term leases or higher rates based upon market rates for borrowing against equivalent assets with similar risk profiles in specific markets for medium to longer term leases as at 1 January 2019 . The weighted average rate applied was 4.20%. Operating lease commitment at 31 December 2018 as disclosed in the Group’s consolidated financial statements Discounted using incremental borrowing rate at 1 January 2019 Finance lease liabilities recognised at 31 December 2018 Recognition exemption for leases with less than 12 months of lease term at transition * Recognition exemption for low value leases Lease liabilities recognised beyond break terms reasonably certain to be utilised ** Lease liabilities recognised at 1 January 2019 including those classified as held for sale 1 January 2019 £m 479.7 325.5 1.5 (14.1) - 7.7 320.6 * Included within the £14.1m recognition exemption for leases with less than 12 months of lease term at transition, are £11.9m of lease commitments in the US business which is a discontinued operation held for sale. These US leases were deemed to be short leases on transition as the Group was reasonably certain that obligations under those leases would be discharged in 2019. These were assigned as part of the sales of US businesses which were completed in 2019. ** The operating lease commitment disclosed at 31 December 2018 was in respect of minimum lease payments under each lease which was based on terminating leases with break clauses at the earliest opportunity. The Group is reasonably certain that the majority of these break options will not be exercised with the lease being utilised up to the lease expiry date, therefore the IFRS 16 liability recognised is greater than that of the corresponding IAS 17 disclosure. 106 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 1 - BASIS OF PREPARATION Impact for the period As a result of initially applying IFRS 16, in relation to those leases which were originally classified as operating leases, the Group has recognised an interest and depreciation cost instead of an operating lease expense and as a Lessor on leases where the Group no longer has the risks and rewards of ownership, recognises an interest receipt instead of a rental income. During the year ended 31 December 2019 the Group recognised £19.2m of depreciation charges, a non-underlying impairment charge of £23.3m, an interest expense of £14.4m and made payments of £43.2m in respect of it’s lease liabilities. As a Lessor, the Group has an interest receipt of £1.1m having received payments of £3.3m in respect of the finance lease receivable. Other standards A number of new standards are effective for annual periods beginning after 1 January 2020 and earlier application is permitted; however, the Group has not early adopted the new or amended standards in preparing these consolidated financial statements. The following amended standards and interpretations are not expected to have a significant impact on the Group’s consolidated financial statements. IFRS 17 Insurance Contracts. Definition of Material – Amendments to IAS 1 and IAS 8 Alternative performance measures The Group uses a number of key performance measures (‘KPI’s’) which are non-IFRS measures to monitor the performance of its operations. The Group believes these KPIs provide useful historical financial information to help investors and other stakeholders evaluate the performance of the business and are measures commonly used by certain investors for evaluating the performance of the Group. In particular, the Group uses KPIs which reflect the underlying performance on the basis that this provides a more relevant focus on the core business performance of the Group. The Group has been using the following KPIs on a consistent basis and they are defined and reconciled as follows: Dividend per share - dividend per share is defined as the interim dividend per share plus the proposed final year dividend for a given period. Gross margin % - gross margin is defined as gross profit as a percentage of revenue. Operating margin % - operating margin is defined as operating profit as a percentage of revenue. Underlying operating profit/profit before tax - results on an underlying basis exclude items that have non-trading attributes due to their size, nature or incidence. The detail of the non-underlying results is shown in note 2.6 and this is also shown on the face of the consolidated income statement to reconcile from the underlying to total results. 107 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 1 - BASIS OF PREPARATION Operating profit reconciliation Underlying operating profit Settlement of historic VAT issues (see note 2.6) Gains/(losses) on the sale of businesses and property (see note 2.6) Past service costs (see note 2.6) Impairment of goodwill (see note 2.6) Impairment of assets held for sale (see note 2.6) Impairment of property, plant and equipment (see note 2.6) Impairment of right of use assets (see note 2.6) Car Store closure costs (see note 2.6) Termination and severance payments (see note 2.6) Non-underlying operating profit/(loss) items Operating loss (Loss)/profit before tax reconciliation Underlying profit before tax Non-underlying operating profit items (see reconciliation above) Non-underlying finance costs (see note 2.6) Non-underlying operating (loss)/profit and finance costs items (Loss)/profit before tax (Loss)/profit after tax reconciliation Underlying profit after tax Non-underlying operating (loss)/profit and finance costs items (see reconciliation above) Non-underlying tax (see note 2.6) Non-underlying operating (loss)/profit, finance costs and tax items (Loss)/profit after tax 2019 IFRS 16 £m 26.7 1.6 33.3 4.8 (102.4) (1.9) (2.6) (23.3) (1.8) (5.5) (97.8) (71.1) 2019 IFRS 16 £m (16.4) (97.8) 0.1 (97.7) (114.1) 2019 IFRS 16 £m (16.4) (97.7) (3.3) (101.0) (117.4) 2018 IAS 17 £m 76.2 - 15.7 (10.5) (88.8) (1.2) (5.8) - - - (90.6) (14.4) 2018 IAS 17 £m 47.8 (90.6) (1.6) (92.2) (44.4) 2018 IAS 17 £m 38.7 (92.2) 3.0 (89.2) (50.5) Underlying basic earnings per share (‘underlying earnings per share’) – the Group presents underlying basic earnings per share as the directors consider that this is a better measure of comparative performance. Underlying basic earnings per share is calculated by dividing the underlying profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period. A full reconciliation of how this is derived is found in note 2.8. 108 Pendragon PLC Annual Report 2019NOTES TO THE FINANCIAL STATEMENTS SECTION 1 - BASIS OF PREPARATION Underlying diluted earnings per share – the Group presents underlying diluted earnings per share as the directors consider that this is a better measure of comparative performance. Underlying diluted earnings per share is calculated by dividing the underlying profit and loss attributable to ordinary shareholders by the weighted average number of ordinary shares in issue taking account of the effects of all dilutive potential ordinary shares, which comprise of share options granted to employees, LTIPs and share warrants. A full reconciliation of how this is derived is found in note 2.8. Net Debt : Underlying EBITDA – the Group uses the ratio of net debt to underlying EBITDA to assess the use of the Group’s financial resources. The reconciliation of this and the composition of underlying EBITDA is shown in note 4.2. Net franchise capital expenditure - the Group uses the ratio of net debt to underlying EBITDA to assess the use of the Group’s financial resources. We have adjusted the underlying operating profit used in the calculation of EBITDA to present it on a pre IFRS 16 basis by treating the rentals paid as an operating expense, adjusting out right of use depreciation and various other adjustments that would have been made under IAS 17. This is to ensure consistency in the 12m period against our target measure of net debt : underlying EBITDA of between 1.0 and 1.5 which is based on a pre IFRS 16 basis. Underlying operating profit on a pre IFRS 16 basis - reconciliation Underlying operating profit (see reconciliation above) Adjustments to 2019 to restate as if under IAS 17: Rentals paid expense Rentals paid expense classified as non-underlying Reversal of IFRS 16 depreciation Lease receivable receipts taken to income Underlying operating profit on IAS 17 basis Net debt : Underlying EBITDA – reconciliation Underlying operating profit on IAS 17 basis Depreciation and amortisation Reversal of IFRS 16 depreciation Depreciation and amortisation - IAS 17 basis Underlying EBITDA on IAS 17 basis Net debt Net debt : Underlying EBITDA ratio 2019 £m 26.7 (39.5) 1.6 19.2 3.3 11.3 2019 £m 11.3 86.8 (19.2) 67.6 78.9 119.7 1.5 2018 £m 76.2 - - - - 76.2 2018 £m 76.2 65.3 - 65.3 141.5 126.1 0.9 Net franchise capital expenditure - total franchise specific (manufacturer new vehicle partners) capital expenditure incurred in the period less franchise specific disposal proceeds. Like for Like reconciliations Like for like - results on a like for like basis include only businesses which have been trading for 12 consecutive months. We use like for like results to aid in the understanding of the like for like movement in revenue, gross profit and operating profit in the business. The difference to underlying results are simply those businesses which are not like for like which have recently commenced operation and therefore do not have a 12 month history plus any retail points closed during the current or previous period. 109 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 1 - BASIS OF PREPARATION Revenues by Department - Franchised UK Motor 2019 Group revenue £m 326.2 1,702.5 1,702.1 3,730.8 Aftersales revenue Used vehicle revenue New vehicle revenue Total Revenue Revenues by Department - Car Store 2019 Disposals revenue £m 2019 Other non like for like revenue £m 2019 like for like revenue £m (1.6) 318.4 2018 Group revenue £m 333.2 2018 Disposals revenue £m (19.8) (131.5) 2018 Other non like for like revenue £m 2018 like for like revenue £m - - - - 313.4 1,664.6 1,537.7 3,515.7 (5.2) 1,664.2 1,796.1 - 1,665.9 1,644.6 (106.9) (6.8) 3,648.5 3,773.9 (258.2) (6.2) (33.1) (36.2) (75.5) 2019 Group revenue £m 2019 Disposals revenue £m 2.5 267.8 270.3 (2.0) (129.9) (131.9) 2019 Other non like for like revenue £m 2019 like for like revenue £m - (8.1) (8.1) 0.5 129.8 130.3 2018 Group revenue £m 2018 Disposals revenue £m 4.2 (3.5) 296.3 300.5 (174.4) (177.9) 2018 Other non like for like revenue £m 2018 like for like revenue £m - - - 0.7 121.9 122.6 Aftersales revenue Used vehicle revenue Total Revenue Revenues by Department - Franchised US Motor 2019 Group revenue £m 2019 Disposals revenue £m 2019 Other non like for like revenue £m 2019 like for like revenue £m 2018 Group revenue £m 2018 Disposals revenue £m 2018 Other non like for like revenue £m 2018 like for like revenue £m Aftersales revenue Used vehicle revenue New vehicle revenue Total Revenue 40.7 75.7 305.9 422.3 (15.6) (40.7) (131.5) (187.8) - - - - 25.1 35.0 174.4 234.5 43.2 97.9 337.3 478.4 (18.6) (53.3) (174.7) (246.6) - - - - 24.6 44.6 162.6 231.8 Gross profit by Department - Franchised UK Motor 2019 Group gross profit £m 2019 Disposals gross profit £m 2019 Other non like for like gross profit £m 2019 like for like gross profit £m 2018 Group gross profit £m 2018 Disposals gross profit £m 2018 Other non like for like gross profit £m 2018 like for like gross profit £m Aftersales gross profit Used vehicle gross profit New vehicle gross profit Total Gross profit 161.5 105.2 104.9 371.6 (1.5) 2.5 (2.4) (1.4) (0.7) (0.5) - 159.3 107.2 102.5 179.8 141.3 111.0 (9.1) (3.9) (7.3) (1.2) 369.0 432.1 (20.3) - - - - 170.7 137.4 103.7 411.8 110 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 1 - BASIS OF PREPARATION Gross profit by Department - Car Store 2019 Group gross profit £m 2019 Disposals gross profit £m 2019 Other non like for like gross profit £m 2019 like for like gross profit £m 2018 Group gross profit £m 2018 Disposals gross profit £m 2018 Other non like for like gross profit £m 2018 like for like gross profit £m Aftersales gross profit Used vehicle gross profit Total Gross profit (1.8) 12.7 10.9 2.8 (5.5) (2.7) - (0.5) (0.5) 1.0 6.7 7.7 1.7 22.9 24.6 1.5 (11.7) (10.2) - - - 3.2 11.2 14.4 Gross profit by Department - US Motor 2019 Group gross profit £m 2019 Disposals gross profit £m 2019 Other non like for like gross profit £m 2019 like for like gross profit £m 2018 Group gross profit £m 2018 Disposals gross profit £m 2018 Other non like for like gross profit £m 2018 like for like gross profit £m Aftersales gross profit Used gross profit New vehicle gross profit Total Revenue 21.1 5.7 29.9 56.7 (8.6) (2.8) (14.4) (25.8) - - - - 12.5 2.9 15.5 30.9 22.7 5.4 32.0 60.1 (10.4) (2.4) (16.4) (29.2) - - - - 12.3 3.0 15.6 30.9 Underlying operating profit/(loss) 2019 Group underlying operating profit/(loss) £m 2019 Disposals underlying operating profit/(loss) £m 2019 Other non like for like underlying operating profit/(loss) £m 2019 like for like underlying operating profit/(loss) £m 2018 Group underlying operating profit/(loss) £m 2018 Disposals underlying operating profit/(loss) £m 2018 Other non like for like underlying operating profit/(loss) £m 2018 like for like underlying operating profit/(loss) £m 13.0 (25.2) 13.4 12.8 12.7 26.7 7.3 15.1 - - (6.3) 16.1 0.5 0.5 - - - 20.8 (9.6) 13.4 12.8 6.4 1.0 43.8 53.0 (11.9) 11.7 14.8 8.6 76.2 8.1 8.3 - - (5.3) 11.1 - - - - - - 61.1 (3.6) 11.7 14.8 3.3 87.3 Franchised UK Motor Car Store Software Leasing US Motor Total underlying operating profit Operating (loss)/profit 2019 Group operating profit/(loss) £m 2019 Disposals operating profit/(loss) £m 2019 Other non like for like operating profit/(loss) £m 2019 like for like operating profit/(loss) £m 2018 Group operating profit/(loss) £m 2018 Disposals operating profit/(loss) £m 2018 Other non like for like operating profit/(loss) £m 2018 like for like operating profit/(loss) £m Franchised UK Motor Car Store Software Leasing US Motor Total operating profit (96.4) (46.6) 13.4 12.8 45.7 (71.1) 7.3 15.1 - - (6.3) 16.1 0.5 0.5 - - - (88.6) (31.0) 13.4 12.8 39.4 (24.5) (27.7) 11.7 14.8 11.3 1.0 (54.0) (14.4) 8.1 8.3 - - (5.3) 11.1 - - - - - - (16.4) (19.4) 11.7 14.8 6.0 (3.3) 111 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 2 - RESULTS AND TRADING This section contains the notes and information to support the results presented in the income statement: 2.1 Revenue 2.2 Net operating expenses 2.3 Operating segments 2.4 Staff costs 2.5 2.6 2.7 2.8 Audit fees Non-underlying items Taxation Earnings per share 2.1 Revenue Accounting policy Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. The Group recognises revenue when it transfers control over a product or service to a customer The following is a description of principal activities from which the Group generates its revenue categorised by the reportable segments as detailed in note 2.3. UK Motor segment and US Motor segment The Franchised UK and US Motor segments principally generate revenue from the sale of new and used motor vehicles, together with the supply of motor vehicle parts, servicing and repair activates, collectively referred to as aftersales. Products and services may be sold separately or in bundled packages. Examples of a bundled package will include the supply of a vehicle with an extended warranty or a servicing plan. For bundled packages, the Group accounts for individual products and services separately as they are distinct items, as each performance obligation within that contract is separately identifiable from other items in the bundled package. The consideration is allocated between separate products and services in a bundle based on their stand-alone selling prices. The stand-alone selling prices are determined based on the list prices at which the Group sells these items and are separately identified on the customer’s invoice. The Group has a number of manufacturer partners who will provide goods/services to customers, for example a warranty or free servicing when purchasing a new vehicle. Such items do not have a contractual obligation on the Group as the obligation lies with the manufacturer and therefore no revenue is recognised in respect of these items. 112 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 2 - RESULTS AND TRADING 2.1 Revenue continued Products and services Nature, timing of satisfaction of performance obligations and significant payment terms New and used The Group recognises revenue on the sale of motor vehicles and parts revenue when they have vehicles, parts and been supplied to the customer. The satisfaction of the performance obligation occurs on delivery or accessories collection of the product. Vehicles are usually paid for prior to delivery though selected corporate operators may be granted terms of up to seven days. Parts are either paid for on delivery or within one month, dependant upon whether or not the customer is retail or has trade terms. Service and repairs The Group recognises revenue when the one time service has been completed. Revenue is recognised at this point provided that the revenue and costs can be measured reliably, the recovery of the consideration is probable and there is no continuing management involvement with the goods. Payment terms are upon completion of the service or within one month, dependant upon whether or not the customer is retail or trade. Commissions The Group receives commissions when it arranges finance and insurance packages for its received customers to purchase its products and services, acting as agent on behalf of various finance and insurance companies. Any commission earned is recognised when the customer draws down the finance or commences the insurance policy from the supplier which coincides with the delivery of the product or service. Commissions receivable are paid typically in the month after the finance is drawn down. Vehicle warranty The Group offers a warranty product on vehicles supplied with a guarantee period typically ranging from 3 months to 3 years. The Group recognises revenue on warranties on a straight-line basis over the warranty period. The performance obligation of the Group, being the rectification of mechanical faults on vehicles sold, will be the period over which the customer can exercise their rights under the warranty and therefore revenue should be recognised over the period of the warranty. Warranties are paid for prior to the commencement of the policy. The unrecognised income is held within deferred income (see note 3.9). There are no such warranties offered for sale in the US Motor segment. 113 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 2 - RESULTS AND TRADING 2.1 Revenue continued Leasing The leasing segment generates revenue from the provision of vehicle leasing services, principally to fleets run by various commercial operators. Vehicles are supplied to customers on operating leases and may include servicing and maintenance agreements, which are bundled into the overall contract For bundled packages, the Group accounts for individual products and services separately as they are distinct items, as each performance obligation within that contract is separately identifiable from other items in the bundled package. At the end of each contract the Group will generate revenue from the disposal of the vehicle, recovery of any rectification work and in some instances additional rentals beyond the original contract term. Products and services Nature, timing of satisfaction of performance obligations and significant payment terms Leasing Where vehicles are supplied to a leasing Group for contract hire purposes and the Group undertakes to repurchase the vehicle at a predetermined date and value the transfer of control is deemed not to have transferred outside the Group and consequently no sale is recognised. As a result the accounting for the arrangement reflects the Group’s retention of the asset to generate future rentals and, in accordance with IFRS 16 Leases, the Group is considered to be an operating lessor for all arrangements in place. The initial amounts received in consideration from the leasing Group are held as deferred income allocated between the present value of the repurchase commitment, held within trade and other payables and a residual amount of deferred revenue held within deferred income. A finance charge is accrued against the present value of the repurchase commitment and recorded as a finance expense in the income statement. The remaining deferred revenue, which effectively represents rentals received in advance, is taken to the income statement on a straight line basis over the related lease term. No additional disclosures are made under IFRS 16 as there are no future rentals receivable. These vehicles are held within ‘property, plant and equipment’ at their cost to the Group and are depreciated to their residual values over the terms of the leases. These assets are transferred into inventory at their carrying amount when they cease to be rented and they become available for sale as part of the Group’s ordinary course of business. Rentals are billed and paid for on a monthly basis. Maintenance The Group offer a maintenance contract to customers to cover routine servicing and unexpected repairs of vehicles under a leasing contract. Revenue is recognised over the period of the contract on a straight line basis. Maintenance contracts are billed and paid for on a monthly basis. Used Vehicles The Group recognises revenue on the sale of ex contract hire motor vehicles when they have been supplied to the customer. This occurs on delivery or collection of the product. Vehicles are paid for on delivery. 114 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 2 - RESULTS AND TRADING 2.1 Revenue continued Software The Group, through its Pinewood business, supplies dealer management systems to motor vehicle dealers. These systems include consultancy, training and installation services and the right to use the Group’s software over a contractual period. Products and services may be sold separately or in bundled packages. Examples of a bundled package will include system consultancy, on and off site training for users together with the right for a number of users to use the software. For bundled packages, the Group accounts for individual products and services separately as they are distinct items, as each performance obligation within that contract is separately identifiable from other items in the bundled package. The consideration is allocated between separate products and services in a bundle based on their stand-alone selling prices. The stand-alone selling prices are determined based on the list prices at which the Group sells these items and are separately identified on the customer’s contract and subsequent invoice. Products and services Nature, timing of satisfaction of performance obligations and significant payment terms Software Pinewood supply its software on a hosting basis and licence specific numbers of users to access this service. As such Pinewood supply ‘Software as a Service’ (SaaS). The software licences are provided only in conjunction with a hosting service, the customer cannot take control of the licence or use the software without the hosting service and as such the customer cannot benefit from the licence on its own and the licence is not separable from the hosting services. Therefore, the licence is not distinct and would be combined with the hosting service. The Group’s assessment of its performance obligation under IFRS 15 of providing SaaS is that revenue is recognised over the period of the contract. SaaS is billed one month in advance of a quarterly billing cycle ensuring payment is received prior to commencement of usage. Training and consultancy The Group recognises revenue on the provision of any consultancy time and training at the point of providing and delivering the service. Consultancy hours are billed at the time of delivery. Training courses are billed at the time of booking which may be in advance of the date the training is scheduled for. 115 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS l _ _ _ _ a t o T _ _ _ _ _ _ _ r o t o M S U _ _ _ _ _ _ g n i s a e L _ _ _ _ _ e r a w t f o S _ _ _ _ e r o t S r a C _ _ _ _ r o t o M K U _ _ d e u n i t n o c s i d d e s i h c n a r F m £ 8 1 0 2 m £ 9 1 0 2 m £ 8 1 0 2 m £ 9 1 0 2 m £ 8 1 0 2 m £ 9 1 0 2 m £ 8 1 0 2 m £ 9 1 0 2 m £ 8 1 0 2 m £ 9 1 0 2 m £ 8 1 0 2 m £ 9 1 0 2 . 3 2 . e t o n e e s , s t n e m g e s l e b a t r o p e r s t i e r a h c h w i , i s n o i s i v d c g e t a r t s i r u o f ’ s p u o r G e h t h t i w e u n e v e r d e t a g e r g g a s i d e h t f o n o i t a i l i c n o c e r a s e d u c n l i o s l a l e b a t e h T . n o i t i n g o c e r e u n e v e r f o g n m i i t d n a s e n i l i e c v r e s / s t c u d o r p r o a m j , t e k r a m l i a c h p a r g o e g y r a m i r p y b d e t a g e r g g a s i d s i e u n e v e r , l e b a t g n w o i l l o f e h t n I I G N D A R T D N A S T L U S E R - 2 N O I T C E S 116 e u n e v e r f o n o i t a g e r g g a s i D d e u n i t n o c e u n e v e R 1 . 2 . 6 0 - . 5 0 . 2 0 - - - - . 4 8 7 4 . 3 2 2 4 . 4 8 7 4 . 3 2 2 4 - - - - - - . 0 8 4 1 , 4 1 . 3 8 0 4 , - - . 3 7 5 . 4 4 6 . 0 7 2 6 4 , 1 . 6 0 5 4 , . 4 8 7 4 . 3 2 2 4 . 3 7 5 . 4 4 6 . 6 0 8 3 . 4 9 6 3 . 9 6 1 . 3 7 5 . 3 0 9 1 , 2 9 . 1 8 9 , 1 . 0 7 2 6 4 , . 5 3 6 5 4 , . 0 6 4 0 2 , . 0 8 0 0 2 , . 2 3 4 . 9 7 9 . 7 0 4 . 7 5 7 . 3 7 3 3 . 9 5 0 3 . 3 8 1 . 4 4 6 - - - - 1 . 6 0 5 4 , . 4 8 7 4 . 3 2 2 4 . 5 6 3 4 4 , . 4 8 7 4 . 3 2 2 4 . 5 3 6 . 6 9 6 - - . 0 7 2 6 4 , 1 . 6 0 5 4 , . 4 8 7 4 . 3 2 2 4 - - - - - - - - . 3 7 5 . 3 7 5 . 4 4 6 . 4 4 6 . 5 6 1 . 8 0 4 . 3 7 5 . 4 0 2 . 0 4 4 . 4 4 6 . 3 6 1 - . 6 0 - . 9 6 1 - - - - . 9 6 1 . 9 6 1 7 . 1 . 2 5 1 . 9 6 1 - . 6 7 1 . 5 0 . 2 0 . 3 8 1 - - - - . 3 8 1 . 3 8 1 7 . 1 . 6 6 1 . 3 8 1 . 5 0 0 3 . 3 0 7 2 - - - - - - . 5 0 0 3 . 3 0 7 2 - - - - - - . 9 3 7 7 3 , . 8 0 3 7 3 , . 9 3 7 7 3 , . 8 0 3 7 3 , s t e k r a m l a c i h p a r g o e g y r a m i r P a c i r e m A h t r o N e p o r u E a c i r f A a i s A s r e m o t s u c l a n r e t x e m o r f e u n e v e R s e n i l e c i v r e s / s t c u d o r p r o a M j . 2 4 5 2 . . 2 3 3 3 . 2 6 2 3 e u n e v e r l s e a s r e t f A . 3 6 9 2 . 8 7 6 2 1 . 6 9 7 , 1 . 5 2 0 7 , 1 - - - - - - - - - - . 6 4 4 6 , 1 1 . 2 0 7 , 1 . 5 0 0 3 . 3 0 7 2 . 7 9 9 2 . 3 9 6 2 . 9 3 7 7 3 , . 2 7 6 7 3 , . 8 0 3 7 3 , . 8 2 2 7 3 , s r e m o t s u c l a n r e t x e m o r f e u n e v e R e u n e v e r e r a w t f o S e u n e v e r g n i s a e L n o i t i n g o c e r e u n e v e r f o g n m T i i e u n e v e r e u n e v e r l i e c h e v d e s U l i e c h e v w e N e m i t n i i t n o p t A . 8 0 0 . 1 . 7 6 0 8 . e m i t r e v O . 5 0 0 3 . 3 0 7 2 . 9 3 7 7 3 , . 8 0 3 7 3 , s r e m o t s u c l a n r e t x e m o r f e u n e v e R Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 2 - RESULTS AND TRADING 2.1 Revenue continued Contract balances Contract Assets The Group recognises the following contract assets Aftersales work in progress yet to be completed Contract liabilities The Group recognises the following contract liabilities Deposits received from customers Unearned proportion of warranty policies sold 2019 £m 1.5 2019 £m 18.7 19.4 2018 £m 2.1 2018 £m 11.4 18.8 Movements in the deferred income balance in respect of the warranty policies is presented in note 3.9 which shows the value of policies sold during the year and the income recognised during the year. 2.2 Net operating expenses Net operating expenses: Distribution costs Administrative expenses Impairment loss on trade receivables Rents received 2019 IFRS 16 £m (256.2) (322.2) (0.6) 1.9 (577.1) 2018 IAS 17 £m (252.7) (332.1) (0.5) 4.7 (580.6) 117 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 2 - RESULTS AND TRADING 2.3 Operating segments The Group has five reportable segments, as described below, which are the Group’s strategic business units. The segments offer different ranges of products and services and are managed separately because they require their own specialisms in terms of market and product. For each of these segments, the Executive Committee which is deemed to be the Chief Operating Decision Maker (CODM), reviews internal management reports on at least a monthly basis. The review of these management reports enables the CODM to allocate resources to each segment and form the basis of strategic and operational decisions, such as acquisition strategy, closure programme or working capital allocation. The following summary describes the operations in each of the Group’s reportable segments: Franchised UK Motor This segment comprises the Group’s motor vehicle retail, parts wholesale and fleet operations from it’s franchised dealer network, encompassing the sale of new and used motor cars, motorbikes, trucks and vans, together with associated aftersales activities of service, body repair and parts sales. Car Store This segment comprises the Group’s used vehicle retail operation branded Car Store, encompassing the sale of used motor cars, together with associated aftersales service activities. Software This segment comprises the Group’s activities as a dealer management systems provider. Leasing This segment comprises the Group’s contract hire and leasing activities. US Motor This segment comprises the Group’s retail operation in California in the United States encompassing the sale of new and used motor cars, together with associated aftersales activities of service and parts sales. The Group has revised its reporting segments. In January 2019 the Group re-organised its management and reporting structure. The significant change was that the Car Store operation was segregated from the management of the Franchised UK Motor operation (previously known as UK Motor) and this is reflected in the internal reporting structure as presented to the Chief Operating Decision Maker. In these financial statements therefore the Car Store segment is now reported separately. The results of the Franchised UK Motor segment and Car Store segment for the comparative period have been dis-aggregated and is restated as follows for the period ended 31 December 2019. 118 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 2 - RESULTS AND TRADING 2.3 Operating segments continued Year ended 31 December 2018 Total gross segment turnover Inter-segment turnover Revenue from external customers Operating profit before non-underlying items Other income and non-underlying items Operating profit/(loss) Finance expense Segmental (loss)/profit before tax Other items included in the income statement are as follows: Depreciation and impairment Impairment of goodwill Impairment of property, plant and equipment Amortisation Share based payments Impairment of assets held for sale Pension past service costs Other income - gains on the sale of businesses and property UK Motor £m 4,074.4 - 4,074.4 41.1 (93.3) (52.2) - (52.2) (22.3) (88.8) (5.8) (0.5) (0.7) (1.2) (10.5) 13.0 _segments as restated_ Franchised UK Motor £m Car Store £m 3,773.9 300.5 - - 3,773.9 300.5 53.0 (77.5) (11.9) (15.8) (24.5) (27.7) - - (24.5) (27.7) (16.9) (5.4) (78.8) (10.0) - (5.8) (0.5) (0.7) (1.2) (10.5) 13.0 - - - - - The tables of financial performance presented in the Operational and Financial Review on pages 20 to 41 are based upon these segmental reports. Inter-segment transfers and transactions are entered into under normal commercial terms and conditions that would also be available to unrelated third parties. 119 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 2 - RESULTS AND TRADING 2.3 Operating segments continued Year ended 31 December 2019 - IFRS 16 Franchised UK Motor £m Car Store £m Software £m Leasing £m Group interest £m Continuing operations Sub total £m Discontinued operations US Motor £m Total £m Total gross segment revenue 3,730.8 270.3 30.9 87.7 Inter-segment revenue - - (12.6) (23.3) Revenue from external customers 3,730.8 270.3 18.3 64.4 Operating profit before non- underlying items Non-underlying items 13.0 (25.2) (109.4) (21.4) Operating profit/(loss) (96.4) (46.6) Finance expense Finance income - - - - 13.4 - 13.4 - - Segmental (loss)/profit before tax (96.4) (46.6) 13.4 12.8 - 12.8 - 9.7 4,119.7 422.3 4,542.0 (35.9) - (35.9) 4,083.8 422.3 4,506.1 14.0 12.7 26.7 (130.8) 33.0 (97.8) - - - - - - (116.8) (3.1) (39.8) (42.9) 3.0 3.0 45.7 (3.1) - (71.1) (46.0) 3.0 (36.8) (156.7) 42.6 (114.1) - - - - - - - - - - - (83.3) (102.4) (25.9) (3.5) (0.6) (1.9) 1.6 (5.5) (1.8) 4.8 - - - - - - 1.0 - - - (83.3) (102.4) (25.9) (3.5) (0.6) (1.9) 2.6 (5.5) (1.8) 4.8 0.3 33.0 33.3 Other items included in the income statement are as follows: Depreciation and impairment (40.0) (0.5) (0.6) (42.2) Impairment of goodwill (102.4) - Impairment of property, plant and equipment (6.3) (19.6) Amortisation Share based payments Impairment of assets held for sale Settlement of historic VAT issues (0.7) (0.6) (1.9) 1.6 Termination and severance costs (5.5) Car Store closure costs Share based payments Other income - losses on the sale of businesses and property - 4.8 0.3 - - - - - (1.8) - - - - (2.8) - - - - - - - - - - - - - - - - - 120 Pendragon PLC Annual Report 2019NOTES TO THE FINANCIAL STATEMENTS SECTION 2 - RESULTS AND TRADING 2.3 Operating segments continued Year ended 31 December 2018 - IAS 17 Franchised UK Motor £m Car Store £m Software £m Leasing £m Group interest £m Continuing operations Sub total £m Discontinued operations US Motor £m Total £m Total gross segment revenue 3,773.9 300.5 28.3 81.2 Inter-segment revenue - - (11.4) (23.9) Revenue from external customers 3,773.9 300.5 16.9 57.3 Operating profit before non- underlying items Non-underlying items 53.0 (11.9) (77.5) (15.8) Operating profit/(loss) (24.5) (27.7) Finance expense Finance income - - - - Segmental (loss)/profit before tax (24.5) (27.7) 11.7 - 11.7 - 0.8 12.5 14.8 - 14.8 - - - - - - 4,183.9 478.4 4,662.3 (35.3) - (35.3) 4,148.6 478.4 4,627.0 67.6 (93.3) (25.7) 8.6 2.7 11.3 76.2 (90.6) (14.4) (2.8) (24.7) (27.5) (2.5) (30.0) - (0.8) - 12.0 (25.5) (53.2) - 8.8 - (44.4) Other items included in the income statement are as follows: Depreciation and impairment (16.9) (5.4) (0.3) (39.3) Impairment of goodwill (78.8) (10.0) Impairment of property, plant and equipment - (5.8) Amortisation Share based payments Impairment of assets held for sale Pension past service costs Other income - losses on the sale of businesses and property (0.5) (0.7) (1.2) (10.5) 13.0 - - - - - - - - - (2.5) (0.1) - - - - - - - - - - - - - - - - (61.9) (0.3) (62.2) (88.8) (5.8) (3.1) (0.7) (1.2) (10.5) - - - - - - (88.8) (5.8) (3.1) (0.7) (1.2) (10.5) 13.0 2.7 15.7 Geographical information. All segments, with the exception of the US Motor Group in the United States originate in the United Kingdom. The US Motor Group segment is a discontinued operation. 121 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 2 - RESULTS AND TRADING 2.4 Staff costs The average number of people employed by the Group in the following areas was: Sales Aftersales Administration Costs incurred in respect of these employees were: Wages and salaries Social security costs Contributions to defined contribution plans (see note 5.1) Cost recognised for defined benefit plans (see note 5.1) Share based payments (see note 4.6) 2019 Number 3,156 4,304 2,104 9,564 2019 £m 271.6 25.4 11.6 (3.0) 0.6 306.2 2018 Number 3,260 4,446 2,174 9,880 2018 £m 272.4 24.1 7.9 12.1 0.7 317.2 Information relating to directors’ emoluments, share options and pension entitlements is set out in the Directors’ Remuneration Report on pages 60 to 78. 2.5 Audit fees Auditor’s remuneration: Fees payable to the company's Auditor for the audit of the company's annual accounts: Fees payable to the company's Auditor and its associates for other services: Audit of the company's subsidiaries pursuant to legislation Audit-related assurance services Tax compliance services Other assurance services 2019 £000 350.0 210.0 80.0 71.0 10.0 721.0 2018 £000 267.0 174.8 45.0 95.0 10.0 591.8 122 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 2 - RESULTS AND TRADING 2.6 Non-underlying items Non-underlying income and expenses are items that are not incurred in the normal course of business and are sufficiently significant and/or irregular to impact the underlying trends in the business. Within operating expenses: Settlement of historic VAT issues Impairment of goodwill Impairment of assets held for sale Impairment of property, plant and equipment Impairment of right of use assets Termination and severance costs Car Store closure costs Past service costs in respect of pension obligations Within other income - gains on the sale of businesses, property and investments: Gains on the sale of businesses Gains/(losses) on the sale of property Within finance expense: Interest on settlement of historic VAT issues Net interest on pension scheme obligations Total non-underlying items before tax Non-underlying items in tax Total non-underlying items after tax 2019 IFRS 16 £m 1.6 (102.4) (1.9) (2.6) (23.3) (5.5) (1.8) 4.8 (131.1) 32.1 1.2 33.3 1.9 (1.8) 0.1 (97.7) (3.3) (101.0) 2018 IAS 17 £m - (88.8) (1.2) (5.8) - - - (10.5) (106.3) 3.3 12.4 15.7 - (1.6) (1.6) (92.2) 3.0 (89.2) The following amounts have been presented as non-underlying items in these financial statements: Goodwill has been reviewed for any possible impairment and as a result of this review there was an impairment charge of £102.4m made during the year (2018: £88.8m) (see note 3.1). 123 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 2 - RESULTS AND TRADING 2.6 Non-underlying items continued Group property, plant and equipment and assets held for sale have been reviewed for possible impairments. As a result of this review there was an impairment charge against assets held for sale of £1.9m during the year (2018: £1.2m) and property, plant and equipment of £25.9m (2018: £5.8m) which comprised impairment of owned assets of £2.6m and right of use assets of £23.3m. There were no reversals of previous impairment charges in respect of assets held for sale where anticipated proceeds less costs to sell have increased over their impaired carrying values (2018: £nil). A Pension Increase Exchange exercise was carried out during the year and the impact of this has been to recognise a credit of £4.8m in the past service cost line. The past service costs for the previous year in respect of pension obligations is an estimate of the cost of GMP equalisation exercise undertaken in 2018. The net financing return on pension obligations in respect of the defined benefit schemes closed to future accrual is shown as a non-underlying item due to the irregularity of this amount historically and it is not incurred in the normal course of business. A net expense of £1.8m has been recognised during the year (2018: £1.6m). Other income consists of the profit or loss on disposal of businesses and property. This comprises a £32.1m (2018: £3.3m) profit on disposals of motor vehicle dealerships during the year (of which £33.0m was in respect of discontinued operations (2018: £2.7m)) and a £1.2m profit on sale of properties (2018: 12.4m). This does not include routine transactions in relation to the disposal of individual assets, and only relates to the disposal of motor vehicle dealerships and associated properties. The Group announced during the year the closure of 22 Car Stores and one preparation centre following a full market and operating model assessment of the Car Store business. The resultant costs of closure of these sites of £1.8m have been recognised as a non-underlying item. During the year some of the Group’s senior executive team were offered compensation on terminating their employment contracts which amounted to £5.5m (2018: £nil). We acquired CD Bramall PLC in 2004, with the Group having made a claim in 2003 for VAT overpaid in respect of bonuses received by the Group’s leasing companies from OEMs during the period 1988-1995 (Fleming claims). These claims were refused by HMRC over the years for a number of reasons which gradually fell away through litigation with other parties. We were then left with a fundamental objection of principle by HMRC and so we litigated in 2017 and were successful (decision released August 2018). As the legal decision was one of principle only, we were then left to agree quantum with HMRC. This was concluded during the first half of 2019, resulting in a VAT repayment of just over £1.9m (cash received in June 2019) with interest to follow shortly of another £1.9m. Associated costs are expected to be £0.3m which will result in a net gain of £3.5m. 124 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 2 - RESULTS AND TRADING 2.7 Taxation Accounting policy Income tax comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in other comprehensive income, in which case it is recognised in the statement of comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised using the balance sheet liability method, recognising temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not recognised: initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination that affect neither accounting nor taxable profit. The amount of deferred tax recognised 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 balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Estimates and judgements The actual tax on the Group’s profits is determined according to complex laws and regulations. Where the effect of these laws and regulations is unclear, estimates are used in determining the liability for the tax to be paid on profits which are recognised in the financial statements. The Group considers the estimates, assumptions and judgements to be reasonable but this can involve complex issues which may take a number of years to resolve. The final determination of tax liabilities could be different from the estimates reflected in the financial statements but the Group believes that none have a significant risk of causing a material adjustment to the carrying amount of the liability within the next financial year. Deferred tax assets and liabilities require management judgement in determining the amounts to be recognised. In particular, judgement is used when assessing the extent to which deferred tax assets should be recognised with consideration given to the timing and level of future taxable income. The unrecognised deferred tax assets are disclosed below. 125 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 2 - RESULTS AND TRADING 2.7 Taxation continued Taxation - Income statement continued UK corporation tax: Current tax on (loss)/profit for the year Adjustments in respect of prior periods Overseas taxation: Current tax on profit for the year Adjustments in respect of prior periods Total current tax Deferred tax expense: Origination and reversal of temporary differences Total deferred tax Total income tax expense in the income statement Factors affecting the tax charge for the period: The tax assessed is different from the standard rate of corporation tax in the UK of 19.00% (2018: 19.00%) The differences are explained below: Loss before taxation 2019 IFRS 16 £m (3.6) - (3.6) 13.4 0.2 13.6 10.0 (6.7) (6.7) 3.3 2019 IFRS 16 £m (114.1) 2018 IAS 17 £m 5.9 (2.5) 3.4 1.1 0.1 1.2 4.6 1.5 1.5 6.1 2018 IAS 17 £m (44.4) Tax on loss at UK rate of 19.00% (2018: 19.00%) (21.7) (8.4) Differences: Tax effect of expenses that are not deductible in determining taxable profit Permanent differences arising in respect of fixed assets Tax rate differential on overseas income Non-underlying items (see below) Impact of UK corporation tax rate change Adjustments to tax charge in respect of previous periods Total income tax expense in the income statement Taxation - Other comprehensive income Relating to defined benefit plan remeasurement (gains) and losses 0.3 1.6 1.1 22.0 0.6 (0.6) 3.3 2019 £m 0.2 0.2 0.1 0.9 0.7 14.0 (0.1) (1.1) 6.1 2018 £m - - 126 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 2 - RESULTS AND TRADING 2.7 Taxation continued Tax rate A reduction in the UK corporation tax rate from 19% to 17% (effective from 1 April 2020) was substantively enacted on 6 September 2016, and the UK deferred tax asset as at 31 December 2019 has been calculated based on this rate. In the 11 March 2020 Budget it was announced that the UK tax rate will remain at the current 19% and not reduce to 17% from 1 April 2020. This will have a consequential effect on the group’s future tax charge. If this rate change had been substantively enacted at the current balance sheet date the deferred tax asset would have increased by £3.0m. The USA deferred tax liability as at 31 December 2019 has been calculated based on the expected long term federal rate of 21% substantively enacted at the balance sheet date. Factors affecting the tax charge The tax charge/credit is decreased/increased by the release of prior year provisions relating to UK corporation tax returns and also non-deductible expenses including the impairment of goodwill and non-qualifying depreciation. Non-underlying tax credit The tax charge in relation to non-underlying items referred to in note 2.6 is £3.3m (2018: credit of £3.0m). Despite the non- underlying items constituting an overall loss, a tax charge arises due to majority of the loss not being eligible for tax relief (goodwill impairment) and the gains arising on disposal of businesses arises in the US, which is taxed at higher rates. Unrecognised deferred tax assets There are unutilised tax losses within the Group of £13.8m (2018: £13.8m) relating to former overseas businesses for which no deferred tax asset has been recognised pending the clarity of the availability of intra-EU losses. There are also unrecognised capital losses net of rolled over gains of £35.2m (2018: £38.0m). Deferred tax assets/(liabilities) Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The offset amounts are as follows: Deferred tax assets Deferred tax liabilities 2019 IFRS 16 £m 25.9 (0.4) 25.5 2018 IAS 17 £m 12.6 (2.8) 9.8 127 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 2 - RESULTS AND TRADING 2.7 Taxation continued The table below outlines the deferred tax assets/(liabilities) that are recognised on the balance sheet, together with their movements in the year; Property, plant and equipment Retirement benefit obligations Other short term temporary differences Losses Tax assets/(liabilities) Property, plant and equipment Retirement benefit obligations Other short term temporary differences Losses Tax assets/(liabilities) At 1 January 2018 £m (Charged) to consolidated income statement £m (Charged) to other comprehensive income £m (3.1) 10.7 2.5 1.3 11.4 (1.8) 1.0 (0.7) - (1.5) - - - - - Exchange differences £m At 31 December 2018 £m (0.1) (5.0) - - - (0.1) 11.7 1.8 1.3 9.8 Recognised on initial application of IFRS 16 £m (Charged) /credited to consolidated income statement £m (Charged) to other comprehensive income £m 8.7 - - - 8.7 1.7 (1.8) - 6.8 6.7 - 0.2 - - 0.2 At 1 January 2019 £m (5.0) 11.7 1.8 1.3 9.8 Exchange differences £m At 31 December 2019 £m 0.1 - - - 0.1 5.5 10.1 1.8 8.1 25.5 A deferred tax asset of £8.1m is recognised in the financial statements in respect of losses arising in the UK. £6.8m of this deferred tax asset was generated during 2019 due to the exceptional nature of activity that occured during 2019. The losses have been recognised as the Group made taxable profits in the UK in 2018 and immediately preceding periods, the Group returned to profit in the second half of 2019 and is forecasting profits to continue in the UK in 2020 and beyond. Losses carry forward indefinitely though are restricted in their use to 50% of taxable profits above £5m. A sensitivity analysis was conducted to determine the forecast recovery of the whole deferred tax assets of £25.4m. Under this analysis the deferred tax assets are expected to be recovered by the end of 2026. If taxable profit increased by 25% the period of recovery would shorten to the end of 2025. If taxable profits decrease by 25% compared to the forecast the period of recovery would extend to 2028. If taxable profit decreased by 50% the period of recovery would extend to 2031. 128 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 2 - RESULTS AND TRADING 2.8 Earnings per share Accounting policy The Group presents basic and diluted earnings per share (‘eps’) data for its ordinary shares. Basic eps is calculated by dividing the profit or loss attributable to ordinary shareholders of the Group by the weighted average number of ordinary shares in issue during the period. The shares held by the EBT have been excluded from the calculation until such time as they vest unconditionally with the employees. Diluted eps is calculated by dividing the profit and loss attributable to ordinary shareholders by the weighted average number of ordinary shares in issue taking account of the effects of all dilutive potential ordinary shares, which comprise of share options granted to employees and LTIPs. Earnings per share calculation 2019 IFRS 16 Earnings per share pence 2019 IFRS 16 Earnings Total £m 2018 IAS 17 Earnings per share pence 2018 IAS 17 Earnings Total £m Basic earnings per share from continuing operations Basic earnings per share from discontinued operations Basic earnings per share Adjusting items: (10.7) (148.9) 2.3 31.5 (8.4) (117.4) Non-underlying items attributable to the parent from continuing operations 9.4 130.7 Non-underlying items attributable to the parent from discontinued operations (2.4) (33.0) Non-underlying items attributable to the parent (see note 2.6) Tax effect of non-underlying items from continuing operations Tax effect of non-underlying items from discontinued operations Tax effect of non-underlying items Underlying earnings per share from continuing operations (Non-GAAP measure) Underlying earnings per share from discontinued operations (Non-GAAP measure) Underlying earnings per share (Non-GAAP measure) 7.0 (0.4) 0.6 0.2 (1.8) 0.6 (1.2) 97.7 (5.5) 9.3 3.3 (24.2) 7.8 (16.4) Diluted earnings per share from continuing operations (10.7) (148.9) Diluted earnings per share from discontinued operations Diluted earnings per share Diluted earnings per share - underlying from continuing operations (Non-GAAP measure) Diluted earnings per share - underlying from discontinued operations (Non-GAAP measure) Diluted earnings per share - underlying (Non-GAAP measure) The calculation of basic, adjusted and diluted earnings per share is based on the following number of shares in issue (millions): 2.3 (8.4) (1.8) 0.6 (1.2) 31.5 (117.4) (24.2) 7.8 (16.4) Weighted average number of ordinary shares in issue Weighted average number of dilutive shares under option Weighted average number of shares in issue taking account of applicable outstanding share options Non-dilutive shares under option 2019 Number 1,390.6 2.6 1,393.2 8.7 (4.1) 0.5 (3.6) 6.8 (0.2) 6.6 (0.3) 0.1 (0.2) 2.5 0.3 2.8 (4.1) 0.5 (3.6) 2.5 0.3 2.8 (57.0) 6.5 (50.5) 94.9 (2.7) 92.2 (3.7) 0.7 (3.0) 34.2 4.5 38.7 (57.0) 6.5 (50.5) 34.2 4.5 38.7 2018 Number 1,405.7 1.4 1,407.1 10.8 The Directors consider that the underlying earnings per share figure provides a better measure of comparative performance. 129 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 3 - OPERATING ASSETS AND LIABILITIES This section contains the notes and information to support those assets and liabilities presented in the Consolidated Balance Sheet that relate to the Group’s operating activities. 3.1 Intangible assets and goodwill 3.2 Property, plant and equipment 3.6 3.7 Trade and other receivables Trade and other payables 3.3 Assets held for sale and discontinued operations 3.8 Provisions 3.4 Inventories 3.9 Deferred income 3.5 Movement in contract hire vehicle balances 3.1 Intangible assets and goodwill Accounting policies All business combinations are accounted for by applying the purchase method. Goodwill represents the excess of the cost of acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquired subsidiary undertakings at the effective date of acquisition and is included in the balance sheet under the heading of intangible assets. The goodwill is allocated to cash generating units (CGUs), which are franchise groups and other business units. An impairment test is performed annually as detailed below. Goodwill is then held in the balance sheet at cost less any accumulated impairment losses. Adjustments are applied to bring the accounting policies of the acquired businesses into alignment with those of the Group. The costs associated with reorganising or restructuring are charged to the post acquisition income statement. For those acquisitions made prior to 1 January 2004, goodwill is recorded on the basis of its deemed cost which represented its carrying value as at 1 January 2004 under UK GAAP. Fair value adjustments are made in respect of acquisitions. If at the balance sheet date the fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities can only be established provisionally then these values are used. Any adjustments to these values made within 12 months of the acquisition date are taken as adjustments to goodwill. Internally generated intangible assets relate to activities that involve the development of dealer management systems by the Group’s Pinewood division. Development expenditure is capitalised only if development costs can be measured reliably, the product is technically and commercially feasible, future economic benefits are probable and the Group intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalised includes the costs of labour and overhead costs that are directly attributable to preparing the asset for its intended use. If the development expenditure does not meet the above criteria it is expensed to the income statement. Capitalised development expenditure is measured at cost less accumulated amortisation and accumulated impairment losses and is amortised over a period of five years. Intangible assets other than goodwill are stated at cost less accumulated amortisation and any impairment losses. This category of asset includes purchased computer software and internally generated intangible assets which are amortised by equal instalments over four years and the fair value of the benefit of forward sales orders assumed on acquisition, which is amortised by reference to when those orders are delivered. Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Intangible assets arising on an acquisition are recognised separately from goodwill if the fair value of the asset can be identified separately and measured reliably. Amortisation is calculated on a straight line basis over the estimated useful life of the intangible asset. Amortisation methods and useful lives are reviewed annually and adjusted if appropriate. 130 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 3 - OPERATING ASSETS AND LIABILITIES 3.1 Intangible assets and goodwill continued Cost At 1 January 2018 Additions Disposals Exchange adjustments Classified as non-current assets held for sale (note 3.3) At 31 December 2018 At 1 January 2019 Additions Disposals Exchange adjustments Classified as non-current assets held for sale (note 3.3) At 31 December 2019 Amortisation At 1 January 2018 Amortised during the year Impairment Disposals Classified as non-current assets held for sale (note 3.3) At 31 December 2018 At 1 January 2019 Amortised during the year Impairment Disposals Classified as non-current assets held for sale (note 3.3) At 31 December 2019 Carrying amounts At 1 January 2018 At 31 December 2018 At 31 December 2019 Goodwill £m Development costs £m Other intangibles £m 431.5 - (0.4) 0.3 (23.9) 407.5 407.5 - (0.7) - - 406.8 70.3 - 88.8 - (17.5) 141.6 141.6 - 102.4 - - 244.0 361.2 265.9 162.8 18.4 3.5 - - - 21.9 21.9 4.1 (9.9) - - 16.1 12.3 2.5 - - - 14.8 14.8 2.8 - (9.9) - 7.7 6.1 7.1 8.4 12.9 0.5 (0.4) - (0.3) 12.7 12.7 0.7 (9.0) - - 4.4 11.5 0.6 - (0.2) (0.3) 11.6 11.6 0.7 - (9.0) - 3.3 1.4 1.1 1.1 Total £m 462.8 4.0 (0.8) 0.3 (24.2) 442.1 442.1 4.8 (19.6) - - 427.3 94.1 3.1 88.8 (0.2) (17.8) 168.0 168.0 3.5 102.4 (18.9) - 255.0 368.7 274.1 172.3 131 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 3 - OPERATING ASSETS AND LIABILITIES 3.1 Intangible assets and goodwill continued The following have been recognised in the income statement within net operating expenses: Amortisation of internally generated intangible assets Amortisation of other intangible assets Impairment of goodwill Research and development costs 2019 £m 2.8 0.7 102.4 0.6 2018 £m 2.5 0.6 88.8 0.5 Goodwill is allocated across multiple cash-generating units which are motor franchise groups and other business units and consequently a consistent approach to performing an annual impairment test to assess the carrying value of this amount is taken. This value was determined by comparing the carrying value of the asset with the higher of its fair value less costs to sell (where value is determined by applying a trading multiple to the estimated future cash flow or by assessing the depreciated replacement cost of the individual assets) (this is the cost to replace or construct a substitute asset) and value in use (where value is determined by discounting the future cash flows generated from the continuing use of the unit and was based on the following key assumptions): Future cash flows were projected into perpetuity with reference to the Group’s forecasts for 2020. The 2020 forecast was derived from the corporate plan, approved by the Board and compiled on a bottom up basis. New car volume growth was based on the latest SMMT forecasts. Used car and aftersales revenue and gross profit growth has been based on latest run- rates for the CGUs. The 2021 to 2024 forecast represents a projection from the 2020 bottom up forecast. Fair value less costs of disposal has been calculated using transaction and trading multiples. The multiples are based on median EV / LTM EBITDA for relevant transactions post 2010 across the 3 main sectors of Pendragon: retail, leasing and software. It is anticipated that the units will grow revenues in the future. For the purpose of the impairment testing, a long-term growth rate of 1.6% (2018: 2.0%) has been assumed beyond 2024. The growth rate of 1.6% that has been used in the impairment calculations is based on long-term inflation. The pre-tax discount rates are estimated to reflect current market estimates of the time value of money and is calculated after consideration of market information and risk adjusted for individual circumstances. The discount rates used are specific to each CGU and vary between 8.0% and 12.0% (2018: discount rates varied between 9.7% and 21.1%). The reduction in discount rates reflect the cash flow forecasts being risk adjusted to a greater degree this year. It is recognised that the net asset value of the Group is lower than the market capitalisation which is a prima facie indicator of impairment. The Group therefore commissioned an independent third party expert valuer to perform calculations, based on the group’s Board approved corporate plan, to test those forecasts and reconcile them to the group’s market capitalisation. The results of the impairment review indicated that the carrying values of certain CGUs exceeded the higher of the fair value and value in use and a total impairment charge of £102.4m arises on certain CGUs, as described below. 132 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS m £ 8 . 1 6 - - - - 5 . 1 5 . 1 9 3 . - - m o o r d a e H 5 2 7 . % 4 8 1 . i g n d a r T l e p i t l u M U V I t n u o m a h c a o r p p a S T C L V F e u a v l k o o b o t l a u q E S T C L V F % 4 8 1 . % 4 8 1 . % 4 8 1 . % 4 3 1 . % 4 3 1 . C R D U V I U V I U V I U V I e u a v l k o o b o t l a u q E C R D 5 2 7 . S T C L V F l e b a r e v o c e R t e s s a U o R E P P 1 3 t A s a d e fi i s s a C l m £ U G C . 9 2 7 1 . 5 9 8 . 9 6 4 8 . 1 3 1 . 4 4 9 . 1 1 . 8 4 2 1 . 6 1 . 2 3 3 . 7 7 1 . 7 0 8 3 . 9 2 0 8 - - - - - - - - - - - - - - - - - - - - - - ) 8 5 ( . ) 8 5 ( . m £ m £ t n e m r i a p m I t n e m r i a p m I m £ 8 1 0 2 . 7 9 6 . 4 4 6 9 7 . . 8 7 2 . 2 7 1 3 7 . 5 . 1 1 . 7 9 - . 2 2 1 . 2 8 3 . 9 5 6 2 m £ m £ ) 4 6 ( . ) 4 6 ( . . 3 0 . 3 0 - m £ . ) 4 3 1 ( . ) 2 4 2 ( . ) 0 0 2 ( . ) 8 0 ( - ) 0 2 ( . - . ) 0 0 1 ( . ) 9 2 1 ( ) 5 5 ( . . ) 8 8 8 ( - - - - - - - - - - m £ . ) 4 0 ( . ) 4 0 ( l e a s r o f d e h l s t n e m t s u d a j t n e m r i a p m I s l a s o p s i d m £ 8 1 0 2 . 7 9 6 . 8 7 7 1 . 2 3 . 8 7 4 . 0 8 1 3 7 . . 5 3 1 . 7 9 . 0 0 1 1 . 5 2 . 2 0 5 2 . 1 6 3 1 t A / e t a r t n u o c s i D l e b a r e v o c e R f o t n u o m a . ) 2 3 e t o n ( . ) 2 3 e t o n ( r e b m e c e D t n e r r u c - n o e g n a h c x E s s e n i s u B y r a u n a J / e t a r t n u o c s i D l e b a r e v o c e R f o t n u o m a . ) 2 3 e t o n ( . ) 2 3 e t o n ( r e b m e c e D t n e r r u c - n o e g n a h c x E s s e n i s u B y r a u n a J l e b a r e v o c e R t e s s a U o R E P P 1 3 t A s a d e fi i s s a C l 1 t A t n e m r i a p m I t n e m r i a p m I l e a s r o f d e h l s t n e m t s u d a j t n e m r i a p m I s l a s o p s i d - - - - - - - - - m £ . 8 0 3 m o o r d a e H % 0 8 . % 0 8 . i g n d a r T l e p i t l u M U V I U V I t n u o m a h c a o r p p a e u a v l k o o b o t l a u q E C R D e u a v l k o o b o t l a u q E C R D % 0 8 . U V I e u a v l k o o b o t l a u q E C R D % 0 8 . % 0 8 . U V I U V I e u a v l k o o b o t l a u q E C R D % 0 8 . U V I m £ U G C 2 . 1 9 1 2 . 1 9 . 4 5 4 9 5 . . 0 6 5 4 . 1 . 3 4 2 . 9 4 . 0 5 2 . 6 2 2 - m £ ) 3 . 1 ( . ) 2 0 ( . ) 6 0 ( ) 3 . 1 ( - - - - . ) 7 8 1 ( . 2 3 9 4 ) 2 . 1 ( 1 . 1 6 9 . ) 3 3 2 ( - - - m £ . ) 3 0 ( . ) 3 0 ( - - . ) 7 0 ( . ) 8 0 ( - . ) 5 0 ( ) 6 2 ( . . t s o c m £ 9 1 0 2 . 7 9 6 . 2 5 3 - - - - - - 6 9 . 9 . 1 1 . 4 6 3 . 8 2 6 1 - - - - - - - - - - - - - - - - - - - - - - - - m £ m £ - m £ . ) 2 9 2 ( ) 9 7 ( . . ) 8 7 2 ( . ) 5 6 1 ( ) 3 7 ( . ) 9 . 1 ( . ) 7 9 ( - . ) 3 0 ( ) 8 . 1 ( - - - - m £ . ) 7 0 ( - - - - - - m £ 9 1 0 2 . 7 9 6 . 4 4 6 9 7 . . 8 7 2 . 2 7 1 3 7 . 5 . 1 1 . 7 9 - . 2 2 1 . 0 8 3 . ) 4 2 0 1 ( . ) 7 0 ( . 7 5 6 2 l t n e m e c a p e r d e t a c e r p e D - C R D i , l l e s o t s t s o c s s e l e u a v l r i a F - S T C L V F , e s u n i l e u a V - U V I r e v o R d n a L r a u g a J z n e B - s e d e c r e M l l a h x u a V W M B d r o F 8 1 0 2 n e o r t i C n a s s i N I I N M e r o t S r a C t l u a n e R s r e h t O l a t o T l l a h x u a V W M B d r o F 9 1 0 2 r e v o R d n a L r a u g a J z n e B - s e d e c r e M n e o r t i C n a s s i N I I N M e r o t S r a C t l u a n e R s r e h t O l a t o T 1 . 3 133 : l w o e b e b a t l e h t n i d e s i r a m m u s e r a s U G C l i a p c n i r p e h t f o s t n e m e v o M d e u n i t n o c l l i w d o o g d n a l s t e s s a e b g n a t n I i S E I T I L I B A I L D N A S T E S S A G N I T A R E P O - 3 N O I T C E S Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 3 - OPERATING ASSETS AND LIABILITIES 3.1 Intangible assets and goodwill continued Goodwill by segment UK Motor Pinewood Leasing Sensitivity of assumptions 2019 £m 140.5 0.3 22.0 162.8 2018 £m 243.6 0.3 22.0 265.9 The forecasts used to determine impairment are sensitive to the key assumptions used in preparing those forecasts. Future uncertainty with respect to the markets we operate in, further heightened at present as the UK prepares to leave the EU, could all have an effect on our sales volumes and margins and the general costs of doing business. The key assumptions used in our forecasts are therefore the long-term growth rates and discount rate applied. The sensitivities below indicate the total change in the value in use forecast, keeping other assumptions constant. Such changes would only result in further impairment to the extent that the impact of the sensitivities reduced the calculation of value in use below the carrying value of the respective CGU. For those CGUs already impaired, any worsening of assumptions would lead to further impairment on a pound for pound basis. For those CGUs not already impaired, the estimated headroom before impairment is disclosed. Sensitivities have not been provided for FVLCTS and DRC as reasonably possible changes in assumptions would not lead to a significant change in any impairment required. 134 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 3 - OPERATING ASSETS AND LIABILITIES 3.1 Intangible assets and goodwill continued Sensitivity by CGU _______Headroom Increase_______ ____Further Impairment___ Carrying Value £m Current Headroom £m Long-Term Growth Rate 1.0% Increase Discount Rate 1.0% Decrease 69.7 35.2 - 9.6 - 11.9 36.4 162.8 30.8 24.7 9.7 7.0 2.6 0.6 3.0 - - - - - 382.8 413.6 31.8 13.3 9.5 3.5 0.7 3.8 Long-Term Rate 1.0% Decrease Discount Rate 1.0% Increase (18.2) (7.0) (5.2) (1.9) (0.4) (2.2) (23.5) (9.8) (6.9) (2.6) (0.6) (2.8) Ford Vauxhall Jaguar Land Rover Citroen Nissan Renault Others Total * Note that “Others” comprises individual CGUs amalgamated for the purposes of disclosure. Ford is the CGU with the largest amount of headroom (£30.8m) noted above. For an impairment to occur in the Ford CGU, there would have to be either: a reduction in the profit growth rate of 0.3%, or an increase in the discount rate to 9.4%. 135 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 3 - OPERATING ASSETS AND LIABILITIES 3.2 Property, plant and equipment Accounting policy Freehold land is not depreciated. Depreciation is provided to write off the cost less the estimated residual value of other assets by equal instalments over their estimated useful economic lives. On transition to IFRS as at 1 January 2004, all land and buildings were restated to fair value as permitted by IFRS 1, which is then treated as the deemed cost. All other assets are initially measured and recorded at cost. Depreciation rates are as follows: • Freehold buildings – 2% per annum • Leasehold property improvements – 2% per annum or over the period of the lease if less than 50 years • Fixtures, fittings and office equipment – 10 – 20% per annum • Plant and machinery – 10 – 33% per annum • Motor vehicles – 20 – 25% per annum • Contract hire vehicles are depreciated to their residual value over the period of their lease The residual value of all assets, depreciation methods and useful economic lives, if significant, are reassessed annually. The Group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is possible that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognised net within other income in the income statement. The depreciation charge in respect of property, plant and equipment is recognised within administrative expenses within the income statement. Cost At 1 January 2018 Additions Exchange adjustments Business disposals Other disposals Contract hire vehicles transferred to inventory Classified as non-current assets held for sale (note 3.3) Land & buildings £m Plant & equipment £m Motor vehicles £m Contract hire vehicles £m 319.4 21.7 2.1 (4.3) (1.6) - (43.0) 86.0 15.0 0.5 (0.8) (4.7) - (8.8) 52.0 92.5 - - (96.0) - (1.8) 213.2 65.5 - - - (48.6) - Total £m 670.6 194.7 2.6 (5.1) (102.3) (48.6) (53.6) At 31 December 2018 294.3 87.2 46.7 230.1 658.3 136 Pendragon PLC Annual Report 2019  (10.7) (72.4) - - - - - - 86.3 37.6 245.3 1,064.7 NOTES TO THE FINANCIAL STATEMENTS SECTION 3 - OPERATING ASSETS AND LIABILITIES 3.2 Property, plant and equipment continued Land & buildings £m Plant & equipment £m Motor vehicles £m Contract hire vehicles £m 46.7 230.1 Cost At 1 January 2019 Recognition of right-of-use asset on initial application of IFRS 16 Adjusted balance at 1 January 2019 Additions Exchange adjustments Business disposals Other disposals Contract hire vehicles transferred to inventory Classified as non-current assets held for sale (note 3.3) Reinstated from non-current assets held for sale At 31 December 2019 Depreciation At 1 January 2018 Exchange adjustments Charge for the year Impairment Business disposals Other disposals Contract hire vehicles transferred to inventory Classified as non-current assets held for sale (note 3.3) 294.3 394.1 688.4 37.8 - (6.1) (12.8) - (22.7) 10.9 695.5 58.2 0.6 6.5 1.8 (0.2) (1.3) - (11.8) At 1 January 2019 Recognition of right-of-use asset on initial application of IFRS 16 Adjusted balance at 1 January 2019 Exchange adjustments Charge for the year Impairment Business disposals Other disposals Contract hire vehicles transferred to inventory Classified as non-current assets held for sale (note 3.3) Reinstated from non-current assets held for sale At 31 December 2019 53.8 201.5 255.3 - 25.6 25.5 (1.1) (8.0) - (4.3) 6.0 299.0 87.2 - 87.2 10.9 - (1.1) 55.9 0.4 8.9 4.0 (0.6) (4.3) - (6.3) 58.0 - 58.0 - 8.5 0.4 (0.5) (9.7) - - - 0.5 47.2 62.8 - - 17.1 - 8.9 - - (19.8) - (0.2) 6.0 6.0 - 6.0 - 7.1 - - (7.7) - - - At 31 December 2018 53.8 58.0 56.7 5.4 75.3 Total £m 658.3 394.6 1,052.9 219.4 - (7.2) (95.9) (92.7) (22.7) 10.9 59.5 - 37.9 - - - (20.8) - 190.7 1.0 62.2 5.8 (0.8) (25.4) (20.8) (18.3) 76.6 194.4 230.1 107.9 - - - (92.7) - - 76.6 - 76.6 - 42.1 - - - (43.4) - - 194.4 201.5 395.9 - 83.3 25.9 (1.6) (25.4) (43.4) (4.3) 6.0 436.4 137 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 3 - OPERATING ASSETS AND LIABILITIES 3.2 Property, plant and equipment continued Carrying amounts At 1 January 2018 At 31 December 2018 At 31 December 2019 Land & buildings £m Plant & equipment £m Motor vehicles £m Contract hire vehicles £m 261.2 240.5 396.5 30.1 29.2 29.6 34.9 40.7 32.2 153.7 153.5 170.0 Total £m 479.9 463.9 628.3 Property, plant and equipment includes right-of-use assets of £158.7m (see Note 4.7). During the year three properties were re-classified as property, plant and equipment following decisions to withdraw them from sale. All three properties have been re-instated at the lower of their recoverable amount, or the carrying amount had the asset never been moved to assets held for sale. In all three instances the properties were re-instated at their recoverable value having been previously impaired down to those values. Building projects currently under construction for which no depreciation has been charged during the year Future capital expenditure which has been contracted for but not yet provided in the financial statements - property development and refurbishment Cumulative interest charges capitalised as construction costs and included in land and buildings The following items have been charged to the income statement as operating expenses during the year: Depreciation of property, plant and equipment - leased Depreciation of contract hire vehicles - leased Depreciation of property, plant and equipment - owned 2019 £m 19.6 8.4 4.4 19.2 42.1 22.0 2018 £m 11.7 5.7 3.6 - 37.9 24.3 138 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 3 - OPERATING ASSETS AND LIABILITIES 3.3 Assets held for sale and discontinued operations Accounting policy Non-current assets that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale. Immediately before classification as held for sale, the assets are measured in accordance with the Group’s accounting policies. Thereafter the assets are measured at the lower of their carrying amount and fair value less costs to sell. Impairment losses on remeasurement are recognised in the income statement. Gains are not recognised in excess of any cumulative impairment loss. Non-current assets classified as held for sale are available for immediate sale and a resultant disposal is highly probable within one year. A non-current asset that stops being classified as held for sale is remeasured at the lower of its carrying amount prior to the asset or disposal group being classified as held for sale, adjusted for any depreciation or amortisation that would have been recognised if the asset had not been classified as held for sale, or, its recoverable amount at the date of the decision not to sell. Discontinued operations The Group announced at the end of 2017 that it intended to dispose of the US motor business and had initiated an active program to find a buyer. At the date of this report this program is still on going, with an initial sale of the Aston Martin business being concluded in July 2018 and the sale of Jaguar Land Rover Mission Viejo and Newport Beach completed in the second half of 2019 for proceeds of £59.3m. The Group expects that a buyer can be found to conclude a sale of the remainder of the business during the first half of 2020. As such the results of the US Business are shown as a discontinued operation within these consolidated financial statements and its assets and liabilities reclassified as held for sale as a disposal group. No impairment loss has been recognised in the income statement for the year ended 31 December 2019 in respect of this transaction. The results of the discontinued operation are set out on the face of the consolidated income statement. Other financial information relating to the discontinued operation for the period is set out below. Assets and liabilities of a disposal Group held for sale From 31 December 2018, the US motor business was classified as a disposal group which was stated at fair value less costs to sell and comprised the following assets and liabilities. Goodwill Other intangible assets Property plant and equipment Inventories Trade and other receivables Assets held for sale Trade and other payables Liabilities held for sale 2019 £m 6.2 0.1 61.7 50.2 19.2 137.3 (90.5) (90.5) 2018 £m 6.5 0.1 32.0 68.9 25.1 132.6 (88.6) (88.6) 139 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 3 - OPERATING ASSETS AND LIABILITIES 3.3 Assets held for sale and discontinued operations continued Exchange differences on translation of discontinued operation Other comprehensive income from discontinued operation Net cash (used in)/from operating activities Net cash from investing activities Net cash used in financing activities Net cash increase generated by discontinued operation Basic earnings per share from discontinued operation Underlying basic earnings per share from discontinued operation Diluted earnings per share from discontinued operation Balance sheet 2019 £m (0.2) (0.2) 2019 £m (41.1) 79.2 (24.4) 13.7 2019 pence 2.3 0.6 2.3 2018 £m - - 2018 £m 7.9 1.1 - 9.0 2018 pence 0.5 0.3 0.5 The Group has classified the non current assets of the US motor business as held for sale as at 31 December 2019. These comprise of goodwill, intangible fixed assets, property, plant and equipment. The assets in this disposal group have been reviewed for possible impairment with reference to the expected proceeds on sale less costs to sell, with no impairment deemed necessary. There are no non-current liabilities within the US disposal group. The Group also holds a number of freehold properties that are currently being marketed for sale which are expected to be disposed of during 2019. Properties are valued using a combination of external qualified valuers and in-house experts. Due to the nature of the market, especially in light of current economic conditions, a property may ultimately realise proceeds that vary from those valuations applied. Assets classified for sale (including disposal Group) comprise: Goodwill Other intangible assets Property, plant and equipment Inventories Trade and other receivables Income statement The following items have been credited/(charged) to the income statement during the year: Income statement category Profit on sale of assets classified as held for sale Other income - gains/(losses) on the sale of businesses and property Impairment of assets held for sale Net operating expenses 2019 IFRS 16 £m 6.2 0.1 74.5 50.2 19.2 150.1 2019 £m 32.9 (1.9) 2018 IAS 17 £m 6.5 0.1 37.0 68.9 25.1 137.6 2018 £m 0.3 (1.2) If the fair value less costs to sell assigned to each property were to be reduced by 10% a further impairment loss of £0.5m would have been recognised (2018: £0.5m). 140 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 3 - OPERATING ASSETS AND LIABILITIES 3.4 Inventories Accounting policies Motor vehicle inventories are stated at the lower of cost and net realisable value. Cost is net of incentives received from manufacturers in respect of target achievements. Fair values of stock are conducted regularly utilising our market intelligence and analysis of the market which we conduct by segment and by model, these fair values are updated in the light of any changing trends by model line. The assessment of fair values involves an element of estimation: the Group takes the age profile of our inventories at the year end, estimates the likely sale period and the expected profit or loss on sale to determine the fair value at the balance sheet date. Whilst this data is deemed representative of current values it is possible that ultimate sales values can vary from those applied. Parts inventories are based on an average purchase cost principle and are written down to net realisable value by providing for obsolescence on a time in stock based formula approach. Consignment vehicles are regarded as being effectively under the control of the Group and are included within inventories on the balance sheet as the Group has the significant risks and rewards of ownership even though legal title has not yet passed. The corresponding liability is included in trade and other payables. Movements in consignment vehicle inventory and its corresponding liability within trade and other payables are not included within movements of inventories and payables as stated in the consolidated cash flow statement as no cash flows arise in respect of these transactions until the vehicle is either sold or purchased at which point it is reclassified within new and used vehicle inventory. Motor vehicles are transferred from contract hire activities at the end of their lease term to inventory at their depreciated cost. No physical cash flow arises from these transfers. Balance sheet New and used vehicles Consignment vehicles Vehicle parts and other inventories Inventories recognised as an expense during the year Carrying value of inventories subject to retention of title clauses Write-down of inventories to net realisable value 2019 £m 730.5 79.5 29.0 839.0 2019 £m 3,977.8 726.4 7.2 2018 £m 858.1 71.8 29.7 959.6 2018 £m 4,021.2 931.8 7.6 The sensitivity of the key assumptions on our sales prices could have the following impact on the net realisable value of inventory. If our assumptions were £500 per unit worse for used vehicles that are expected to make a loss per unit, the net realisable value of inventory would reduce by £2.4m in the year. Cash flow statement information Movement in inventory Inventory changes in business combinations and disposals Impact of exchange differences Non cash movement in consignment vehicles Classified as held for sale Transfer value of contract hire vehicles from fixed assets to inventory Cash flow decrease due to movements in inventory 2019 £m 120.6 (2.9) 0.5 7.7 (50.2) 49.3 186.7 2018 £m 43.9 (2.0) (0.7) (23.7) (68.9) 27.8 (23.6) 141 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 3 - OPERATING ASSETS AND LIABILITIES 3.5 Movement in contract hire vehicle balance Depreciation Changes in trade and other payables and deferred income Purchases of contract hire vehicles Unwinding of discounts in contract hire residual values 3.6 Trade and other receivables Accounting policy 2019 £m 42.1 13.3 (107.9) (3.1) (55.6) 2018 £m 37.9 (1.5) (65.5) (2.8) (31.9) Trade and other receivables are recognised initially at fair value and are subsequently stated at amortised cost using the effective interest method, less any impairment losses. Impairment losses are measured in accordance with IFRS 9, which is based on an ‘expected credit loss’ (ECL) model. The impairment model applies to financial assets measured at amortised cost. The calculation of ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive). The Group considers a trade or other receivable to be in default when the borrower is unlikely to pay its credit obligations to the Group in full after all reasonable actions have been taken to recover the debt. Credit risk management The Group is exposed to credit risk primarily in respect of its trade receivables and financial assets. Trade receivables are stated net of provision for estimated impairment losses. Exposure to credit risk in respect of trade receivables is mitigated by the Group’s policy of only granting credit to certain customers after an appropriate evaluation of credit risk. Credit risk arises in respect of amounts due from vehicle manufacturers in relation to bonuses and warranty receivables. This risk is mitigated by the range of manufacturers dealt with, the Group’s procedures in effecting timely collection of amounts due and management’s belief that it does not expect any manufacturer to fail to meet its obligations. Financial assets comprise trade and other receivables (as above) and cash balances. The counterparties are banks and management does not expect any counterparty to fail to meet its obligations. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the balance sheet. Before granting any new customer credit terms the Group uses external credit scoring systems to assess the potential new customer’s credit quality and defines credit limits by customer. These limits and credit worthiness are regularly reviewed and use is made of monitoring alerts provided by the providers of the credit scoring systems. The Group has no customer that represents more than 5% of the total balance of trade receivables. 142 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 3 - OPERATING ASSETS AND LIABILITIES 3.6 Trade and other receivables continued Balance sheet Trade receivables Allowance for doubtful debts Other receivables Prepayments 2019 IFRS 16 £m 42.4 (0.4) 42.0 60.0 4.9 106.9 2018 IAS 17 £m 46.3 (0.4) 45.9 52.5 16.4 114.8 All amounts are due within one year with the exception of finance lease receivables. All trade receivables are classified as loans and receivables and held at amortised cost in the current year and prior year. Total trade receivables held by the Group at 31 December 2019 was £50.9m (2018: £60.1m). This includes trade receivables that have been classified as held for sale of £8.9m (2018: £14.2m). The average credit period taken on sales of goods is 29 days (2018: 29 days). No interest is charged on trade receivables. The Group makes an impairment provision based on the expected credit losses it deems likely to incur. The calculation is based on an average of previous default experiences which is assessed against the risk of the current total in light of current economic expectations. An expense has been recognised in respect of impairment losses during the year of £0.6m (2018: Trade receivables 2019 £m Other receivables 2019 £m Trade receivables 2018 £m Other receivables 2018 £m £0.6m). The ageing of trade and other receivables at the reporting date was: Not past due Past due 0-30 days Past due 31-120 days Past due 120+ days Provision for impairment 28.6 9.7 3.4 0.7 42.4 (0.4) 42.0 51.3 4.9 3.8 - 60.0 - 60.0 The movement in the allowance for impairment in respect of trade receivables during the year was as follows: Balance at 1 January Utilisation Impairment loss recognised Balance at 31 December The Directors consider that the carrying amount of trade and other receivables approximates their fair value. 31.9 10.3 3.3 0.8 46.3 (0.4) 45.9 2019 £m 0.4 (0.6) 0.6 0.4 41.7 4.6 6.2 - 52.5 - 52.5 2018 £m 0.4 (0.5) 0.5 0.4 143 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 3 - OPERATING ASSETS AND LIABILITIES 3.6 Trade and other receivables continued Finance lease receivables Where the group acts as a lessor of properties of which it is a lessee and the term of the head lease and sub lease are coterminous, rather than recognise a right of use asset the Group recognises a finance lease receivable which Is measured at the net present value of future cash receipts discounted at the Groups incremental borrowing rate. The finance income element of rentals received under these leases is credited so as to give a constant rate of finance income on the remainder of the obligation. Finance income is credited in the income statement. The finance lease receivable is reduced by rentals received and increased by the interest income recognised. Non-current Current 2019 IFRS 16 £m 20.6 2.4 23.0 2018 IAS 17 £m - - - Finance lease rentals are invoiced quarterly on standard rent quarter days, no credit terms are extended beyond these dates. Expected credit losses in respect of finance lease receivables are deemed immaterial. 144 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 3 - OPERATING ASSETS AND LIABILITIES 3.7 Trade and other payables Accounting policy Trade and other payables are recognised initially at fair value and are subsequently stated at amortised cost using the effective interest method, less any write-offs. Balance sheet Trade payables Contract hire buyback commitments Consignment vehicle liabilities Payments received on account Other taxation and social security Accruals Non-current Current 2019 £m 843.1 88.1 79.5 18.7 25.8 89.8 1,145.0 60.4 1,084.6 1,145.0 2018 £m 940.5 81.2 71.8 11.4 17.7 107.2 1,229.8 54.4 1,175.4 1,229.8 Trade payables are classified as other financial liabilities and principally relate to vehicle funding. Fair value is deemed to be the same as carrying value. The non-current element of trade and other payables relates to contract hire buyback commitments where the Group has contracted to repurchase vehicles, at predetermined values and dates, that have been let under operating leases or similar arrangements. The Group enters into leasing arrangements whereby it agrees to repurchase vehicles from providers of lease finance at the end of the lease agreement, typically two to four years in the future. The repurchase price is determined at the time the agreement is entered into based on the then estimate of a vehicle’s future residual value. The actual value of the vehicles at the end of the lease contract, and therefore the proceeds that can be realised from eventual sale, can vary materially from these estimates. Annual reviews are undertaken to reappraise residual values and to recognise impairment write downs where necessary. 145 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 3 - OPERATING ASSETS AND LIABILITIES 3.8 Provisions Accounting policy A provision is recognised if as a result of a past event the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that the Group will be required to settle the obligation. 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 the risks specific to the liability. Vacant property provision Prior to the adoption of IFRS 16 on 1 January 2019 a provision for vacant properties was recognised when the expected benefits to be derived by the Group from a lease contract were lower than the unavoidable cost of meeting its obligation under the contract. The provision was measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. On adoption of IFRS 16 the Group has, as an alternative to performing an impairment review, applied the practical expedient to determine if a lease is onerous by applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets immediately before the date of initial application. On the date of initial application the value of right of use assets has been reduced by £0.7m in respect of leases previously classified as operating leases by applying the value of the vacant property provision held against them. At 31 December 2018 the Group had a vacant property provision of £2.3m. £0.7m related to leases now clasified as right of use assets and on transition to IFRS 16 this has been allocated against the carrying value of those assets. The remaining £1.6m of the vacant property provision related to properties that were fully sub-let to term. As such, the Group will not share the risks and rewards of ownership in these leases over the lease term and therefore no right of use asset has been recognised so the £1.6m has been credited to reserves on transition. The movements in provisions for the year are as follows: At 31 December 2018 Provisions allocated to right of use assets on adoption of IFRS 16 Provisions derecognised on adoption of IFRS 16 At 31 December 2019 Vacant property provision £m 2.3 (0.7) (1.6) - 146 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 3 - OPERATING ASSETS AND LIABILITIES 3.9 Deferred income Property leases Deferred income arose in 2006 from a sale and leaseback arrangement relating to certain dealership properties leased by the Group over a 25 year period. This comprised of a credit recognised in respect of the contractual rentals being higher than the fair values of such rentals at the time of the sale and leaseback, and of the resultant credit form recognising rentals with fixed annual increases on a straight line basis. On transition to IFRS 16 on 1 January 2019, the fair value component of the deferred income of £11.4m has been credited against the carrying value of right of use assets. Warranty policies sold The income received in respect of warranty policies sold and administered by the Group is recognised over the period of the policy on a straight line basis. The unrecognised income is held within deferred income. Contract hire Vehicles supplied to a leasing Group for contract hire purposes where the Group undertakes to repurchase the vehicle at a predetermined date are accounted for in accordance with IFRS 16 Leases, where the Group is considered to be an operating lessor for all arrangements in place. The initial amounts received in consideration from the leasing Group are allocated between the present value of the repurchase commitment, held within trade and other payables and a residual amount of deferred revenue held within deferred income. The deferred revenue, which effectively represents rentals received in advance, is taken to the income statement on a straight line basis over the related lease term. At 31 December 2018 Allocated to right of use assets on adoption of IFRS 16 Created in the year Recognised as income during the year At 31 December 2019 Non-current Current Recognition of opening balance as at 31 December 2018 Reclassified on adoption of IFRS 16 Recognised during the year Carried forward at 31 December 2019 Property leases £m Warranty policies £m Contract hire £m 11.4 (11.4) - - - - - - 11.4 - - 11.4 18.8 - 11.0 (10.4) 19.4 5.4 14.0 19.4 - 13.9 4.9 18.8 71.7 - 49.0 (42.6) 78.1 41.2 36.9 78.1 - 36.3 35.4 71.7 Total £m 101.9 (11.4) 60.0 (53.0) 97.5 46.6 50.9 97.5 11.4 50.2 40.3 101.9 The deferred income balance at 31 December for warranty policies and contract hire is the aggregate transaction price allocated to performance obligations that are unsatisfied or partly satisfied at the reporting date. No information is provided about remaining performance obligations at 31 December 2019 or 31 December 2018 that have an original expected duration of one year or less as allowed by IFRS 15. 147 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE This section contains the notes and information to support the elements of both net debt and equity financing as presented in the Consolidated Balance Sheet. 4.1 Accounting policies 4.2 Financial instruments and derivatives 4.3 Net financing costs 4.4 Capital and reserves 4.1 Accounting policies 4.5 4.6 4.7 Dividends Share based compensation Obligations under finance leases IFRS 9 requires an entity to recognise a financial asset or a financial liability in its statement of financial position when it becomes party to the contractual provisions of the instrument. At initial recognition, an entity measures a financial asset or a financial liability at its fair value plus or minus, in the case of a financial asset or a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or the financial liability. Subsequent to intial recognition financial assets and financial liabilities are classified and measured as described below. Financial assets IFRS 9 classifies assets according to the business model for their realisation, as determined by the expected contractual cashflows. This classification determines the accounting treatment, and the classification under IFRS 9 is by reference to the accounting treatment i.e. amortised cost, fair value through other comprehensive income or fair value through profit and loss. A financial asset is measured at amortised cost if both of the following conditions are met: the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Financial assets are therefore classified and measured in these financial statements at amortised cost. The Group recognises loss allowances for expected credit losses (ECLs) on financial assets measured at amortised cost, debt investments measured at FVOCI and contract assets (as defined in IFRS 15). The Group measures loss allowances at an amount equal to lifetime ECL, except for other debt securities and bank balances for which credit risk (i.e. the risk of default occurring over the expected life of the financial instrument) has not increased significantly since initial recognition which are measured as 12-month ECL. Loss allowances for trade receivables and contract assets are always measured at an amount equal to lifetime ECL. When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECL, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group’s historical experience and informed credit assessment and including forward-looking information. The Group assumes that the credit risk on a financial asset has increased significantly if it is more than 30 days past due. The Group considers a financial asset to be in default when: • the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held); or • the financial asset is more than 90 days past due. 148 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.1 Accounting policies continued Lifetime ECLs are the ECLs that result from all possible default events over the expected life of a financial instrument. 12-month ECLs are the portion of ECLs that result from default events that are possible within the 12 months after the reporting date (or a shorter period if the expected life of the instrument is less than 12 months). The maximum period considered when estimating ECLs is the maximum contractual period over which the Group is exposed to credit risk. Measurement of ECLs ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive). ECLs are discounted at the effective interest rate of the financial asset. Credit-impaired financial assets At each reporting date, the Group assesses whether financial assets carried at amortised cost and debt securities at FVOCI are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Write-offs The gross carrying amount of a financial asset is written off (either partially or in full) to the extent that there is no realistic prospect of recovery. Impairment of financial assets IFRS 9 adopts an expected credit loss approach (ECL). The IFRS 9 approach does not require a credit event (an actual loss or a debt past a number of days due) to occur but is based on changes in expectations of credit losses. IFRS 9 also requires that impairment of financial assets be shown as a separate line item in either the statement of comprehensive income or the income statement. Financial assets Trade and other receivables Finance lease receivables Cash and cash equivalents Trade and other receivables - see note 3.6 Cash and cash equivalents IFRS 9 classification Amortised cost Amortised cost Amortised cost £m 102.0 23.0 55.7 Cash and cash equivalents comprise cash in hand and demand deposits, and other short term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. 149 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.1 Accounting policies continued Loans and borrowings Interest-bearing loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. The effective interest basis is a method of calculating the amortised cost of a financial liability and of allocating interest payments over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or where appropriate, a shorter period. Trade and other payables - see note 3.7 Hedging Instruments The Group holds hedging instruments to hedge currency risks arising from its activities. Hedging instruments are recognised at fair value. Any gain or loss on remeasurement is recognised in the income statement. However, the treatment of gains or losses arising from hedging instruments which qualify for hedge accounting depends on the type of hedge arrangement. The fair value of hedging instruments is the estimated amount receivable or payable to terminate the contract determined by reference to the market prices prevailing at the balance sheet date. The only hedging instrument held by the Group at the balance sheet date was its borrowing in USD to hedge its investment in overseas operations. A gain or loss in respect of an effective hedge of a net investment in an overseas operation is recognised directly in equity. Any ineffective portion of the hedge is recognised in the income statement. 4.2 Financial instruments and derivatives Net Debt Cash and cash equivalents Non-current interest bearing loans and borrowings 2019 £m 55.7 (175.4) (119.7) 2018 £m 51.4 (177.5) (126.1) The Group has on adoption of IFRS 16 Leases excluded Finance Lease liabilities from its measure of Net Debt. Full details of lease liabilities are presented in note 4.7. Cash and cash equivalents Bank balances and bank overdrafts set out below are stated net of legal rights of set-off resulting from pooling arrangements operated by individual banks. Carrying value and fair value 2019 £m Carrying value and fair value 2018 £m Bank balances and cash equivalents 55.7 51.4 Borrowings As at 31 December 2019, the Group had a £240m credit facility and a £60m senior note, expiring as set out below: Revolving credit facility Senior note 150 Expiry Date March 2021 March 2023 £m 240.0 60.0 300.0 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.2 Financial instruments and derivatives continued During 2016 the Group signed a £240m 5 year committed bank facility and a £60m 5.75% 7 year debt private placement. The fees and expenses associated with this debt of £2.1m are amortised over the expected life of the facility commencing in 2016. At 31 December 2019, £2.0m had been amortised and £0.1m remains to be amortised in future periods. Revolving credit facility Senior note Current margin 1.85% 5.75% Commitment (non-utilisation) fee 0.65% n/a The margin on the revolving credit facility varies according to a ratchet mechanism linked to the ratio of net debt to underlying EBITDA (after stocking interest). At 31 December 2019, the margin was 1.85%, consequent on the Group having achieved a ratio of between 1.5 and 2.0 for the twelve month period ended 30 June 2019. The commitment fee is calculated at 35% of the margin. The interest rate in respect of the senior note is a fixed rate of 5.75% until maturity. The revolving credit facility and the senior note are both subject to the same performance covenants with respect to net debt : underlying EBITDA (after stocking interest) and fixed charge cover. Security Both the revolving credit facility and the senior note are unsecured and rank pari-passu. Amendment and extension of the revolving credit facility With effect from 11 March 2020 the maturity of the revolving credit facility has been extended to 31 March 2022 and the facility has been reduced to £175m. The margin has been increased by 0.50% for each level of the net debt to underlying EBITDA ratchet. Summary of borrowings Non-current: Bank borrowings 5.75% Senior note 2023 Other loan notes Finance leases Total non-current Finance leases Total current Total borrowings Carrying value IFRS 16 2019 £m Fair value IFRS 16 2019 £m Carrying value IAS 17 2018 £m Fair value IAS 17 2018 £m 115.2 60.0 0.2 237.8 413.2 23.9 23.9 115.2 60.0 0.2 237.8 413.2 23.9 23.9 117.3 60.0 0.2 1.5 117.3 60.0 0.2 1.5 179.0 179.0 - - 437.1 437.1 179.0 179.0 151 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.2 Financial instruments and derivatives continued Reconciliation of movements of liabilities to cash flows arising from financing activities At 1 January 2019 Adjustment on initial application of IFRS 16 (net of tax) (see note 1) ____Borrowings____ __________Equity_________ Long term borrowings £m Finance Lease £m 177.5 1.5 - 279.7 Share capital £m 70.0 - Other reserves £m Retained earnings £m 74.1 - 201.5 (48.4) Total £m 524.6 231.3 Adjusted balance at 1 January 2019 177.5 281.2 70.0 74.1 153.1 755.9 Cash flows from financing activities Dividends paid to shareholders Repurchase of own shares Payment of lease liabilities (excluding those classified as held for sale) Repayment of loans Proceeds from issue of loans Other changes - - - (5.0) 5.4 0.4 - - (38.2) - - - (0.1) - - - - 0.1 - - (9.7) (0.5) - - - (9.7) (0.5) (38.2) (5.0) 5.4 (38.2) (0.1) 0.1 (10.2) (48.0) The effect of changes in foreign exchange rates (3.0) New finance leases undertaken Disposal of finance leases Liability-related : Lease expenses Liability-related : Amortisation of fees and expenses Equity-related ; Total other changes - - - 0.5 - - 8.4 (4.2) 14.5 - - - - - - - - - - - - - - - - - - (3.0) 8.4 (4.2) 14.5 0.5 (0.2) (120.2) (120.4) At 31 December 2019 175.4 261.7 69.9 74.0 22.7 372.4 Interest payments in respect of the above borrowings are reported in operating cash flows in the Consolidated Cash Flow Statement. Fair value hierarchy Financial instruments carried at fair value are required to be measured by reference to the following levels: Level 1: quoted prices in active markets for identical assets or liabilities Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs) The revolving credit facility and senior note have been measured by a Level 2 valuation method. The effective interest rates for all borrowings are all based on LIBOR for the relevant currency, except for the 5.75% senior note 2023, which is at a fixed rate. Finance leases are effectively held at fixed rates of interest within the range set out below. Information regarding classification of balances and interest, the range of interest rates applied in the year to 31 December 2019 and repricing periods, is set out in the table below. 152 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.2 Financial instruments and derivatives continued The effective interest rates for all borrowings are all based on LIBOR for the relevant currency, except for the 5.75% Senior note 2023, which is at a fixed rate. Finance leases are effectively held at fixed rates of interest within the range set out below. Information regarding classification of balances and interest, the range of interest rates applied in the year to 31 December 2018 and repricing periods, is set out in the table below. Bank balances and cash equivalents Loans and receivables 55.7 Amortised cost Floating GBP 0.70% - 2.11% 6 months or less Classification Carrying value  £m Classification Interest classification Interest rate range Repricing periods Borrowings Non - current: Bank borrowings Bank borrowings Other financial liabilities 39.8 Amortised cost Floating GBP 1.88% - 2.12% 6 months or less Other financial liabilities 75.4 Amortised cost Floating USD 2.88% - 3.84% 6 months or less 5.75% Senior note 2023 Other financial liabilities 60.0 Amortised cost Fixed GBP Other loan notes Finance leases Total non-current Finance leases Total current Total borrowings Other financial liabilities 0.2 Amortised cost Fixed GBP Other financial liabilities 237.8 Amortised cost Fixed GBP 6.00% - 7.93% Other financial liabilities 23.9 Amortised cost Fixed GBP 1.91% 413.2 23.9 437.1 5.75% 12.50% The carrying amounts of the Group’s borrowings are denominated in the following currencies: Pound sterling US dollar Treasury policy, financial risk, funding and liquidity management Financial risk management The Group is exposed to the following risks from its use of financial instruments: 2019 IFRS 16 £m 361.7 75.4 437.1 n/a n/a n/a n/a 2018 IAS 17 £m 106.1 72.9 179.0 Funding and liquidity risk - the risk that the Group will not be able to meet its financial obligations as they fall due Credit risk - the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and investment securities. Market risk - the risk that changes in market prices, such as interest rates and foreign exchange rates, have on the Group’s financial performance The Group’s quantitative exposure to these risks is explained throughout these financial statements whilst the Group’s objectives and management of these risks is set out below. 153 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.2 Financial instruments and derivatives continued Treasury policy and procedures Group treasury matters are managed within policy guidelines set by the Board with prime areas of focus being liquidity, interest rate and foreign exchange exposure. Management of these areas is the responsibility of the Group’s central treasury function. Hedging financial instruments are utilised to reduce exposure to movements in foreign exchange rates. The Board does not permit the speculative use of derivatives. Funding and liquidity management The Group is financed primarily by its issued Senior note, revolving credit facility, vehicle stocking credit lines and operating cash flow. Committed facilities mature within appropriate timescales, are maintained at levels in excess of planned requirements and are in addition to short term uncommitted facilities that are also available to the Group. Each business within the Group is responsible for its own day-to-day cash management and the overall cash position is monitored on a daily basis by the Group treasury department. The maturity of non-current borrowings is as follows, excluding finance lease liabilities: Between 1 and 2 years Between 2 and 5 years Over 5 years 2019 IFRS 16 £m 115.2 60.2 - 175.4 2018 IAS 17 £m - 179.0 - 179.0 Maturities include amounts drawn under revolving credit facilities which are contractually repayable generally within a month of the year end but which may be redrawn at the Group’s option. The maturities above therefore represent the final repayment dates for these facilities. If the amounts drawn at the year end were redrawn at the Group’s usual practice of monthly drawings, the total cash outflows associated with all borrowings, assuming interest rates remain at the same rates as at the year end, are estimated on an undiscounted basis as follows: Bank borrowings Senior note Loan notes Finance leases Carrying amount Con- tractual cashflows 115.2 60.0 0.2 175.4 261.7 437.1 119.0 71.2 0.4 190.6 371.6 752.8 The Group has the following undrawn borrowing facilities: Expiring in 1-2 years Expiring in more than two years Within 6 months 6 - 12 months 1-2 years 2-5 years over 5 years 1.5 1.7 - 3.2 18.2 24.6 1.5 1.7 - 3.2 18.1 24.5 - 64.3 0.4 64.7 102.9 232.3 116.0 3.5 - 119.5 35.7 274.7 2019 £m 124.8 - - - - - 196.7 196.7 2018 £m - 122.7 154 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.2 Financial instruments and derivatives continued Interest rate risk management The objective of the Group’s interest rate policy is to minimise interest costs whilst protecting the Group from adverse movements in interest rates. Borrowings issued at variable rates expose the Group to cash flow interest rate risk whereas borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group does not actively manage cash flow interest rate risk as the Board believes that the retail sector in which the Group operates provides a natural hedge against interest rate movements. Consequently, it is normal Group policy to borrow on a floating rate basis and all fair value interest rate risk arising from fixed rate borrowings entered into by the Group are usually managed by swaps into floating rate. However, the Group decided on a deviation from this policy in respect of its former 6.875% bond 2020. This bond was issued at a fixed rate of interest and, due to the historically low rates in current floating interest rates, there was relatively low downside risk in maintaining the bond at fixed rate. This policy has been continued in respect of the Group’s £60m Senior note 2023. Interest rate risk sensitivity analysis As some of the Group’s borrowings and vehicle stocking credit lines are floating rate instruments they therefore have a sensitivity to changes in market rates of interest. The table below shows the effect of a 100 basis points change in interest rates for floating rate instruments outstanding at the period end, showing how profit or loss would have varied in the period on the assumption that the instruments at the period end were outstanding for the entire period. 100 basis points increase Tax effect Effect on net assets 100 basis points decrease Tax effect Effect on net assets Foreign exchange risk management Profit/(loss) 2019 £m Profit/(loss) 2018 £m (4.7) 0.9 (3.8) 4.7 (0.9) 3.8 (7.6) 1.4 (6.2) 7.6 (1.4) 6.2 The Group faces currency risk in respect of its net assets denominated in currencies other than sterling. On translation into sterling, movements in currency will affect the value of these assets. The Group’s policy is therefore to match, where possible, net assets in overseas subsidiaries which are denominated in a foreign currency with borrowings in the same currency. The Group has therefore borrowed USD 100.0m (2018: USD 93.0m) against its net assets held in overseas subsidiaries. 155 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.2 Financial instruments and derivatives continued Hedges of net investments in overseas operations A gain or loss in respect of an effective hedge of a net investment in an overseas operation is recognised directly in equity. Any ineffective portion of the hedge is recognised in the income statement. Included within bank borrowings are balances denominated in US dollars which are designated as a hedge of the net investment in the Group’s US subsidiaries. Foreign exchange differences on translation of the borrowings to sterling at the balance sheet date are recognised within the translation differences reserve in equity, net of exchange differences in respect of the net investments being hedged. Aggregate fair value of borrowings designated as hedge of net investment in the Group's US subsidiaries Foreign exchange gains/(losses) on translation of borrowings to sterling at balance sheet date Foreign exchange (losses)/gains on translation of net investments to sterling at balance sheet date Net exchange gain/(loss) recognised within translation reserve in equity Capital management 2019 $m 100.0 £m 3.0 (3.2) (0.2) 2018 $m 93.0 £m (4.0) 4.0 - The Group views its financial capital resources as primarily comprising share capital, issued Senior note, bank loans, vehicle stocking credit lines and operating cashflow. Core debt i.e. total debt required to fund the Group’s net debt : underlying EBITDA target of 1.0 to 1.5, is essentially funded by the Group’s issued Senior note and revolving credit facility. The Group requires its revolving credit facility to fund its day-to-day working capital requirements. A fundamental element of the Group’s financial resources revolves around the provision of vehicle and parts stocking credit lines, provided by the vehicle manufacturers’ funding arms and other third party providers. The Group’s funding of its vehicle and parts inventories is set out below: Manufacturer finance arm Third party stock finance Bank Total inventories 2019 £m 474.7 280.7 83.6 839.0 2018 £m 524.2 407.6 96.7 1,028.5 When considering vehicle stocks from a funding risk view point we split the funding into that which is funded by the vehicle manufacturers through their related finance arms and that funded through third party stock finance facilities and bank borrowings. Financing for stock other than through bank borrowings is shown in trade creditors in the balance sheet. Manufacturers’ finance arms tend to vary the level of finance facilities offered dependent on the amount of stocks their manufacturer wishes to put into the network and this varies depending on the time of year and the level of production. Undrawn third party stock finance facilities at 31 December 2019 amounted to £47m (2018: £22m). 156 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.2 Financial instruments and derivatives continued The Group is also responsible for funding the pension deficit. The total financial resources required by the Group to fund itself at 31 December 2019 comprises: Net debt Finance lease liabilities Stock finance Pension deficit 2019 IFRS 16 £m 119.7 237.8 726.4 59.0 1,142.9 2018 IAS 17 £m 126.1 1.5 931.8 68.3 1,127.7 The Board’s policy is to maintain a strong capital base to maintain market confidence and to sustain the development of the business, whilst maximising the return on capital to the Group’s shareholders. The Group’s strategy will be to maintain facilities appropriate to the working requirements of the Group, to grow organically and service its debt requirements through generating cash flow. The Group had set a net debt : underlying EBITDA target range of 1.0 to 1.5 : 1. At 31 December 2019 the net debt : underlying EBITDA ratio achieved was 1.1 : 1 on an IFRS 16 basis and 1.5 : 1 on an IAS 17 basis (see alternative performance measures in section 1), calculated as follows: Underlying operating profit Depreciation Amortisation Underlying EBITDA Net debt (being net debt as set out above) Net debt : underlying EBITDA ratio 2019 IFRS 16 £m 26.7 83.3 3.5 113.5 119.7 1.1 2019 IAS 17 £m 11.3 64.1 3.5 78.9 119.7 1.5 2018 IAS 17 £m 76.2 62.2 3.1 141.5 126.1 0.9 The key measures which management uses to evaluate the Group’s use of its financial resources, and performance achieved against these in 2019 and 2018 are set out below: Underlying profit before tax (£m) Underlying earnings per share (p) Net debt : underlying EBITDA 2019 IFRS 16 (16.4) (1.2) 1.1 2018 IAS 17 47.8 2.8 0.9 The Group’s capital structure and capital allocation priorities were reassessed during 2017 and the conclusion of that review in December 2017 decided the following priorities: UK New car business - a review of capital allocation of Premium Brands was completed and certain franchise locations would be reduced over a three year period. To date this procees is now complete with 6 Jaguar Land Rover franchise sites either disposed of or closed in FY19. US Motor Group - the business would be sold to realise its value of approximately £100m before tax. In total to date, total disposal proceeds of £78.8m have been received (includng £16.5m received in February 2020): two businesses remain to be sold. UK Used car business - this would be the focus for growth and will remain a core part of the strategy to be developed by the Group’s new management. 157 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.2 Financial instruments and derivatives continued The Group has a target range of 1.0 to 1.5 times net debt to underlying EBITDA and is currently trading with financial leverage within this level. The Group believes that it will continue to generate strong cash flows and shall be developing a strategy during 2020 to assess the capital needs of the business and the leverage position. The Group has previously engaged in share buyback programmes though none are currently operating. The Group may also issue shares or purchase them in the market to satisfy share incentives issued to employees of the Group. The Group encourages employees to be shareholders of the Group, providing selective share option and LTIP schemes from time to time. Certain of the Group’s subsidiaries are required to maintain issued share capital at levels to support capital adequacy under Financial Conduct Authority (FCA) requirements. The Group ensures these requirements are met by injections of equity to the subsidiaries in question, when required. Other than specifically set out above, there were no changes to capital management in the year. 158 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.3 Net financing costs Accounting policy Finance income comprises interest income on funds invested, return on net pension scheme assets and gains on hedging instruments that are recognised in profit and loss. Interest income is recognised as it accrues in profit and loss, using the effective rate method. Finance expense comprises interest expense on borrowings, unwinding of the discount on provisions, interest on net pension scheme obligations and losses on hedging instruments recognised in profit and loss. All borrowing costs are recognised in profit and loss using the effective interest method. Gross finance costs directly attributable to the construction of property, plant and equipment are capitalised as part of the cost of those assets until such a time as the assets are substantially ready for their intended use or sale. Finance expense Recognised in profit and loss Interest payable on bank borrowings, Senior note and loan notes Vehicle stocking plan interest Interest payable on finance leases Net interest on pension scheme obligations (non-underlying - see note 2.6) Less: interest capitalised Total interest expense being interest expense in respect of financial liabilities held at amortised cost Unwinding of discounts in contract hire residual values Total finance expense 2019 IFRS 16 £m 8.2 19.3 14.4 1.8 (0.8) 42.9 3.1 46.0 Interest of £0.8m has been capitalised during the year on assets under construction at an average rate of 5.75% Finance income Recognised in profit and loss Interest receivable on finance leases Interest on settlement of historic VAT issues Total finance income 2019 IFRS 16 £m 1.1 1.9 3.0 2018 IAS 17 £m 8.4 18.1 0.1 1.6 (1.0) 27.2 2.8 30.0 2018 IAS 17 £m - - - 159 Pendragon PLC Annual Report 2019 Financial assets Trade and other receivables Cash and cash equivalents Financial liabilities Loans and borrowings Trade and other payables IFRS 9 classification IAS 39 classification IFRS 9 Carrying value  £m Remeas- urement  £m IAS 39 Carrying value  £m Amortised costs Loans and receivables 139.8 Amortised costs Loans and receivables 51.4 Amortised cost Amortised cost (179.0) Amortised cost Amortised cost (1,318.3) - - - - - 139.8 51.4 (179.0) (1,318.3) (72.9) Foreign currency loans used to hedge overseas investments Fair value hedging instrument Fair value hedging instrument (72.9) NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.4 Capital and reserves Ordinary share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects. Allotted, called up and fully paid shares of 5p each at 31 December 2018 Shares cancelled during the year Allotted, called up and fully paid shares of 5p each at 31 December 2019 There were no issues of ordinary shares during the year. Number 1,399,149,025 (2,204,621) 1,396,944,404 £m 70.0 (0.1) 69.9 2,204,621 ordinary shares having a nominal value of £0.1m were bought back and subsequently cancelled during the year in accordance with the authority granted by shareholders in the Annual General Meeting on 25 April 2019. The aggregate consideration paid, including directly attributable costs, was £0.5m. Since the commencement of the current share buyback programme in 2016, as at 31 December 2019, 63,376,251 shares have been bought back and cancelled representing 4.3% of the issued ordinary shares, at a total cost to date of £18.7m. The share buyback programme has been suspended and the Group anticipate that no further transactions will be made during 2020. 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 meetings of the Group. All shares rank equally with regard to the Group’s residual assets. Capital redemption reserve The capital redemption reserve has arisen following the purchase by the Group of its own shares and comprises the amount by which distributable profits were reduced on these transactions in accordance with s733 of the Companies Act 2006. £0.1m (2018: £1.2m) was transferred into the capital redemption reserve during the year in respect of shares purchased by the Group and subsequently cancelled. Other reserves Other reserves comprise the amount of demerger reserve arising on the demerger of the Group from Williams Holdings PLC in 1989. Own shares held by Employee Benefit Trust (EBT) Transactions of the Group-sponsored EBT are included in the Group financial statements. In particular, the trust’s purchases of shares in the Group, which are classified as own shares, are debited directly to equity through retained earnings. When own shares are sold or reissued the resulting surplus or deficit on the transaction is also recognised within retained earnings. The market value of the investment in the Group’s own shares at 31 December 2019 was £0.8m (2018: £1.4m), being 6.4m (2018: 6.4m) shares with a nominal value of 5p each, acquired at an average cost of £0.33 each (2018: £0.33). During the year the trust acquired no shares (2018: nil) and disposed of no shares (2018: 1.3m, for a consideration of £0.1m ) shares in respect of LTIP and executive share option awards. The amounts deducted from retained earnings for shares held by the EBT at 31 December 2019 was £18.1m (2018: £18.1m). The trustee of the EBT is Salamanca Group Trust (Jersey) Limited. The shares in trust may subsequently be awarded to Executive Directors and employees under the Pendragon 1999 Approved Executive Share Option Scheme, Pendragon 1999 Unapproved Executive Share Option Scheme and to satisfy amounts under LTIPs and the VCP. Details of the plans are given in the Directors’ Remuneration Report on pages 60 to 78. 160 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.4 Capital and reserves continued Dividends on the shares owned by the trust, the purchase of which were funded by interest free loans to the trust from Pendragon PLC, are waived. All expenses incurred by the trust are settled directly by Pendragon PLC and charged in the accounts as incurred. The trust is regarded as a quasi subsidiary and its assets and results are consolidated into the financial statements of the Group. Translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the net investment in foreign operations as well as from the translation of liabilities held to hedge the respective net investment in foreign operations. 4.5 Dividends Final dividends proposed by the Board and unpaid at the end of the year are not recognised in the financial statements until they have been approved by the shareholders at the AGM. Interim dividends are recognised when they are paid. Ordinary shares Final dividend in respect of 2018 of 0.7p per share (2017: 0.8p per share) Interim dividend in respect of 2019 of nil per share (2018: 0.8p per share) 2019 £m 9.7 - 9.7 2018 £m 11.3 11.2 22.5 The Board is not recommending the payment of a final dividend for 2019 (2018: 0.7p equating to £9.7m). 161 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.6 Share based compensation Accounting policy The Group operates a number of employee share option schemes and an executive share ownership plan ‘exsop’ awarded in 2010. The fair value at the date at which the share options are granted is recognised in the income statement on a straight line basis over the vesting period, taking into account the number of options that are expected to vest. The fair value of the options granted is measured using an option pricing model, taking into account the terms and conditions upon which the options were granted. The number of options that are expected to become exercisable is reviewed at each balance sheet date and if necessary estimates are revised. Executive share options The number and weighted average exercise prices of share options is as follows: Outstanding at beginning of period Exercised during the period Lapsed during the period Outstanding at the end of the period Exercisable at the end of the period Weighted average exercise price 2019 Number of options millions 2019 Weighted average exercise price 2018 Number of options millions 2018 23.6p - 5.5 - 31.8p (0.3) 23.1 p 23.1 p 5.2 5.2 29.89p 11.17p 39.45p 23.63p 23.63p 12.9 (1.3) (6.1) 5.5 5.5 The options outstanding at 31 December 2019 have an exercise price in the range of 8.82p to 31.82p and a weighted contractual life of 3.4 years. All share options are settled in equity. Movements in the number of options to acquire ordinary shares under the Group’s various share option schemes, together with exercise prices and the outstanding position at 31 December 2018 were as follows: Exercise period Date of grant Exercise price per share At 31 December 2018 Number Exercised Number Lapsed Number At 31 December 2019 Number 20 September 2013 to 19 September 2020 20 September 2010 14.22p 435,977 7 October 2014 to 6 October 2021 6 October 2011 8.82p 758,318 31 March 2015 to 30 March 2022 30 March 2012 13.50p 1,100,000 19 September 2017 to 19 September 2024 18 September 2014 31.82p 3,229,500 5,523,795 - - - - - - - - 435,977 758,318 1,100,000 (350,000) 2,879,500 (350,000) 5,173,795 All grants of share options were issued pursuant to the 2009 Executive Share Option Scheme, which prescribed an earnings per share performance criterion. It is a precondition to the exercise of grants made under the 2009 Scheme that the growth in the Group’s earnings per share over the prescribed three year period must exceed by at least 3 percent per annum compound the annual rate of inflation as shown by the RPI Index. There were no exercises of share options during the year. The weighted average share price at the date of exercise for share options exercised in the previous year was 25.5p. All options are settled by physical delivery of shares. 162 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.6 Share based compensation continued The fair value of the services received in return for share options is measured by reference to the fair value of the options granted. The estimate of the fair value of the services received in respect of share option schemes is measured using the Black-Scholes option pricing model. The weighted average fair value of the options at the date of grant for those that are outstanding at 31 December 2019 is 6.4p (2018: 6.4p). The Group recognised a total net expense of £0.6m (2018: £0.7) as an employee benefit cost in respect of all equity-settled share based payment transactions included within administration costs. 4.7 Leases Accounting policies The Group has applied IFRS 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 17 and IFRIC 4. The details of accounting policies under IAS 17 and IFRIC 4 are disclosed separately. Leases as a Lessee - Policy applicable from 1 January 2019 At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Group uses the definition of a lease in IFRS 16. This policy is applied to contracts entered into, on or after 1 January 2019. The Group recognises a right of use asset and a lease liability at the lease commencement date. The right of use asset is initially measured at cost, and subsequently at cost less accumulated depreciation and impairment losses, and adjusted for certain remeasurements of the lease liability. Cost comprises the initial amount of the lease liability adjusted for any initial direct costs incurred less any lease incentives received. Depreciation is recognised on a straight line basis over the period of the lease the right of use asset is expected to be utilised. The lease liability is initially measured at the present value of lease payments that are not paid at the commencement date, discounted by the interest rate implicit in the lease or when this is not readily attainable, the Group’s incremental borrowing rate. Lease payments include fixed rental payments and amounts expected to be payable under a residual value guarantee. Generally the Group uses it’s incremental borrowing rate as the discount rate. The Group determines its incremental borrowing rate by obtaining interest rates from various external financing sources and makes certain adjustments to reflect the terms of the lease and type of the asset leased. The lease liability is subsequently increased by the interest cost on the lease liability and reduced by payments made. It is remeasured when there is a change in future lease payments arising from a change of index or rate, a variation in amounts payable following contractual rent reviews and changes in the assessment of whether an extension/termination option is reasonably certain to be exercised. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. The Group presents right-of-use assets that do not meet the definition of investment property in ‘property, plant and equipment’ and lease liabilities in ‘loans and borrowings’ in the Balance Sheet. The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low-value assets and short-term leases. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. 163 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.7 Obligations under finance leases Leases as a Lessee - Policy applicable before 1 January 2019 In the comparative period, leases were classified as finance leases wherever the lease transfers substantially all the risks and rewards of ownership to the Group. All other leases are treated as operating leases. Assets held under finance leases are recorded at inception at the lower of the fair value of the asset and the present value of the minimum payments required to be made under the lease. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. The corresponding liability is recorded as a finance lease obligation. The finance charge element of rentals paid under these leases is expensed so as to give a constant rate of finance charge on the remainder of the obligation. Finance charges are expensed in the income statement and the capitalised leased asset is depreciated over the shorter of the lease term and the asset’s useful economic life. Leases were classified as operating leases wherever the lease does not transfer substantially all the risks and rewards of ownership to the Group. Rentals paid under operating leases were charged directly to the income statement on a straight line basis over the period of the lease. Leases subject to predetermined fixed rental uplifts have their rentals accounted for on a straight line basis recognised over the life of the lease. Lease incentives received and paid were recognised in the income statement as an integral part of the total lease expense over the term of the lease. Balance Sheet The Group leases a large number of properties for use as motor vehicle dealerships, parts distribution warehouses, storage compounds and offices. Lease terms vary and at 31 December 2019 property leases had an average of around 13 years to expiry. These leases comprise those with provision for periodic rent reviews, fixed scheduled increases and those with periodic increases based on the RPI. The Group does not have any property leases that contain extension clauses. A number of property leases have break clauses allowing the Group to terminate the agreement earlier than the lease expiry date. The Group has applied judgement in that unless it is reasonably certain that such a break option will be exercised, the calculation of the lease liability and right of use asset is made up to the expiry date of the lease. Had the Group recognised a shorter lease term then right of use assets and Lease liabilities would both be lower than currently reported and the interest expense for the current year on lease liabilities would be reduced with the possibility depreciation charges could increase. In addition to property leases the Group have leases for various items of plant and equipment and motor vehicles. Right of use assets are presented as part of property, plant and equipment as presented in note 3.2. Right of Use Assets 2019 - IFRS 16 Balance at 1 January 2019 Additions to right of use assets Depreciation charge Impairment Other disposals of right of use assets Balance at 31 December 2019 Land & buildings £m Plant & Equipment £m Motor vehicles £m 196.2 7.6 (18.8) (23.3) (3.0) 158.7 - - - - - - 0.5 0.4 (0.4) - - 0.5 Total £m 196.7 8.0 (19.2) (23.3) (3.0) 159.2 Disposals of right of use assets have occurred on assignment of leases, derecognition on entering into sub leases and early terminations. 164 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.7 Obligations under finance leases continued Assets acquired under Finance Leases Included in the amounts for property, plant and equipment in note 3.2 are the following amounts relating to leased assets and assets acquired under hire purchase contracts: 2018 - IAS 17 Balance at 31 December 2018 Lease liabilities 2019 - IFRS 16 Balance at 1 January 2019 Additions to right of use assets Interest expense related to lease liabilities Disposals of lease liabilities Repayment of lease liabilities (including interest element) Other movements Balance at 31 December 2019 Non-current Current Land & buildings £m Plant & Equipment £m Motor vehicles £m 0.1 - - Land & buildings £m Plant & Equipment £m Motor vehicles £m Total £m 0.1 Total £m (280.7) (8.0) (14.4) 4.2 37.8 (0.1) (261.2) (237.8) (23.4) (261.2) (0.5) (281.2) (0.4) - - 0.4 - (8.4) (14.4) 4.2 38.2 (0.1) (0.5) (261.7) - (237.8) (0.5) (0.5) (23.9) (261.7) - - - - - - - - - The calculation of the lease liability and the right of use asset relies upon the estimation of a suitable interest rate. The Group has applied rates to represent the different types of leases it has by applying its incremental borrowing rate for shorter term leases and a higher rates based upon market rates for borrowing against equivalent assets with similar risk profiles in specific markets for medium to longer term leases. Had the interest rate applied to the shorter term leases been 0.5% higher and that to the medium/longer term leases been 1.0% higher the lease liability at 31 December 2019 would have been £11.5m lower, the right of use asset would be £12.3m lower, the interest charge would have been £1.4m higher and the depreciation charge on leased assets would have been £0.9m lower. 165 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.7 Obligations under finance leases continued Amounts recognised in profit or loss 2019 – Leases under IFRS 16 Impairment of right of use assets (non-underlying) Impairment of right of use assets (non-underlying) Interest on lease liabilities Expenses relating to low value leases Expenses relating to short term leases 2018 – Operating leases under IAS 17 Lease expenses - hire of plant and machinery Lease expenses - property rentals The Group as lessee - obligations under IAS 17 2019 £m 19.2 23.3 14.4 - 3.6 2.1 43.8 45.9 At 31 December 2018, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: A reconciliation of these obligations to the Finance Lease liability on transition to IFRS 16 is presented in note 1. Within one year In the second to fifth years inclusive After five years The Group as lessor 2018 £m 46.0 169.2 264.5 479.7 Leases as a Lessor - Accounting policy applicable from 1 January 2019 When the Group acts as a lessor, it determines at lease inception whether each lease is a finance lease or an operating lease. To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. As part of this assessment, the Group considers certain indicators such as whether the lease is for the major part of the economic life of the asset. When the Group is an intermediate lessor, it accounts for its interests in the head lease and the sub-lease separately. It assesses the lease classification of a sub-lease with reference to the right-of-use asset arising from the head lease, not with reference to the underlying asset. 166 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.7 Obligations under finance leases continued Leases as a Lessor - Accounting policy applicable before 1 January 2019 Where the Group acts as a Lessor, receipts of lease payments are recognised in the income statement on a straight line basis over the period of the lease. Balance Sheet Lease receivables 2019 - IFRS 16 Balance at 1 January 2019 Additions to lease receivables Interest income related to lease receivables Disposals of lease liabilities Payment of lease receivables (including interest element) Balance at 31 December 2019 Non-current Current Land & Buildings £m 24.7 0.5 1.1 - (3.3) 23.0 20.6 2.4 23.0 The following table sets out a maturity analysis of lease payments receivable, showing the undiscounted lease payments to be received after the reporting date: Less than one year Between one and two years Between two and three years Between three and four years Between four and five years More than five years Total undiscounted lease receivable Unearned finance income 2019 IFRS 16 £m 3.6 3.7 3.6 3.6 3.4 15.0 32.9 (9.9) 23.0 167 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 4 - FINANCING ACTIVITIES AND CAPITAL STRUCTURE 4.7 Obligations under finance leases continued At the 31 December 2019 balance sheet date, the Group had contracted with tenants for the following future minimum lease payments on leases classified as operating leases. Within one year In the second to fifth years inclusive After five years The Group has no properties that are treated as investment properties. 2018 - IAS 17 2019 IFRS 16 £m 1.1 23.1 22.7 46.9 At the 31 December 2018 balance sheet date, the Group had contracted with tenants for the following future minimum lease payments: Within one year In the second to fifth years inclusive After five years Amounts recognised in profit or loss 2019 – Leases under IFRS 16 Operating lease rentals received Interest received on finance lease receivables 2018 – Leases under IAS 17 2018 IAS 17 £m 4.6 15.9 18.5 39.0 2019 IFRS 16 £m 1.9 1.1 3.0 Property rental income earned during the prior year was £4.7m. No contingent rents were recognised in income in the prior year. These properties are not treated as investment properties. In addition, the Group is a lessor in respect of vehicle sales with committed repurchase terms (see notes 3.7 and 3.9). There are no future minimum lease payments outstanding. 168 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 5 - PENSION SCHEMES This section explains the pension scheme obligations of the Group. 5.1 Pension obligations Accounting policy The Group operated a number of defined benefit and defined contribution plans during the year. The assets of the defined benefit plan and one defined contribution plan are held in independent trustee administered funds. The Group also operates a Group Personal Pension Plan which is a defined contribution plan where the assets are held by the insurance Group under a contract with each individual. Defined contribution plans - A defined contribution plan is one under which the Group pays fixed contributions and has no legal or constructive obligation to pay further amounts. Therefore, no assets or liabilities of these plans are recorded in these financial statements. Obligations for contributions to defined contribution pension plans are recognised as an employee benefit expense in the income statement when they are due. Defined benefit plans - Pension accounting costs for defined benefit plans are assessed by determining the pension obligation using the projected unit credit method after including a net return on the plan assets. Under this method, in accordance with the advice of qualified actuaries, the amounts charged in respect of employee benefits reflect the cost of benefits accruing in the year and the cost of financing historical accrued benefits. The Group recognises all actuarial gains and losses arising from defined benefit plans in the statement of other comprehensive income immediately. The present value of pension obligations is measured by reference to market yields on high quality corporate bonds which have terms to maturity approximating to the terms of the related pension liability. Plan assets are measured at fair value. When the calculation results in a benefit to the Group, the recognised asset is limited to the total of the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. An economic benefit is available to the Group if it is realisable during the life of the plan, or on settlement of the plan liabilities. Under IAS 19 Employee Benefits, the Group recognises an interest expense or income which is calculated on the net defined benefit liability or asset respectively by applying the discount rate to the net defined benefit liability or asset. Remeasurements arising from defined benefit plans comprise actuarial gains and losses and the return on plan assets (excluding interest) are immediately recognised directly in the statement of other comprehensive income. Actuarial gains and losses are the differences between actual and interest income during the year, experience losses on scheme liabilities and the impact of any changes in assumptions. Details of the last independent statutory actuarial valuation and assumptions are set out below. Pension arrangements The Group operated six defined benefit pension schemes (one of which had a defined contribution section) which closed to new members and accrual of future benefits on 30 September 2006 and a defined contribution scheme which was closed to new contributions from April 2006. All affected employees were offered membership of a defined contribution pension arrangement with Friends Provident. A Group Personal Pension arrangement with Legal & General replaced the Friends Provident arrangement from 1 January 2010. Total contributions paid by the Group in 2019 to the Legal & General arrangement were £2.8m (2018: £2.7m). To comply with the Government’s automatic enrolment legislation, the Group chose to participate in the People’s Pension Scheme in April 2013. This is a defined contribution occupational pension scheme provided by B&CE. Total contributions paid by the Group to the People’s Pension in 2019 were £8.7m (2018: £5.1m). The combined contributions to the Group’s Personal Pension arrangement (including the US Motor business) and the Peoples Pension scheme therefore totalled £11.6m in the period. 169 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 5 - PENSION SCHEMES 5.1 Pension obligations continued During 2012 the Trustees merged the six defined benefit schemes into one new defined benefit scheme, ‘the Pendragon Group Pension Scheme’, which remains closed to new members and accrual of future benefits. The assets of the six schemes have all been transferred into the new scheme and the benefits previously accrued in the six schemes were transferred without amendment of the benefit entitlement of members to the new scheme. The scheme is subject to the funding legislation outlined in the Pensions Act 2004 which came into force on 30 December 2005. This, together with documents issued by the Pensions Regulator, and Guidance Notes adopted by the Financial Reporting Council, set out the framework for funding defined benefit occupational pension schemes in the UK. The Board of the Trustees of the pension scheme is currently composed of two member nominated trustees (i.e. members of the pension scheme nominated by other members to be trustees), two employer representatives and a professional independent trustee. The former independent chair of trustees retired at 31 December 2017 and the professional independent trustee became chair during 2018. The Trustee of the scheme is required to act in the best interest of the scheme’s beneficiaries. The appointment of the Trustee is determined by the scheme’s trust documentation. Under IAS 24, the pension schemes are related parties of the Group. At 31 December 2019 there was an outstanding balance of £0.9m (2018: £0.8m) payable to the pension schemes. Funding The Pendragon Group Pension Scheme is fully funded by the Group’s subsidiaries. The funding requirements are based on the Scheme’s actuarial measurement framework set out in the funding policies of the Scheme. Employees are not required to contribute to the plans. Explanation of the Pension Deficit The liability to pay future pensions is a liability to settle a stream of future cashflows. These future cashflows have the following profile: m £ t n e m y a P l a u n n A 30 25 20 15 10 5 0 170 2020 2030 2040 2050 2060 2070 2080 2090 2100 2110 Deferreds Pensioners Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 5 - PENSION SCHEMES 5.1 Pension obligations continued ‘Deferred’ are those pension scheme members not yet drawing a pension as at 31 December 2019; ‘Pensioners’ are those in receipt of pension at 31 December 2019. The actual total cash liabilities shown above are estimated at £731m. The value of these liabilities discounted to present value at 31 December 2019 are £531.2m. In order to meet those future cashflows, the Pension Scheme has to grow its assets sufficient to settle those liabilities. The risk of the future value of those assets is dependent on the financial return; the liabilities will change dependent on the rate of inflation (as most pensions are inflation adjusted) and longevity (how long the pensioner lives for and therefore in receipt of pension). The pension deficit is the gap between those assets and liabilities and can be calculated in one of two ways, both of which are arithmetically identical: either forecast future assets at the asset growth rate to offset against actual liabilities or discount future liabilities by the asset growth rate and compare with the present value of the assets. The latter method is the one commonly adopted and accounting standards require that the asset growth rate (the discount rate) should be estimated on a similar basis for every Group, to enhance comparability and to assume a relatively low level of risk. The more realistic picture is provided by the actuarial valuation which considers what the prudent estimate of the asset growth rate should be and hence what the gap is that the Group will be required to fund through cash contributions. These actuarial valuations are conducted every three years (the triennial valuation). The last triennial valuation was conducted as at 31 December 2018 giving the following comparison: As at 31 December 2018 Assets Liabilities Pension deficit Discount rate used Inflation IAS 19 (Accounts) £m 418.0 (486.3) (68.3) Actuarial valuation £m 418.1 (535.2) (117.1) 3.90% 2.1%-3.9% 2.47% 2.65%-3.45% The triennial valuation of the pension scheme reflecting the position as at 31 December 2018 was agreed by the Trustees on 17 March 2020. The Group has agreed with the trustees that it will aim to eliminate the deficit over a period of 7 years and 7 months from 31 March 2020 by the payment of deficit recovery contributions of £12.5m each year, increasing at 2.25% p.a. These contributions include the expected quarterly distributions from the Central Asset Reserve over the recovery period. The next triennial valuation of the pension scheme will reflect the position as at 31 December 2021. Central Asset Reserve Pendragon PLC is a general partner and the Pendragon Group Pension Scheme is a limited partner of the Pendragon Scottish Limited Partnership (the Partnership). The Partnership holds properties with a book value of £345.5m (with a most recent market valuation of £47m), which have been leased back to the Group at market rates. The Group retains control over these properties, including the flexibility to substitute alternative properties. As such, the Partnership is consolidated into the results of the Group. During the year the Group has paid £3.0m to the Pendragon Group Pension Scheme through the Partnership (2018: £2.9m) and will increase by 2.25% on 1 August each year until the leases expire on 31 July 2032. These payments could cease in advance of that date if the Pension Scheme’s actuarial valuation reaches a point where there is a surplus of 5% over the liability value (on the actuarial triennial valuation basis). The Pension Scheme therefore has a right to receive a future stream of rental receipts. No asset is recognised in these financial statements as the Group has to consent to any proposed disposal of this asset by the Pension Scheme. However, if the Group became insolvent the properties themselves would be retained by the Pension Scheme. 171 2020 2030 2040 2050 2060 2070 2080 2090 2100 2110 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 5 - PENSION SCHEMES 5.1 Pension obligations continued IAS 19 assumptions The assumptions used by the actuary in performing the triennial valuation at 31 December 2015 include an element of caution and are chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be borne out in practice. The IAS assumptions have been updated at 31 December 2019 and differ from those used for the earlier independent statutory actuarial valuations explained above. The principal assumptions used by the independent qualified actuaries for the purposes of IAS 19 for all schemes were: Inflation - RPI Inflation - CPI Discount rate 2019 2.85% 2.05% 2.05% 2018 3.25% 2.25% 2.85% 2017 3.25% 2.25% 2.55% Mortality table assumption * VitaCurves CMI 2018 M (1.25%) / S2PMA CMI 2017 M (1%) / S2PMA CMI 2016 M (1%)/ VitaCurves CMI 2018 F (1.25%) S2PFA CMI 2017 F (1%) S2PFA CMI 2016 F (1%) *The mortality table assumption implies the following expected future lifetime from age 65: Males aged 45 Females aged 45 Males aged 65 Females aged 65 2019 Years 22.6 24.7 21.2 23.1 2018 Years 22.8 24.9 21.8 23.7 2017 Years 23.0 25.0 21.9 23.7 During 2010 the Government announced a change to the index to be used for pension increases from RPI to CPI. The change applied to certain elements of pension increases depending on the nature of the pension entitlement, the period in which it was earned and the rules of each scheme. The application of either RPI or CPI to calculate the pension liability has been assessed for each scheme and the relevant elements of pension increases within each scheme. The Group has updated its approach to setting RPI and CPI inflation assumptions in light of the RPI reform proposals published on the 4th September 2019 by the UK Chancellor and UK Statistics Authority. The Group continued to set RPI inflation in line with the market break-even expectations less an inflation risk premium. The inflation risk premium has been increased from 0.2% at 31 December 2018 to 0.4% at 31 December 2019, reflecting an allowance for additional market distortions caused by the RPI reform proposals. For CPI, the Group reduced the assumed difference between the RPI and CPI by 1% to an average of 0.8% per annum. The estimated impact of the change in the methodology is approximately a £5.0m decrease in the defined benefit obligation as at 31 December 2019. In January 2019, the House of Lords Economic Affairs Committee published a report that strongly criticised the calculation of the RPI index and called for the RPI calculation methodology to be improved. In response, correspondence between the UK Statistics Authority and the UK Government, published on 4 September 2019, proposed changes to the calculation of RPI to match CPI including Housing (CPIH) at some time between 2025 and 2030. Whilst there is still to be a consultation on how this could be implemented, we believe the most likely outcome is that this will go ahead. We expect that there will be varying views on how to allow for the proposed reforms and so a range of approaches may be considered reasonable. The extent to which these reforms require an adjustment to the derivation of the RPI inflation rate depends upon the extent to which market-implied RPI remains a good indicator of the expected future level of RPI. Our assumption is that the market implied inflation curve (which is derived from market prices for nominal inflation linked gilts) does not fully reflect 172 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 5 - PENSION SCHEMES 5.1 Pension obligations continued the proposed changes, and that the curve is no longer a reliable guide to RPI expectations after 2030. A 0.2% p.a. reduction has been made to the RPI inflation assumption to reflect the likelihood that RPI expectations will be lower in the longer term. RPI is expected to match CPIH (which includes housing costs) sometime between 2025 and 2030. While the RPI assumption is reduced, it remains above the CPI inflation assumption. The proposal in Government correspondence is not expected to impact on CPI inflation expectations, so the outlook for CPI inflation is unchanged. It is therefore necessary to make a consistent reduction of 0.2% to the wedge (or ‘gap’) between the RPI and CPI assumptions, i.e. to reflect the change made to the RPI inflation assumption. The sensitivities regarding the principal assumptions used to measure scheme liabilities are set out below: Assumption Discount rate Rate of inflation Mortality Change in assumption Impact on scheme liabilities Increase/decrease by 0.1% Decrease/increase of £8.5m Increase/decrease by 0.1% Increase/decrease of £5.1m Increase in life expectancy of 1 year Increase by £17.0m The sensitivities shown above are approximate. Each sensitivity considers one change in isolation. The inflation sensitivity includes the impact of changes to the assumptions for revaluation and pension increases. The average duration of the defined benefit obligation at the period ending 31 December 2019 is 16 years (2018: 17 years). The scheme typically exposes the Group to actuarial risks such as investment risk in assets (the return and gain or loss on assets invested in), inflation risk (as pensions typically rise in line with inflation) and mortality risk (the length of time a pensioner lives for) in respect of liabilities. As the accounting deficit is calculated by reference to a discount rate linked to corporate bonds then the Group is also exposed to interest rate risk i.e. the discounted value of liabilities will rise or fall in line with changes in the interest rate used to calculate (discount) the future pension liabilities to present value. A decrease in corporate bond yields, a rise in inflation or an increase in life expectancy would result in an increase to scheme liabilities. This would detrimentally impact the balance sheet position and may give rise to increased charges in future income statements. This effect could be partially offset by an increase in the value of the scheme’s assets. In order to further mitigate risk, the scheme’s investment strategy was changed during 2017 and now operates within a liability driven framework known as Liability Driven Investments (‘LDI’) i.e. the scheme invests in a mix of assets that are broadly expected to match the expected movement in the net present value of liabilities. This is achieved by investing in assets that are broadly expected to hedge the underlying inflation and interest rate risks of 90% of the liabilities (2018: 90% of the liabilities). The nature of the products available for liability driven investing mean that a greater proportion of the scheme’s assets can be used to invest in assets that are expected to have a higher growth rate than low risk assets. Traditionally, a pension scheme would typically invest in low risk assets such as gilts or cash to broadly match the liabilities of pensions already in payment and invest in higher risk assets such as equities in an attempt to seek growth to fund future pensions for deferred members. Today, the products available for liability driven investing means that each £100 of gilts formerly held can now be replaced with c. £25 of collateral LDI assets and £75 of higher growth assets in order to generate a higher expected return with a similar expected level of risk of volatility. When the LDI investment strategy was put in place in 2017, the investments were rebalanced to hold the required level of LDI collateral assets and the balance invested in a range of diversified growth funds which typically target a return of 3-5% per annum. Additionally, caps on inflationary increases are in place to protect the scheme against extreme inflation. During 2018 a new investment advisor was appointed to the Pension Scheme and the current focus is on further reducing the risk the pension scheme runs in investing in equities, which by their nature are volatile. In poursuance of this strategy, in 2019 the trustees divested from riskier UK only equities and Diversified Growth Funds and reinvested in less risky overseas equities and multi-asset credit funds (including corporate bonds, and classified in total as corporate bonds in the table below). Further diversification is planned away from Diversified Growth Funds and into illiquid assets (investments into a pooled fund which invests in mainly land and buildings with rental yields). 173 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 5 - PENSION SCHEMES 5.1 Pension obligations continued The fair value of the scheme’s assets which are not intended to be realised in the short term and may be subject to significant change before they are realised, and the value of the schemes liabilities, which is derived from cash flow projections over long periods and thus inherently uncertain, are: Scheme assets and liabilities UK equities Overseas equities Unit trust Corporate bonds Government bonds Liability driven investments Diversified growth fund Cash Fair value of scheme assets Present value of funded defined benefit obligations Net liability on the balance sheet 2019 £m - 106.3 - 87.6 - 115.4 119.9 43.0 472.2 2018 £m 129.1 1.9 13.2 - - 58.9 163.1 51.8 418.0 2017 £m 193.0 0.2 17.8 - - 65.6 163.1 19.3 459.0 (531.2) (486.3) (521.8) (59.0) (68.3) (62.8) None of the fair values of the assets shown above include any of the Group’s own financial instruments or any property occupied by, or other assets used by, the Group. All of the scheme assets have a quoted market price in an active market with the exception of the Trustee’s bank account balance. UK equities are held as a mixture of pooled funds (where cash is invested in a quoted fund designed by the fund manager) or via a segregated mandate where cash is advanced to a fund manager for direct investment in equities at the discretion of the fund manager. Liability driven investments (‘LDI’) comprises of investments in funds invested mostly in assets akin to gilts. The diversified growth fund comprises of investments with a number of different fund managers in their individual funds, which funds invest in a mixture of UK and global equities, government and non-government bonds, cash and derivatives. An LDI solution does not remove all risks within a pension scheme. Those that remain include: • Demographic risks. For example mortality experience may differ from that assumed when projecting the liability cashflows. • Basis risk. The valuation of the liabilities by the Scheme Actuary may be based on a specific discount rate, or perhaps a market reference yield. The LDI portfolio will be subject to either underlying gilt or swap market rates. To the extent that these differ, it may result in a residual variation between the two valuation approaches. • LIBOR target risk. With derivative positions in place, the assets need to achieve a LIBOR (cash return) based target in order to keep pace with the liabilities. To the extent that this return is not achieved (through poor cash funds, or underperformance of growth assets), this will detract from the funding position. • Counterparty risk. The instruments used in an LDI solution rely on investment bank counterparties to provide the required exposures. If a counterparty defaults, this can lead to a loss of that particular exposure and potentially a loss of any accrued profit on the position. This latter is mitigated by the counterparty, placing assets as security or ‘collateral’ to cover accrued profits. It is the policy of the Trustee and the Group to review the investment strategy at the time of each funding valuation and keep this under review. The Trustee investment objectives and the processes undertaken to measure and manage the risks inherent in the scheme investment strategy are documented in the scheme’s Statement of Investment Principles. 174 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 5 - PENSION SCHEMES 5.1 Pension obligations continued The Group has reviewed implications of the guidance provided by IFRIC 14 and have concluded that it is not necessary to make any adjustments to the IAS 19 figures in respect of an asset ceiling or Minimum Funding Requirement as at 31 December 2019 and at 31 December 2018. Movements in the net liability for defined benefit obligations recognised in the balance sheet Net liability for defined benefit obligations at 1 January Contributions received Income/(expense) recognised in the income state- ment Actuarial gains and losses recognised in the statement of other comprehensive income Net liability for defined benefit obligations at 31 December The defined benefit obligation can be allocated to the plan’s participants as follows: Deferred plan participants Retirees Actual return on assets Expected contributions in following year Total in the income statement Net interest on obligation Past service cost The expense is recognised in the following line items in the income statement: Operating expenses Finance costs 2019 £m (68.3) 7.6 3.0 (1.3) (59.0) 2019 % 58 42 2019 £m 66.0 12.5 2019 £m 1.8 (4.8) (3.0) 2019 £m (4.8) 1.8 2018 £m (62.8) 7.5 (12.1) (0.9) (68.3) 2018 % 58 42 2018 £m (27.3) 7.3 2018 £m 1.6 10.5 12.1 2018 £m 10.5 1.6 The expected discount rate as at 31 December 2019 was 2.05%. This compares to the discount rate of 2.85% used in the calculation of the interest income for the period ending 31 December 2018. Based on the reported deficit of £59.0m at 31 December 2019 and the discount rate assumption of 2.05% the charge in 2020 is expected to be £1.2m. 175 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 5 - PENSION SCHEMES 5.1 Pension obligations continued Past service costs 2019: Pension Increase Exchange (PIE) The Group has implemented a PIE for pensioner members whereby future inflationary increases in pension payments were exchanged for an increased fixed pension. 31% of eligible members took up the offer and the new pensions went into payment on 27 September 2019.The gain arising has been recorded as a negative past service cost in the income statement. The rule change made to facilitate the offer was implemented in November 2018 but the amount has all been recognised in the current year. Past service costs - GMP equalisation On 26 October 2018, a landmark pensions case was handed down by the High Court, which has confirmed that pesnion schmes are required to equalise Guaranteed Minimum Pensions (“GMP”). The cost of equalising GMPs was estimated to be £10.5 million and this was recognised as a past service cost via the income statement in 2018. There are no chnages in the expected GMP and no further charge is required in 2019. 176 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 5 - PENSION SCHEMES 5.1 Pension obligations continued Actuarial gains and losses recognised directly in the statement of other comprehensive income Cumulative amount at 1 January Recognised during the period Cumulative amount at 31 December Defined benefit income recognised in statement of other comprehensive income Return on plan assets excluding interest income Experience (loss)/gain on scheme liabilities Changes in assumptions underlying the present value of scheme obligations Changes in the present value of the defined benefit obligation Opening present value of defined benefit obligation Interest cost Past service cost Remeasurements: Experience adjustments Actuarial gains due to changes in demographic assumptions Actuarial (gains)/losses due to changes in financial assumptions Benefits paid Closing present value of defined benefit obligation Movement in fair value of scheme assets during the period Opening fair value of assets Interest income Return on plan assets, excluding interest income Contributions by employer Benefits paid End of period 2019 £m (51.6) (1.3) (52.9) 2019 £m 54.3 (5.1) (50.5) (1.3) 2019 £m 486.3 13.5 (4.8) 5.1 0.2 50.3 (19.4) 531.2 2019 £m 418.0 11.7 54.3 7.6 (19.4) 472.2 2018 £m (50.7) (0.9) (51.6) 2018 £m (38.8) (5.2) 43.1 (0.9) 2018 £m 521.8 13.2 10.5 5.2 (17.6) (25.5) (21.3) 486.3 2018 £m 459.0 11.6 (38.8) 7.5 (21.3) 418.0 177 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 5 - PENSION SCHEMES 5.1 Pension obligations continued History of experience adjustments Present value of defined benefit obligation Fair value of scheme assets Deficit in schemes Experience adjustments on scheme liabilities: Amount Percentage of scheme liabilities (%) Experience adjustments on scheme assets: Amount Percentage of scheme liabilities (%) 2019 £m 531.2 472.2 59.0 2018 £m 486.3 418.0 68.3 2017 £m 521.8 459.0 62.8 2016 £m 544.6 441.4 103.2 2015 £m 440.3 396.9 43.4 55.6 10.5% (37.9) (0.1) (7.4) (1.4%) 111.2 20.4% (22.9) (5.2%) 54.3 10.2% (38.8) (0.1)% 28.4 5.4% 49.9 9.2% (0.5) (0.1%) 178 Pendragon PLC Annual Report 2019NOTES TO THE FINANCIAL STATEMENTS SECTION 6 - OTHER NOTES This section contains the notes and information relating to acquisitions and disposals and related party transactions: 6.1 Business combinations 6.3 Related party transactions 6.2 Business disposals 6.1 Business combinations Accounting policy The Group accounts for business combinations using the acquisition method when control is transferred to the Group (see Basis of preparation in Section 1 above). The results of companies and businesses acquired during the year are included from the effective date of acquisition. . Acquisitions on or after 1 January 2010 For acquisitions on or after 1 January 2010, the Group measures goodwill at the acquisition date as: • the fair value of the consideration transferred; plus • the recognised amount of any non-controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less • the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. When share based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree’s employees (acquiree’s awards) and relate to past services, then all or a portion of the amount of the acquirer’s replacement awards is included in measuring the consideration transferred in the business combination. This determination is based on the market based value of the replacement awards compared with the market based value of the acquiree’s awards and the extent to which the replacement awards relate to past and/or future service. Acquisitions between 1 January 2004 and 1 January 2010 For acquisitions between 1 January 2004 and 1 January 2010, goodwill represents the excess of the cost of the acquisition over the Group’s interest in the recognised amount (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess was negative, a bargain purchase gain was recognised immediately in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurred in connection with business combinations were capitalised as part of the cost of the acquisition. 179 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 6 - OTHER NOTES 6.1 Business combinations continued Acquisitions prior to 1 January 2004 (date of transition to IFRSs) As part of its transition to IFRSs, the Group elected to restate only those business combinations that occurred on or after 1 January 2003. In respect of acquisitions prior to 1 January 2003, goodwill represents the amount recognised under the Group’s previous accounting framework, UK GAAP. Activity There were no business combinations in the current or prior year. 6.2 Business disposals Accounting policy The results of businesses disposed of during the year are included up to the effective date of disposal using the acquisition method of accounting. Activity During the year the Group disposed of six UK dealerships representing Jaguar and Land Rover and four US dealerships representing Jaguar and Land Rover. Net assets at the date of disposal: Goodwill Property, plant and equipment Assets held for sale Inventories Trade and other receivables Trade and other payables US Businesses £m Other disposables £m Net book value £m - - 26.3 - - - 26.3 33.0 59.3 0.7 5.6 - 2.9 0.1 (0.3) 9.0 (0.9) 8.1 0.7 5.6 26.3 2.9 0.1 (0.3) 35.3 32.1 67.4 Profit on sale of businesses Proceeds on sale satisfied by cash and cash equivalents No cash was disposed as part of any business disposal during the year. During the previous year the Group disposed of four UK dealerships representing Jaguar and Land Rover and an Aston Martin franchise in the US for proceeds of £10.9m and realising a profit of £3.3m on disposal. 180 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS SECTION 6 - OTHER NOTES 6.3 Related party transactions Subsidiaries The Group’s ultimate parent Group is Pendragon PLC. A listing of subsidiaries is shown within the financial statements of the company on page 190. Transactions with key management personnel The key management personnel of the Group comprise the executive and non-executive directors. The details of the remuneration, long term incentive plans, shareholdings, share option and pension entitlements of individual directors are included in the Directors’ Remuneration Report on pages 60 to 78. Directors of the Group and their immediate relatives control 2.31% of the ordinary shares of the Group. During the year key management personnel compensation was as follows: Short term employee benefits Post-employment benefits Termination payments Share based payments 2019 £m 1.4 0.1 1.4 0.6 3.5 2018 £m 1.3 0.2 - 0.3 1.8 181 Pendragon PLC Annual Report 2019 COMPANY BALANCE SHEET At 31 December 2019 Fixed assets Investments Loans to subsidiary undertakings Current assets Debtors (amounts due after more than one year:£10.5m) Creditors: amounts falling due within one year Net current liabilities Total assets less current liabilities Creditors: amounts falling due after more than one year Retirement benefit obligations Net assets Capital and reserves Called up share capital Share premium account Capital redemption reserve Other reserves Profit and loss account Equity shareholders' funds Approved by the Board of Directors on 18 March 2020 and signed on its behalf by: W Berman Chief Executive Registered Company Number: 2304195 M S Willis Chief Finance Officer Notes 5 6 7 8 11 11 11 2019 £m 804.0 90.0 894.0 38.0 38.0 2018 £m 912.4 90.0 1,002.4 40.9 40.9 (371.6) (431.1) (333.6) (390.2) 560.4 612.2 (175.2) (59.0) (177.3) (68.3) 326.2 366.6 69.9 56.8 5.6 13.9 180.0 326.2 70.0 56.8 5.5 13.9 220.4 366.6 The Company adopted IFRS 16 Leases with effect from 1 January 2019 using the modified retrospective approach on transition and has accordingly not restated prior periods. However the Company has had no lease arrangements during the year so the periods presented are directly comparable. The notes on pages 185 to 193 form part of these financial statements. 182 Pendragon PLC Annual Report 2019 COMPANY STATEMENT OF OTHER COMPREHENSIVE INCOME Year ended 31 December 2019 Profit for the year Note Other comprehensive income Items that will never be reclassified to profit and loss: Defined benefit plan remeasurement gains and (losses) Income tax relating to defined benefit plan remeasurement (gains) and losses Other comprehensive income for the year, net of tax Total comprehensive income for the year 2019 £m (31.4) 0.4 0.2 0.6 (30.8) 2018 £m 16.6 0.8 0.2 1.0 17.6 The notes on pages 185 to 193 form part of these financial statements 183 Pendragon PLC Annual Report 2019COMPANY STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2019 Share capital £m Share premium account £m Capital redemption reserve £m Other reserves £m Retained earnings £m Total £m Balance at 1 January 2019 70.0 56.8 5.5 13.9 220.4 366.6 Total comprehensive income for 2019 Profit for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners, recorded directly in equity Own shares purchased for cancellation Own shares issued by EBT Share based payments Dividends paid (see note 4) Total contributions by and distributions to owners Balance at 31 December 2019 - - - (0.1) - - - (0.1) 69.9 - - - - - - - - 56.8 - - - 0.1 - - - 0.1 5.6 - - - - - - - - (31.4) 0.6 (31.4) 0.6 (30.8) (30.8) (0.5) - 0.6 (9.7) (9.6) (0.5) - 0.6 (9.7) (9.6) 13.9 180.0 326.2 Balance at 1 January 2018 71.2 56.8 4.3 13.9 231.2 377.4 Total comprehensive income for 2018 Profit for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners, recorded directly in equity Own shares purchased for cancellation Own shares issued by EBT Share based payments Dividends paid (see note 4) Total contributions by and distributions to owners Balance at 31 December 2018 - - - (1.2) - - - (1.2) 70.0 - - - - - - - - 56.8 - - - 1.2 - - - 1.2 5.5 - - - - - - - - 16.6 1.0 17.6 (6.7) 0.1 0.7 (22.5) (28.4) 16.6 1.0 17.6 (6.7) 0.1 0.7 (22.5) (28.4) 13.9 220.4 366.6 The Company adopted IFRS 16 Leases with effect from 1 January 2019 using the modified retrospective approach on transition and has accordingly not restated prior periods. However the Company has had no lease arrangements during the year so the periods presented are directly comparable. The notes on pages 185 to 193 form part of these financial statements. 184 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS OF THE COMPANY 1 Accounting Policies (a) Basic of preparation Pendragon PLC is a company incorporated and domiciled in England, UK. 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. These financial statements have been perpared on a going concern basis as explained in note 1 of the Group financial statements. Principal risks and uncertainties are outlined in the Group financial statements on pages 34 to 41. In these financial statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures: • a Cash Flow Statement and related notes; • Comparative period reconciliations for share capital, tangible fixed assets and intangible assets; • 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. • Disclosures of transactions with a management entity that provides key management personnel services to the company; • Certain disclosures required by IAS 36 Impairments of Assets in respect of the impairment of assets. As the consolidated financial statements of the Company 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 Payments 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. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these financial statements. Judgements The Company applies judgement in how it applies its accounting policies, which do not involve estimation, but could materially affect the numbers disclosed in these financial statements. There are however no such key accounting judgements applied in these financial statements. Accounting estimates The preparation of financial statements in conformity with FRS 101 requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Although these estimates are based on management’s best knowledge of the amount, events or actions, actual results ultimately may differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The directors consider the following to be the key estimates applicable to the financial statements, which have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year or in the long-term: 185 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS OF THE COMPANY 1 Accounting Policies continued Key estimate area Key assumption Potential impact within the next financial year Potential impact in the longer term Note reference Retirement benefit obligations Investment impairment The main assumptions in determining the Company’s Retirement Benefit Obligations are: discount rate, mortality and rate of inflation. Full detail is included in the pension note in the Consolidated Financial Statements in note 5.1. The balances of investment in subsidiary companies are held at cost less any impairment. It is considered that these investments are one CGU. An impairment exists when their recoverable amount is less than the costs held in the accounts. There are a number of factors which could impact the recoverable amount which creates a risk of this recoverable amount being lower than the investment balance held. 3 3 3 5.1 Group 3 5 and 3.1 Group (b) Deferred taxation Full provision is made for deferred taxation on all timing differences which have arisen but have not reversed at the balance sheet date, except as follows: (i) tax payable on the future remittance of the past earnings of subsidiaries is provided only to the extent that dividends have been accrued as receivable or a binding agreement to distribute all past earnings exists; (ii) deferred tax assets are recognised only to the extent that it is more likely than not that they will be recovered. Deferred tax is measured on a non-discounted basis at the tax rates that are expected to apply in the periods in which the timing differences reverse, based on tax rates and laws substantively enacted at the balance sheet date. (c) Impairment excluding deferred tax assets Financial assets (including trade and other debtors) A financial asset not carried at fair value through profit or loss is measured for impairment losses in accordance with IFRS 9 using an expected credit loss (ECL) model. The impairment model applies to financial assets measured at amortised cost. The calculation of ECLs are a probability-weighted estimate of credit losses. For trade receivables, the Company applies the simplified approach set out in IFRS 9 to measure expected credit losses using a lifetime expected credit loss allowance. The Company considered a trade or other receivables, including intercompany receivables, to be in default when the borrower is unlikely to pay its credit obligations to the Company in full after all reasonable actions have been taken to recover the debt. Non-financial assets The carrying amounts of the Company’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the ‘cash-generating unit). 186 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS OF THE COMPANY 1 Accounting Policies continued An impairment loss is recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis. Fair value hedges Where a derivative financial instrument hedges the changes in fair value of recognised assets or liabilities, any gain or loss is recognised in profit and loss. The hedged item is also stated, separately from the derivative, at fair value in respect of the risk being hedged with any gain or loss also recognised in profit and loss. This will result in variations in the balance sheet values of the gross debt and the offsetting derivatives as the market value fluctuates. (d) Investments held as fixed assets are stated at cost less any impairment losses. For Investments the recoverable amount is estimated at each balance sheet date. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. Further details of impairment testing policies are presented in note 3.1 of the Group Financial Statements. (e) Employee benefits - Share based payments The Company operates a number of employee share option schemes. The fair value at the date at which the share options are granted is recognised in profit and loss on a straight line basis over the vesting period, taking into account the number of options that are expected to vest. The number of options that are expected to become exercisable is reviewed at each balance sheet date and if necessary estimates are revised. (f) Pension obligations The Company operated a defined benefit and defined contribution plan during the year, the assets of which are held in independent trustee administered funds. Pension accounting costs for defined benefit plans are assessed by determining the pension obligation using the projected unit credit method after including a net return on the plan assets. Under this method, in accordance with the advice of qualified actuaries, the amounts charged in respect of employee benefits reflect the cost of benefits accruing in the year and the cost of financing historical accrued benefits. The Company recognises all actuarial gains and losses arising from defined benefit plans in the statement of other comprehensive income immediately. The present value of pension obligations is measured by reference to market yields on high quality corporate bonds which have terms to maturity approximating to the terms of the related pension liability. Plan assets are measured at fair value. When the calculation results in a benefit to the Company, the recognised asset is limited to the total of the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. An economic benefit is available to the Company if it is realisable during the life of the plan, or on settlement of the plan liabilities. Under IAS 19 Employee Benefits, the Group recognises an interest expense or income which is calculated on the net defined benefit liability or asset respectively by applying the discount rate to the net defined benefit liability or asset. A defined contribution plan is one under which the Company pays fixed contributions and has no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an employee benefit expense in the income statement when they are due. 187 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS OF THE COMPANY 1 Accounting Policies continued In accordance with IFRIC 14 surpluses in schemes are recognised as assets only if they represent unconditional economic benefits available to the Company in the future. Provision is made for future unrecognisable surpluses that will arise as a result of regulatory funding requirements. Movements in unrecognised surpluses are included in the statement of recognised income and expense. If the fair value of the assets exceeds the present value of the defined benefit obligation then the surplus will only be recognised if the nature of the arrangements under the trust deed, and funding arrangements between the Trustee and the Company support the availability of refunds or recoverability through agreed reductions in future contributions. In addition, if there is an obligation for the Company to pay deficit funding, this is also recognised. Under the provisions of FRS 101 Pendragon PLC is designated as the principal employer of the Pendragon Group Pension Scheme and as such applies the full provisions of IAS 19 Employee benefits (2011). In line with IAS 19 Employee benefits (2011), the Company has recognised a pension prepayment with respect to an extraordinary contribution made during 31 December 2011 as this does not meet the definition of a planned asset and therefore the amount is held in pension prepayment and will be unwound over the period in which Scottish Limited Partnership Limited makes contributions to the pension scheme. Information relating to pension obligations can be found in the Consolidated Financial Statements in note 5.1. (g) Dividends Dividends proposed by the Board and unpaid at the end of the year are not recognised in the financial statements until they have been approved by the shareholders at the Annual General Meeting. Interim dividends are recognised when they are paid. (h) Own shares held by ESOP trust Transactions of the group-sponsored ESOP trust are included in the Company financial statements. In particular, the trust’s purchases and sales of shares in the Company are debited and credited directly to equity. (i) Contingent liabilities Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its group, the Company considers these to be insurance arrangements, and accounts for them as such.  In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee. 2 Profit and loss account of the company and distributable reserves In accordance with the exemption allowed by Section 408 of the Companies Act 2006, the profit and loss account of the Company is not presented. The loss after taxation attributable to the Company dealt with in its own accounts for the year ended 31 December 2019 is £31.4m (2018: profit £16.6m). The profit and loss account of the Parent Company does not include any unrealised profits. The amount available for distribution under the Companies Act 2006 by reference to these accounts is £180.0m (2018: £220.4m) which is stated after deducting the ESOT reserve of £18.2m (2018: £18.2m). The Group’s subsidiary companies which earn distributable profits themselves are expected to make distributions each year up to the Parent Company in due course to ensure a regular flow of income to the Company such that surplus cash generated can continue to be returned to our external shareholders. 188 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS OF THE COMPANY 3 Directors Total emoluments of directors (including pension contributions) amounted to £3.5m (2018: £1.8m). Information relating to directors’ emoluments, share options and pension entitlements is set out in the Directors’ Remuneration Report on pages 60 to 78. The directors are the only employees of the Company. 4 Dividends Ordinary shares Final dividend in respect of 2018 of 0.7p per share (2017: 0.8p per share) Interim dividend in respect of 2019 of nil per share (2018: 0.8p per share) 2019 £m 9.7 - 9.7 2018 £m 11.3 11.2 22.5 The Board is not recommending the payment of a final dividend for 2019 (2018: 0.7p equating to £9.7m). 5 Investments At 31 December 2018 Impairment At 31 December 2019 Shares in subsidiary undertakings £m 912.4 (108.4) 804.0 In conjunction with the impairment review of goodwill performed for the Group (see note 3.1 of the Group financial statements), a related exercise was performed with relation to the Company’s carrying value of its investment in subsidiaries, resulting in an impairment charge of £108.4m (2018: £10.2m). The calculation is sensitive to the assumptions used in valuing the expected future cashflows of subsidiaries. Full details of impairment testing are presented in note 3.1 of the Group Financial Statements. Shares in subsidiary undertakings are stated at cost. Pendragon PLC owns directly or indirectly 100 percent of the issued ordinary share capital of the following subsidiaries. 189 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS OF THE COMPANY 5 Investments continued Incorporated in Great Britain having a registered office at Loxley House, 2 Little Oak Drive, Annesley, Nottingham, NG15 0DR: Alloy Racing Equipment Limited Bramall Quicks Dealerships Limited Car Store Limited CD Bramall Dealerships Limited Chatfields Limited Derwent Vehicles Limited Evans Halshaw Limited National Fleet Solutions Limited Bletchley Motor Company Limited Bletchley Motor Contracts Limited Bletchley Motor Group Limited Bletchley Motor Rentals Limited Bletchley Motors Car Sales Limited Bletchley Properties Limited Boxmoor Motors Limited Bramall Contracts Limited Pendragon Vehicle Management Limited Bridgegate Limited Manchester Garages Holdings Limited Manchester Garages Limited Merlin (Chatsworth) Limited Miles (Chesham) Limited Motors Direct Limited Motown Limited Munn & Chapman Limited Munn Holdings Limited Neville (EMV) Limited Pendragon Finance & Insurance Services Limited * Brightdart Limited Newport (Gwent) Motor Company Limited Pendragon Management Services Limited Pendragon Motor Group Limited Pendragon Premier Limited Pendragon Property Holdings Limited Pendragon Sabre Limited Pinewood Technologies PLC * Reg Vardy (MML) Limited Reg Vardy (VMC) Limited ** Reg Vardy Limited * Stratstone Limited Stripestar Limited Victoria (Bavaria) Limited Chatfields - Martin Walter Limited Pendragon Group Services Limited * Pendragon Overseas Limited * Pendragon Stock Limited Pendragon Stock Finance Limited Vardy Contract Motoring Limited Vardy Marketing Limited Buist Manor Limited C P Evinson Limited C.G.S.B Holdings Limited Calmoon Limited CD Bramall Motor Group Limited CD Bramall Pensions Limited Oggelsby's Limited P J Evans (Holdings) Limited Paramount Cars Limited Parkhouse Garage (Newcastle) Limited Pendragon Company Car Finance Limited Pendragon Demonstrator Finance Limited CD Bramall Pension Trustee Limited Pendragon Demonstrator Finance November Limited CD Bramall York Limited Pendragon Demonstrator Sales Limited Central Motor Company (Leicester) Limited Petrogate Properties Limited Charles Sidney Holdings Limited Charles Sidney Limited Pinewood Computers Limited Plumtree Motor Company Limited Comet Vehicle Contracts Limited Portmann Limited Davenport Vernon Finance Limited Premier Carriage Limited Davenport Vernon Milton Keynes Limited Quicks (1997) Motor Holdings Limited Davies Holdings Limited Dunham & Haines Limited Evans Halshaw (Cardiff) Limited Evans Halshaw (Chesham) Limited Quicks Finance Limited Reades of Telford Limited Regency Automotive Limited Reg Vardy (AMC) Limited Evans Halshaw (Dormants) Limited * Reg Vardy (Property Management) Limited Pendragon Limited Partner Limited * Evans Halshaw (Halifax) Limited Reg Vardy (RTL) Limited Bramall Quicks Limited Car Store.com Limited CD Bramall Limited * Executive Motor Group Limited Stratstone Motor Holdings Limited * Petrogate Limited Evans Halshaw (Midlands) Limited Rudds Limited Evans Halshaw Group Pension Trustees Limited Sanderson Murray & Elder Limited Evans Halshaw Motor Holdings Limited Skipper of Aintree Limited Evans Halshaw Vehicle Management Services Limited Skipper of Cheltenham Limited Evinson Tractors Limited Excalibur Motor Finance Limited Skipper of Darlington Limited Skipper of Torbay Limited Skipper of Wakefield Limited Reg Vardy (Property Management) Limited Executive Motor Group Limited Reg Vardy (TMC) Limited Reg Vardy (TMH) Limited Evans Halshaw.com Limited Pendragon Automotive Services Limited * Stratstone.com Limited Vardy (Continental) Limited Executive Motors (Stevenage) Limited Strattons (Service) Limited Folletts Limited G.E. Harper Limited Giltbase Limited Godfrey Davis (Trust) Limited Godfrey Davis Motor Group Limited Strattons (Wilmslow) Limited Suresell Limited The Car and Van Store Limited The Mcgill Group Limited The Skipper Group Limited Pendragon Group Pension Trustees Limited * Hemel Hempstead Motors Limited Tins Limited * Allens (Plymouth) Limited Kingston Reconditioning Services Limited Trust Motors Limited AMG Limited Andre Baldet Limited Arena Auto Limited Automend Limited Berkhamsted Motor Company Limited Leveling Limited Lewcan Limited Longton Garages Limited Manchester Garages (Cars) Limited Trust Properties Limited Vertcell Limited Wayahead Fuel Services Limited Incorporated in Great Britain having a registered office at Citypoint, 65 Haymarket Terrace, Edinburgh, Scotland, EH12 5HD: Pendragon General Partner Limited * Incorporated in Great Britain having a registered office at 221 Windmillhill Street, Motherwell, Lanarkshire, ML1 2UB: Reg Vardy (MME) Limited Incorporated in Great Britain having a registered office at 1 Forth Avenue, Kirkcaldy, Fife, KY2 5PS: Bramall Laidlaw Limited Incorporated in the United States of America having a registered office at 2171 Campus Dr Ste 260, Irvine, California: Pendragon North America Automotive, Inc. Penegon West, Inc. Penegon Mission Viejo, Inc. Penegon Newport Beach, Inc. Penegon Glendale, Inc. Lincoln Irvine, Inc. Penegon South Bay, Inc. Penegon Santa Monica, Inc. South County, Inc. Bauer Motors, Inc. Penegon Properties, Inc. Penegon East, Inc. Incorporated in Germany having a registered office at 40210 Düsseldorf,Nordrhein-Westfalen, Germany: Pendragon Overseas Holdings GmbH. * Direct subsidiary of Pendragon PLC ** Pendragon PLC owns 95% of the issued ordinary share capital 190 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS OF THE COMPANY 6 Debtors Amounts due within one year: Prepayments Amounts due after more than one year: Deferred tax (see note 9) 2019 £m 27.5 27.5 10.5 10.5 38.0 Expected credit losses in respect of trade and other intercompany receivables are deemed immaterial. 7 Creditors: amounts falling due within one year Amounts due to subsidiary undertakings Bank loans and overdrafts 8 Creditors: amounts falling due after more than one year Bank loans (repayable between one and two years) Bank loans (repayable between two and five years) 5.75% Senior notes 2023 2019 £m 359.0 12.6 371.6 2019 £m 115.2 - 60.0 175.2 2018 £m 28.7 28.7 12.2 12.2 40.9 2018 £m 418.9 12.2 431.1 2018 £m - 117.3 60.0 177.3 Full details of the Company’s borrowings including security and maturity are given in note 4.2 to the consolidated financial statements. 191 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS OF THE COMPANY 9 Deferred tax Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. There are no offset amounts as follows: Deferred tax assets The movement in the deferred tax assets for the year is as follows: At 1 January 2018 Credited to income statement Credited to equity At 31 December 2018 At 1 January 2019 Charged to income statement Credited to equity At 31 December 2019 2019 £m 10.5 Retirement benefit obligations Other provisions £m 10.8 0.7 0.2 11.7 11.7 (1.8) 0.2 10.1 0.5 - - 0.5 0.5 (0.1) - 0.4 2018 £m 12.2 Total £m 11.3 0.7 0.2 12.2 12.2 (1.9) 0.2 10.5 Deferred tax asset is shown within debtors (see note 6) 10 Share based payments Details of share schemes in place for the Group of which the Company participates as at 31 December 2019 are fully disclosed above in note 4.6 of this report. 11 Called up share capital Allotted, called up and fully paid shares of 5p each at 31 December 2018 Shares cancelled during the year Allotted, called up and fully paid shares of 5p each at 31 December 2019 There were no issues of ordinary shares during the year. Number 1,399,149,025 (2,204,621) 1,396,944,404 £m 70.0 (0.1) 69.9 2,204,621 ordinary shares having a nominal value of £0.1m were bought back and subsequently cancelled during the year in accordance with the authority granted by shareholders in the Annual General Meeting on 25 April 2019. The aggregate consideration paid, including directly attributable costs, was £0.5m. Since the commencement of the current share buyback programme in 2016, as at 31 December 2019, 63,376,251 shares have been bought back and cancelled representing 4.3% of the issued ordinary shares, at a total cost to date of £18.7m. The share buyback programme has been suspended and the Group anticipate that no further transactions will be made during 2020. Movements in the number of options to acquire ordinary shares under the Group’s various share option schemes, together with exercise prices and the outstanding position at 31 December 2019 are fully disclosed above in note 4.6 of this report. 192 Pendragon PLC Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS OF THE COMPANY The market value of the investment in the Group’s own shares at 31 December 2019 was £0.8m (2018: £1.4m), being 6.4m (2018: 6.4m) shares with a nominal value of 5p each, acquired at an average cost of £0.33 each (2018: £0.33). During the year the trust acquired no shares (2018: nil) and disposed of no shares (2018: 1.3m, for a consideration of £0.1m ) shares in respect of LTIP and executive share option awards. The amounts deducted from retained earnings for shares held by the EBT at 31 December 2019 was £18.1m (2018: £18.1m). The trustee of the EBT is Salamanca Group Trust (Jersey) Limited. The shares in trust may subsequently be awarded to Executive Directors and employees under the Pendragon 1999 Approved Executive Share Option Scheme, Pendragon 1999 Unapproved Executive Share Option Scheme and to satisfy amounts under LTIPs and the VCP. Details of the plans are given in the Directors’ Remuneration Report on pages 60 to 78. Dividends on the shares owned by the trust, the purchase of which were funded by interest free loans to the trust from Pendragon PLC, are waived. All expenses incurred by the trust are settled directly by Pendragon PLC and charged in the accounts as incurred. Capital redemption reserve The capital redemption reserve has arisen following the purchase by the Group of its own shares and comprises the amount by which distributable profits were reduced on these transactions in accordance with s733 of the Companies Act 2006. £0.1m (2018: £1.2m) was transferred into the capital redemption reserve during the year in respect of shares purchased by the Group and subsequently cancelled. Other reserves Other reserves comprise the amount of demerger reserve arising on the demerger of the Group from Williams Holdings PLC in 1989. 12 Retirement benefit obligations Details of Pendragon Group Pension Scheme are fully disclosed above in note 5.1 of this report. 13 Related party transactions Identity of related parties The company has related party relationships with its subsidiaries and with its key management personnel. Transactions with related parties The transaction with Directors of the company are set out in note 6.3 to the consolidated financial statements. 14 Contingent liabilities (a) The company has entered into cross-guarantees with its bankers whereby it guarantees payment of bank borrowings in respect of UK subsidiary undertakings. (b) The company has given performance guarantees in the normal course of business in respect of subsidiary undertaking obligations. 193 Pendragon PLC Annual Report 2019 ADVISORS, BANKS AND SHAREHOLDER INFORMATION Financial Calendar 2020 18 March date of this Report Share dealing service Pendragon’s company registrar offers a share dealing service, provided by Link Asset Services (a trading name of Link Market 18 March preliminary announcement of 2019 results Services). Details appear at www.linksharedeal.com 21 may May Annual General Meeting Auditor KPMG LLP Banks Barclays Bank PLC Lloyds TSB Bank plc Royal Bank of Scotland plc Allied Irish Banks plc HSBC Bank plc Stockbrokers Joh. Berenberg, Gossler & Co. KG Jefferies International Limited Shareholder and investor information Making some of our corporate materials and policies available on our website reduces the length of this Report. This year we have placed certain background information on policy and governance on our website. We also display historic financial reports and have a section on company news, which we regularly update on www.pendragonplc.com Online services Shareholders can choose to receive communications and access a variety of share-related services online via the share portal offered by Pendragon’s company registrar. This allows shareholders to manage their shareholding electronically and is free of charge. For details, visit www.mypendragonshares. com Getting company reports online Reduces the environmental impacts of report distribution. To choose online only reporting, visit the share portal and register for electronic form reporting, or contact our registrar, whose details are: Solicitors CMS Cameron McKenna Nabarro Olswang LLP Registrar and shareholder enquiries Link Asset Services Geldards LLP Eversheds LLP How to find Pendragon PLC’s offices Visit Contacts on the company’s website www.pendragonplc.com. The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Stock Classification The company’s ordinary shares are traded on the London Stock shareholderenquiries@linkgroup.co.uk Exchange. Investment codes for Pendragon’s shares are: Tel: 0871 664 0300 London Stock Exchange: PDG Bloomberg: PDG.LN GlobalTOPIC and Reuters: PDG.L 194 Pendragon PLC Annual Report 20195 YEAR GROUP REVIEW Revenue Gross profit 2019 IFRS 16 £m 2018 IAS 17 £m 2017 IAS 17 £m 2016 IAS 17 £m 2015 IAS 17 £m 4,506.1 4,627.0 4,739.1 4,537.0 4,453.9 472.7 550.5 552.9 Operating (loss)/profit before other income (104.4) (30.1) (Loss)/profit before taxation (114.1) (44.4) 91.5 65.3 Basic earnings per share (8.4)p (3.6p) 3.7p Net assets Net borrowings (note 1) Other financial information 168.9 119.7 345.6 425.4 126.1 124.1 559.6 100.1 73.0 3.8p 372.8 79.6 548.9 96.4 79.0 5.0p 395.1 108.8 Underlying profit before tax (16.4) 47.8 60.4 75.4 70.1 Underlying earnings per share (note 4) Net debt : underlying EBITDA (note 6) Gross margin Total operating margin (note 2) After tax return on equity (note 3) Dividends per share (note 5) Dividend cover (times) (note 8) Interest cover (times) (note 9) Gearing (note 9) Business summary -1.2p 1.1 10.5% -2.3% -45.6% - - (1.7) 70.9% 2.8p 0.9 11.9% (0.7%) (13.1%) 1.50p 2.0 (0.5) 36.9% 3.3p 0.9 0.1 0.0 0.1 1.6 2.4 3.5 0.3 3.9p 0.6 12.3% 2.2% 14.5% 1.5p 2.7 3.7 3.7p 0.5 12.3% 2.3% 19.8% 1.3p 3.9 2.9 24.6% 20.1% Number of franchise points 166 186 194 196 200 note 1 Net borrowings comprise interest bearing loans and borrowings, cash and cash equivalents and derivative financial instruments, excluding lease liabilities. note 2 Total operating margin is calculated after adding back non-underlying items, and excluding other income. note 3 Return on equity is profit after tax for the year as a percentage of average shareholders’ funds. note 4 Basic earnings per share adjusted to eliminate the effects of non-underlying operating, non-underlying finance and tax items, see note 2.8 of the financial statements. note 5 Dividends per share are based on the interim dividend paid and final dividend proposed for the year. note 6 Full details of the calculation of the net debt : underlying EBITDA ratio are given in note 4.2 to the financial statements. note 7 Dividend cover is underlying profit after tax divided by the total of the interim dividend paid and final dividend proposed for the year. note 8 Interest cover is operating profit divided by net finance expense. note 9 Gearing is calculated as net borrowings as a percentage of net assets. Pendragon PLC Annual Report 2019 195 ADDRESS I Pendragon PLC Loxley House, Little Oak Drive, Annesley, Nottingham NG15 0DR TELEPHONE I 01623 725200 E-MAIL I enquiries@pendragon.uk.com WEBSITE I www.pendragonplc.com DESIGN I Creative Services Loxley House, Little Oak Drive, Annesley, Nottingham NG15 0DR 

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