Dignity plc

Interim results for the 26 week period ended 26 June 2020

Dignity plc (Dignity, the Company or the Group), the UK's only listed provider of funeral related services, announces its unaudited interim results for the 26 week period ended 26 June 2020.

Prior year adjustments

As described in the Annual Report & Accounts for the period to 27 December 2019, the Group has changed its accounting policy in respect of certain pre-arranged funeral plan trusts and revised its adoption of IFRS 15 accordingly. These changes were applied retrospectively and therefore certain statutory amounts in respect of the 26 week period ended 28 June 2019 have been restated on the same basis.  See note 1 for further details.

Alternative performance measures (APMs)

All measures marked as underlying in the table above and throughout this announcement are alternative performance measures. The Board believes that whilst statutory reporting measures provide financial performance of the Group under GAAP, APMs are necessary to enable users of the financial statements to fully understand the trading performance and financial position of the business. The APMs provided are aligned with those used in the day-to-day management of the business and allow for greater comparability across periods. Further detail may be found on pages 42 to 44.

Key points

·      Number of deaths significantly higher than average principally due to COVID-19

·      Funeral market share broadly stable

·      Average income per funeral materially lower due to restrictions in client choices

·      Strategic review on target notwithstanding impact of COVID-19

·      CMA Provisional Decision Report due by end of August

·      Business has prepared for possibility of lower volumes in coming years than original ONS expectations

Clive Whiley, Executive Chairman of Dignity plc, commented:

"The turbulent trading conditions experienced in recent months have reinforced the need for businesses to be managed proactively in order to respond promptly to unexpected events. In particular, I would like to pay tribute to our staff, whose tireless efforts to support each other and our clients during these testing times has gone some way to allowing adequate closure for the bereaved. Their professionalism and flexibility have been crucial to providing respectful, high quality care to the deceased and their families notwithstanding the daily obstacles presented by the pandemic: whether it be high levels of colleague absence, the costly challenge of sourcing personal protective equipment or managing the pressure on mortuary space.

Their resilience leaves me in no doubt that the conclusion of our root and branch review of the business will ensure the Group is ready for any challenge in the future. In the interim, our focus on controlling discretionary spending will enhance covenant headroom, which together with appropriate cash management will provide the time necessary to implement those plans without the need for external capital.

With the exception of business rates relief, we expect to complete 2020 without any direct financial support from shareholders, nor indeed Her Majesty's Government, without furloughing any employee and having reinvested any benefit from business rates relief in the protection of the welfare of our staff and our clients."

For more information

Clive Whiley, Executive Chairman

Steve Whittern, Finance Director

Dignity plc                                                              +44 (0)20 7466 5000

Richard Oldworth

Chris Lane

Tilly Abraham

Buchanan                                                                +44 (0)20 7466 5000

www.buchanan.uk.com                                        Dignity@buchanan.uk.com 

Executive Chairman's statement

Overview

The first half of 2020, and in particular the second quarter, has witnessed unprecedented times for the world. COVID-19 has impacted everyone's daily lives in dramatic ways. Our business has had to deal with the consequences of this pandemic, sadly having to help many more clients than usual remember their loved ones.

Our staff, wherever they work, have responded positively to the necessary changes, the government restrictions and the uncertainty that this environment has created. I am grateful to each of them for the role they have played during these difficult months and their efforts must be recognised as a subset of key workers who deserve all of our thanks.

Whilst this year's interim results are presented against the backdrop of COVID-19, various other areas relevant to the Group have received focus:

·      Continuation of the strategic review initiated when I joined the Board in September 2019;

·      The possible impacts of the Competition and Markets Authority ('CMA') investigation into the funeral and crematoria services market;

·      Regulation by the Financial Conduct Authority ('FCA') of the pre-need funeral industry; and

·      Board recruitment.

Financial summary

The number of deaths in the first half was 368,000 (June 2019: 300,000), 23 per cent higher than the same period last year. Underlying operating profits only increased by six per cent to £39.0 million (June 2019: £36.7 million). In broad terms, this reflects lower average incomes offsetting the financial impact of significantly higher funeral and cremation volumes.

Whilst this financial performance means that the Group has comfortably achieved the required covenant levels for its securitised debt, it remains prudent to plan for lower volumes in 2021 and 2022. As a consequence, on 25 July 2020 the Group completed an internal restructure of its trading assets which, together with our focus on controlling discretionary spend, will serve to further increase covenant headroom in the coming quarters.

Further details on the Group's financial performance and the internal restructure are provided in the business and financial review.

The impact of COVID-19

We have maintained our overall approach to the COVID-19 crisis as highlighted in May: we have not furloughed any employees, nor have we sought any financial assistance from Her Majesty's Government. Whilst business rates relief provided to all business premises within certain categories is expected to provide approximately £5.5 million of benefit in the 2020/21 business rates year, we expect all of that, and more, to be reinvested in personal protective equipment ('PPE') for the safety of our staff and our clients.

Operationally, we continue to plan for localised second peaks later in the third quarter of 2020. We have spent time understanding the lessons from the initial dramatic increase in deaths to ensure we can continue to respond professionally and safely.  A key part of this will be staffing: absence levels peaked at approximately 16 per cent compared to normal levels of one to two per cent. This was managed through a national provider of temporary resource. This arrangement remains extant for the time being.

Strategic review

The purpose of the strategic review is to position the Group for all eventualities, whether this is driven by the rapidly changing competitive landscape we operate in, through enforced changes resulting from the CMA's investigation or as highlighted by the pandemic.

The Transformation Plan, originally initiated in 2018, focused on funeral operations only and was being managed by a significant number of external contractors. The strategic review currently underway is challenging every aspect of the Group's operations principally using the experience and support of existing staff. In effect, it will focus upon a continuous evolution of the business implemented as a series of business as usual activities, rather than a discrete Transformation Plan. This will build on the learnings from the earlier transformation work alongside several operational and pricing trials already in progress, albeit distorted by the recent experience due to COVID-19.

Whilst our plans continue to develop, the high funeral and cremation volumes, combined with enforced restrictions in client choices, has necessarily required the Group to focus on existing operations. No further trials have been conducted in recent months and the Group is currently considering when and how best to begin further tests. The Group therefore anticipates making further comment on its strategic review in November as part of its third quarter trading update.

CMA

On 28 May 2020, the CMA issued an updated administrative timetable. Consequently, their Provisional Decision Report is expected in August 2020. This will be followed by response hearings in the autumn, which the Group anticipates being invited to participate in. The CMA has set a deadline of 29 January 2021 for any final responses to the Provisional Decision Report, consistent with their legal requirement to issue the Final Decision Report on or before 27 March 2021.

The Group has continued to engage positively with the CMA, responding to its information requests expediently and also providing detailed information to highlight the significant industry changes in 2019 and 2020, even before the impact of the pandemic. The Group will make further announcements as appropriate.

Pre-need regulation

As confirmed on 7 May 2020, HM Treasury intends to introduce secondary legislation in the fourth quarter of 2020 to bring pre-arranged funeral plans firms under the remit of the FCA. Regulation of the pre-need industry should follow 18 months after the enactment of this legislation.

Whilst the precise implications of regulation are not yet known, the Group continues to believe that regulation is necessary and welcomes its planned introduction as a required forerunner to further industry growth.

The Board

Since the preliminary results, I am delighted that both Dean Moore and Gillian Kent have joined the Board as non-executive Directors and Chair of the Audit Committee and Remuneration Committee respectively. These appointments conclude the changes in non-executive directors and I look forward to the business benefitting from their combined retail and digital experience.

The Group continues to progress its search for a Chief Executive and further announcements will be made as and when appropriate.

Outlook

Given the various uncertainties currently facing the business, the Group is not providing guidance on 2020 and beyond. We are however confident that the strategic review will result in a sustainable growth plan for the business, leaving it ready to respond to whatever challenges are presented by its markets and other external factors, which we remain determined to deliver without dilution for shareholders.

Clive Whiley

Executive Chairman

29 July 2020

Business and financial review

Introduction

For statutory purposes, the Group has two reporting segments, Funeral services and Crematoria. Further details may be found in the Group's 2019 Annual Report. Statutory financial results are shown on page 1.

The Group's underlying operations are managed across three distinct divisions: funerals, crematoria and pre-arranged funeral plans. Funeral services relate to the provision of funerals and ancillary items, such as memorials and floral tributes. Crematoria services relate to cremation services and the sale of memorials and burial plots at Dignity operated crematoria and cemeteries. Pre-arranged funeral plans represent the sale of funerals in advance to customers wishing to make their own funeral arrangements.

Number of deaths

Sadly, deaths in the second quarter materially exceeded any level witnessed in the last 20 years. Should 2020 record a large number of deaths, beyond the 600,000 originally anticipated by the Office for National Statistics, then it is possible that 2021 and 2022 could experience a lower number of deaths than in 2019 (584,000). The Group will not speculate on the most likely outcome.

Funeral operations

At 26 June 2020, the Group operated a network of 807 (June 2019: 826; December 2019: 820) funeral locations throughout the UK, generally operating under established local trading names. The change to the portfolio reflects 13 closures. These closures represent locations where leases have naturally come to an end and have not been renewed and also include three freehold closures.

The table above demonstrates that the financial performance in the first half of 2020 is linked strongly to the impacts of COVID-19 and resulting client choices.

Market share

In the first half of 2020 the Group conducted 46,000 funerals (June 2019: 36,200; December 2019: 69,400) in the United Kingdom, a 27 per cent increase on the prior year. Just over one per cent of the funerals in each period were performed in Northern Ireland. Excluding Northern Ireland, these funerals represented approximately 12.4 per cent (June 2019: 11.9 per cent; December 2019: 11.7 per cent) of total estimated deaths in Great Britain. Year-on-year growth in market share is primarily attributable to growth in Simplicity and pre-arranged funeral plans. Market share of full, simple and limited funerals was broadly flat year-on-year.

Whilst funerals divided by estimated deaths is a reasonable measure of Dignity's market share, the Group does not have a complete national presence and consequently, this calculation can only ever be an estimate. The current crisis means that analysis of the various trials being undertaken by the Group is unlikely to be meaningful in the coming months, as clients are unable to make all the choices they would normally make to personalise their funeral arrangements. Allied to this, market share is calculated based on a fixed assumption of one week between the registration of the death and the date of the funeral. Therefore, if clients choose to delay funerals, calculations of market share, particularly over shorter periods, may not be comparable.

Funeral mix and underlying average income

As demonstrated in the table, overall average income in the second quarter of 2020 was significantly lower than the first quarter. Limitations on attendance at funerals, closures of places of worship and the Group's decision to withdraw limousines from service in the interest of the welfare of our staff and clients all served to reduce average income on full service funerals. Allied to this, such restrictions resulted in significantly more clients choosing a simple funeral rather than a full service funeral. Finally, these restrictions also resulted in lower sales of ancillary items such as flowers and memorials.

Whilst on average in the second quarter, 41 per cent of clients selected a full service rather than a simple funeral, at its lowest, only 35 per cent of clients were selecting a full service funeral. Relaxation of some of the restrictions, together with the reintroduction of the Group's limousines following the installation of dividing screens behind the driver, has collectively meant that this ratio has once again started to increase, with the most recent data indicating approximately 60 per cent of funerals being full service rather than simple. The Group expects this proportion to continue to increase in the coming weeks.

Crematoria

Crematoria operations

The Group operates 46 crematoria (June 2019: 46; December 2019: 46) and is the largest single operator of crematoria in Great Britain.

The Group performed 42,500 cremations (June 2019: 33,800; December 2019: 64,800) in the period. These volumes represent approximately 11.6 per cent (June 2019: 11.3 per cent; December 2019: 11.1 per cent) of total estimated deaths in Great Britain. However, a greater proportion of cremations performed were direct cremations, where the funeral director was either Dignity (i.e. the Simplicity offering) or other funeral directors. Consequently, average cremation revenue reduced to £875 (June 2019: £911).

In addition, crematoria were required to keep their grounds closed, save for acts of cremation. Consequently, sales of memorials in the second quarter declined, resulting in average revenue per cremation from memorials and other items of £151 per cremation (June 2019: £273 per cremation).

However, crematoria grounds are now open and changes have been made to the Group's locations to ensure clients and staff can discuss memorials safely. To many people, such memorials are an important permanent tribute to their loved one, hence it is anticipated that a proportion of the sales that would have been made in the second quarter will instead be made in the second half of the year.

Pre-arranged operations

Active pre-arranged funerals were approximately 537,000 at the end of the period (June 2019: 503,000; December 2019: 523,000).  After a solid start to the year, sales of pre-arranged funeral plans in the second quarter fell slightly behind prior year, as certain routes to market involving face to face selling became difficult. However, demand for such plans remains clear and the Group is optimistic of its ability to market plans in the future.

In its 2019 Annual Report, the Group disclosed that the actuarial valuations of the Trusts that hold and invest monies of a significant proportion of the active pre-arranged funeral plans showed a surplus equivalent to two per cent of the assets held. This valuation is based on the amounts the Trusts are expected to pay when a funeral is performed rather than the actual cost of performance (being a lower amount) to the Group. The Trusts' investment strategies are expected to provide returns in excess of inflation in the longer-term, but will however, result in volatility year-on-year in the value of the Trusts' assets. As a result of the impact of the current crisis on global markets, this volatility has been seen since the year end. After a reduction in market values in the first quarter, information as of the end of June estimates that the position has improved and that the actuarial valuation would now show a broadly neutral position. This reflects the market value of the reported Trust assets decreasing to £920.1 million compared to £947.5 million at the end of 2019 (June 2019: £926.3 million).

The pre-need trustees are currently reviewing the investment strategy of the pre-need trusts, focused on providing the Trading Group with greater certainty over amounts to be paid when funerals are performed in a rolling five year period (by retaining cash or high quality bonds to cover these liabilities), together with implementing an overall investment strategy with lower aggregate management and execution costs.

Central overheads

Central overheads relate to central services that are not specifically attributed to a particular operating division. These include the provision of IT, finance, personnel and Directors' emoluments. In addition, and consistent with previous periods, the Group records centrally the costs of incentive bonus arrangements, such as Long-Term Incentive Plans ('LTIPs') and annual performance bonuses, which are provided to over 100 managers working across the business.

Central overheads are expected to reduce as part of the strategic review.

Marketing and digital activity

COVID-19 has required the Group to evolve its marketing propositions in a sensitive manner. Developments in services such as Funeral Notices have allowed clients who may be holding a subsequent memorial service to retain and update their notices for a longer period of time.  Work to support funeral operations has helped to ensure the Group's offer of a Timeless Service during the crisis has been appropriately communicated.

Underpinning these activities, the Group's websites continue to evolve and the Group's average natural position in relevant searches continues to improve.

The strategic review will conclude on the manner in which the Dignity brand is most appropriately used in the short, medium and long-term.

Simplicity Cremations

Simplicity continues to be a relevant proposition for clients and the Group has seen meaningful growth in the first half of the year. However, some selection of Simplicity and other direct cremation activity may be driven by the restricted choices clients had in the second quarter of 2020 due to COVID-19.

Corporate development activity

The Group has planning permission for four crematoria. The total capital commitment for these projects is expected to be approximately £26 million to £27 million, with £6.1 million of this amount having already been invested. Each of the locations with planning permission will take five to seven years to reach maturity, performing 800 to 1,000 cremations per year.

In addition, the Group has one location where it is appealing the planning decision and another two that are currently in the planning process.

The Group's strategic review will determine the next course of action for these locations.

Earnings per share

Underlying earnings per share increased 11 per cent to 41.8 pence per Ordinary Share, principally driven by the six per cent increase in underlying operating profits.

IFRS 16, Leases transition

The Group has adopted the new accounting standard in 2020. In broad terms, this standard requires the Group to recognise an asset and liability on its balance sheet for operating leases that were previously held off balance sheet. As approximately half of the Group's funeral properties and some of its crematoria are leased, this has had a material impact to the Group's statutory results.  The Group has recognised an initial asset of £94.5 million and an initial liability of £93.5 million. Under the transition approach being followed comparative results for the prior period are not restated.

At the half year the Group held a right-of-use asset of £91.4 million and a corresponding lease liability of £91.4 million.  Furthermore, in the period, operating costs of £6.0 million were replaced by a depreciation charge of £4.6 million and a finance cost of £2.4 million.

The adoption of IFRS 16 does not impact the Group's securitisation covenants, as the Securitisation Group has exercised its ability to disregard the impact of the new standard to maintain consistency of measurement.

For more information see note 20.                                       

Alternative performance measures

The Group's alternative performance measures are stated before non-underlying items and the effect of consolidation of the Trusts, applying IFRS 15 and adopting IFRS 16 as defined on page 42. These items have been adjusted for in determining underlying measures of profitability as these underlying measures are those used in the day-to-day management of the business and allow for greater comparability across periods. In particular, as the Group's change of accounting policy in respect of the Trusts has not impacted the way it operates or considers the economics of this operating activity, underlying measures have not had to be restated as a consequence of the accounting policy change.

Detailed information on non-underlying items is set out on pages 42 to 44 and a reconciliation of statutory revenue to underlying revenue is detailed in note 2.

Accordingly, the following information is presented to aid understanding of the performance of the Group:

(a) Transformation Plan costs includes settlement costs in respect of the former Chief Executive.

(b)                   Further details of alternative performance measures can be found on pages 42 to 44.

Cash flow

The Group continues to be strongly cash generative. Cash generated from operations, before non-underlying items, was £54.9 million (2019: £41.3 million). This cash generation reflects continued efficient operating profit conversion. Other working capital changes were consistent with the Group's experience of converting profits into cash. These changes fluctuate year-on-year as a result of timings of the Group's period end and the level of bonuses paid.

In addition to the corporate development activity in the period, the Group spent £6.5 million (2019: £8.0 million) on purchases of property, plant and equipment.

(a)       Maintenance capital expenditure includes vehicle replacement programme, improvements to locations and purchases of other tangible and intangible assets.

Cash flow and cash balances for the Trading Group

Cash balances held by the Trading Group at the end of the period were £80.3 million (June 2019: £49.8 million; December 2019: £57.9 million). This includes £16.9 million of restricted cash (June 2019: £nil; December 2019: £16.9 million), see note 8. Of the remaining amount, £36.4 million (June 2019: £36.1 million; December 2019: £29.8 million) was held by Dignity plc. Subsequent to the balance sheet date, £16.3 million was transferred from the Securitisation Group to Dignity plc.

Taxation

The Group's effective tax rate for 2020 is expected to be approximately 21 per cent before the effect of non-underlying items. The effective rate for 2021 and beyond is expected to be approximately one and a half to two per cent above the headline rate of Corporation Tax for the relevant period.

In the March 2020 budget, legislation to reduce the headline corporation tax rate from 19 per cent to 17 per cent was cancelled. The impact of this reversal on the measurement of deferred taxation has been recognised as an exceptional item in the period. See note 4 for further details.

Capital structure and financing

Secured Notes

The Group's principal source of long-term debt financing is the Secured Notes issued in 2014. The principal is repaid completely over the life of the Secured Notes and is therefore scheduled to be repaid by 2049. The interest rate is fixed for the life of the Secured Notes and interest is calculated on the principal.

The key terms of the Secured Notes are summarised in the table below:

On 9 July 2020 Fitch revisited the rating of the Secured Notes, reconfirming them at the above ratings.

The Secured Notes have an annual debt service obligation (principal and interest) of circa £33.2 million.

It is not currently possible to issue further Secured Notes, as such an issue would require the rating of the Secured B Notes to raise to BBB by both rating agencies. In any event, the Group does not have any requirement to issue any further Secured Notes for the foreseeable future.

Secured Notes Financial Covenant

The Group's primary financial covenant under the Secured Notes requires EBITDA to total debt service to be above 1.5 times. The ratio at 26 June 2020 was 2.15 times (June 2019: 2.05 times; December 2019: 2.13 times). The Group therefore had EBITDA headroom of approximately £22 million against its financial covenants at the end of June 2020.

In addition, in order for the Group to transfer excess from the Securitisation Group to Dignity plc, it must achieve both a higher EBITDA to total debt service ratio of 1.85 times and achieve a Free Cash Flow to total debt service (a defined term in the securitisation documentation) of at least 1.4 times. This latter ratio at June 2020 was 1.72 times (June 2019: 1.53 times; December 2019 1.65 times). These combined requirements are known as the Restricted Payment Condition ('RPC'). Given the ratios achieved, the RPC was achieved at June 2020. If the RPC is not achieved, then the Group's ability to pay dividends could be impacted. These covenant calculations use a prescribed definition of EBITDA detailed in the loan documentation and only represents the profit of a sub group of the Group which is party to the loans. EBITDA for this calculation uses the last twelve months ('LTM') results and can be reconciled to the Group's statutory operating profit as follows:

Notes

(a)    The terms of the securitisation require certain items (such as pensions) to be adjusted from an accounting basis to a cash basis.

As set out in note 10, the Group's gross amounts owing on its debt obligations were £547.0 million (June 2019: £551.8 million; December 2019: £551.9 million). Net debt was £478.8 million (June 2019: £502.2 million; December 2019: £506.2 million).

The market value of the Secured Notes at the balance sheet date was £479.7 million (June 2019: £501.4 million; December 2019: £499.7 million).

Whilst the Group has no plans to do so, should it wish to repay all amounts due under the Secured Notes, the cost to do so at 26 June 2020 would have been approximately £851 million (June 2019: £792 million; December 2019: £792 million). £235 million of this redemption cost relates to the Class A Notes.

Group restructure

On 25 July 2020, the Group used pre-existing abilities in the securitisation documentation to sell various trading assets held outside of the Securitisation Group to the Securitisation Group.

This action will allow the profit generated by these assets to be recorded as EBITDA for the securitisation covenant test and will therefore generate additional covenant headroom in the future. In the twelve months ended 26 June 2020, the assets now transferred generated approximately £12 million of EBITDA (and generated approximately £10 million in 2019).

As these assets acted as security for the Group's revolving credit facility ('RCF'), that facility has been reduced by £40 million to £10 million. The RCF is available until July 2021, with the option to renew, subject to the bank's consent at the time, by a further year. The margin on the facility ranges from 150 to 225 basis points depending on the resulting gross leverage. The RCF remains undrawn.

Trust balances

At the balance sheet date, the Trusts had £920.1 million (June 2019: £926.3 million; December 2019: £947.5 million) of financial assets and £10.3 million (June 2019: £13.7 million; December 2019: £15.5 million) of cash, which has been recognised in the consolidated balance sheet. The movement in financial assets from December 2019 to June 2020 is primarily attributable to remeasurement losses recognised in the consolidated income statement of £17.6 million (June 2019: remeasurement gain of £60.2 million; December 2019: remeasurement gain of £79.5 million) and net disposals of financial assets of £8.6 million (June 2019: net purchases of £5.3 million; December 2019: net purchases of £9.5 million).

Aggregated contract liabilities totalled £1,302.9 million (June 2019: £1,279.3 million; December 2019: £1,304.6 million) with the primary movement from December 2019 to June 2020 being sales of new plans of £37.6 million (June 2019: £44.9 million; December 2019: £91.2 million), increases due to significant financing of £26.8 million (June 2019: £27.3 million; December 2019: £54.1 million) and releases due to death or cancellation totalling £66.1 million (June 2019: £49.0 million; December 2019: £96.8 million).

Post balance sheet events

There were no significant post balance sheet events, other than the group restructure detailed earlier.

Forward-looking statements

Certain statements in this Interim Report are forward-looking. Please see page 47 for further details.

Going concern

In order to assess the appropriateness of the application of the going concern principle in these interim financial statements, the Directors have considered the principal risks and uncertainties and financial position of the Dignity Group.

The Group has carried out a diligent going concern analysis and considered the ongoing impact of the COVID-19 pandemic, on these financial statements. Full details of this analysis are set out in Note 1 to the financial statements.

Following consideration of the base case forecasts, and the range of downside and stress test scenarios, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Directors formally considered this matter at the Board meeting held on 24 July 2020. For these reasons, they continue to adopt the going concern basis for preparing the Interim Report.

Our key performance indicators

We use non-financial and financial KPIs to both manage the business and ensure that the Group's strategy and objectives are being delivered.

Group Performance

In addition to these key performance indicators, the Group closely monitors the results of its client surveys. Highlights of these results can be found on the following page.

(a)              H1 2019 relates to the 26 weeks ended 28 June 2019.

(b)             FY 2019 relates to the 52 weeks ended 27 December 2019.

Maintaining consistent high-quality and standards

We closely monitor the results of our client surveys which are conducted by our Funeral Services division. In the last five years, we have received approximately 160,000 responses. This is our measure of how these services meet or exceed client expectations.

Our consistently high satisfaction scores reflect the strength of our relationships with our clients. We listen to our clients and use our survey responses to focus on areas in which we can improve and add value.

The Dignity Client Survey 2020