Dignity Plc – Third quarter trading update November 2019

 

 

Dignity plc

Third quarter trading update

Dignity plc (Dignity, the Company or the Group), the UK's only listed provider of funeral related services, announces its trading update for the third quarter of 2019.

 

	39 week period ended 27 September 2019	39 week period ended             28 September 2018	Decrease (per cent)
Underlying revenue (£million)	225.4	244.2	8
Underlying operating profit (£million)	47.9	68.6	30
Number of deaths	432,000	455,000	5

Alternative performance measures

All measures marked as underlying in the table above and throughout this announcement are alternative performance measures. The reasons for the Group's use of alternative performance measures are provided in the section on alternative performance measures at the end of this announcement.

 

Financial summary

Operating performance in the third quarter was in line with the Board's expectations, driven by robust funeral market share and average income in line with the Board's expectations. Operating performance in the year to date was consistent with the Board's expectations allowing for the significantly lower number of deaths, particularly in the first half of the year. Underlying operating profit by division is summarised in the table below:

	13 weeks ended 27 September 2019	13 weeks ended 28 September 2018	39 weeks ended 27 September 2019	39 weeks ended 28 September  2018
Underlying operating profit by division	£m	£m	£m	£m
Funeral division	10.3	11.1	40.8	53.2
Crematoria division	8.8	8.8	29.6	32.2
Pre-need division	–	(0.3)	–	2.5
Central overheads	(7.9)	(7.4)	(22.5)	(19.3)
Underlying operating profit	11.2	12.2	47.9	68.6

 

Number of deaths

	2019	2018	Increase/ (decrease) (per cent)
First quarter	159,000	181,000	(12)
Second quarter	141,000	143,000	(1)
Third quarter	132,000	131,000	1
Year to date	432,000	455,000	(5)
Fourth quarter	n/a	144,000	n/a
Full year	n/a	599,000	n/a

 

As the table illustrates, the third quarter of 2019 witnessed deaths broadly comparable to the same period in 2018. If the number of deaths remained one per cent higher than the previous year in the fourth quarter, then 2019 would witness a total of 577,000 deaths; 3.7 per cent lower than the previous year and the lowest number of deaths since 2014.

Based on updated data released in October 2019, the Office for National Statistics ('ONS') has increased its forecasted number of deaths from 2020 by approximately 20,000 per year, increasing from approximately 600,000 in 2020 to approximately 740,000 in 2040.

 

Funeral operations

Key changes in the profitability of the Group's funeral business are detailed in the table below:

	H1	Q3	YTD
Funeral operations	£m	£m	£m
Underlying operating profit – 2018	42.1	11.1	53.2
Impact of:
Number of deaths	(7.0)	1.0	(6.0)
Market share	(2.0)	(0.9)	(2.9)
Average incomes	(4.4)	0.1	(4.3)
Cost base changes	1.6	(0.9)	0.7
Acquisition activity	0.2	(0.1)	0.1
Underlying operating profit – 2019	30.5	10.3	40.8

Funeral market share

Funeral market share continued to show a positive response to the Group's updated service offering and price points introduced since January 2018. The Group performed 52,100 funerals in the first 39 weeks of the year (2018: 55,700). Excluding funerals performed in Northern Ireland, this represented a market share of 11.9 per cent (2018: 12.1 per cent). On a comparable basis market share was 11.8 per cent compared to 12.0 per cent for the same period in 2018 and compared to 11.8 per cent for the whole of 2018 and 11.8 per cent for the first half of 2019. This compares favourably to the two years of significant market share decline witnessed in 2016 and 2017.

 

Average income

As demonstrated in the table below, average income per funeral in the third quarter was in line with the Board's expectations of £2,940. The Group continues to expect average income for the remainder of the year to remain at this level. The Board continues to assess the impact of its trials and its tailored funeral option is now expected to be rolled out across the business during 2020.

	Funeral type	Q1 2019 Actual	Q2 2019 Actual	H1 2019 Actual	Q3 2019 Actual	Q3 2019 YTD Actual
Underlying average revenue (£)	Full service	3,542	3,585	3,558	3,608	3,571
	Simple and limited service	2,159	2,000	2,089	2,000	2,063
	Pre-need	1,826	1,789	1,806	1,879	1,828
	Other (including Simplicity)	773	734	756	772	756
Volume mix (%)	Full service	52	53	52	52	52
	Simple and limited service	14	13	14	14	14
	Pre-need	27	28	28	27	27
	Other (including Simplicity)	7	6	6	7	7
Underlying weighted average (£)		2,691	2,705	2,694	2,717	2,693
Ancillary revenue (£)		213	233	225	227	234
Underlying average revenue (£)		2,904	2,938	2,919	2,944	2,927

 

	Funeral type	Q1 2018 Actual	Q2 2018 Actual	H1 2018 Actual	Q3 2018 Actual	Q3 2018 YTD Actual	Q4 2018 Actual	FY 2018 Actual
Underlying average revenue (£)	Full service	3,875	3,700	3,800	3,695	3,775	3,590	3,735
	Simple and limited service	2,100	2,340	2,240	2,420	2,315	2,435	2,350
	Pre-need	1,680	1,680	1,680	1,720	1,690	1,750	1,705
	Other (including Simplicity)	580	535	560	550	550	610	570
Volume mix (%)	Full service	55	48	52	44	49	43	48
	Simple and limited service	12	20	15	24	18	24	19
	Pre-need	28	26	27	26	27	27	27
	Other (including Simplicity)	5	6	6	6	6	6	6
Underlying weighted average (£)		2,883	2,713	2,799	2,688	2,756	2,637	2,734
Ancillary revenue (£)		212	225	224	233	239	260	239
Underlying average revenue (£)		3,095	2,938	3,023	2,921	2,995	2,897	2,973

 

 

Crematoria operations

Key changes in the profitability of the Group's crematoria business are detailed in the following table:

	H1	Q3	YTD
Crematoria operations	£m	£m	£m
Underlying operating profit – 2018	23.4	8.8	32.2
Impact of:
Number of deaths	(2.4)	0.2	(2.2)
Market share	0.8	(0.1)	0.7
Average incomes	(0.6)	(0.2)	(0.8)
Cost base changes	(0.5)	–	(0.5)
Acquisition activity	0.1	0.1	0.2
Underlying operating profit – 2019	20.8	8.8	29.6

Crematoria performed 48,500 cremations in the year to date (2018: 49,900), representing a market share of 11.2 per cent (2018: 11.0 per cent) for the first 39 weeks of the year.

Where possible, the Group is delaying the construction of its new crematoria pending the outcome of the Competition and Markets Authority ('CMA') investigation.

 

Pre-need operations

Active pre-arranged funeral plans were approximately 514,000 at the end of the period (September 2018: 478,000; December 2018: 486,000). Although a broadly similar number of plans were sold in each period, there was a slight increase in the number of trust based plans sold, offset by a reduction in the number of insurance based plans sold compared to the prior year. These plans continue to represent future potential incremental business for the funeral division.

 

Central overheads

As indicated in the Group's preliminary results issued in March 2019 the Group anticipates central overheads to be 25 to 30 per cent higher than in 2018. This reflects continued investment anticipated in the Transformation Plan.

 

Marketing and digital activity

Marketing activity continues, with a focus on maintaining and further developing the Group's improved digital presence. The Group has also recently run new campaigns advertising Simplicity.

 

Transformation Plan update

Activity in the third quarter has been focused on all aspects of the Transformation Plan. Crucially, the Group is due to launch trials of new ways of working and operational management in three pilot networks imminently. As part of this work, the Group is consulting with approximately 60 employees who currently work in those areas to identify the most appropriate roles for them on a case by case basis. The Group will provide a further update in its preliminary results.

The first technology changes to support the strategy have been introduced: the pilot networks will be supported with a new resource management solution, mobile technology for client facing funeral arrangers is being trialled and a new telephony solution has been implemented in our Client Support Centre.

 

Competition and Markets Authority investigation

On 28 March 2019, the CMA confirmed its widely anticipated full market investigation into the funeral and crematoria sector. Dignity welcomes the investigation and is cooperating fully with the CMA. In particular, it has established a strong working group of internal and external resource and will seek to focus on these key areas

• Quality of service provided to meet customer needs;
• Regulation of the industry to protect customers; and
• Capital employed in the crematoria.

The Group has continued to engage with the CMA to provide it with detailed information on the Group's operations in the at-need funeral and crematoria markets and its wider observations on these markets more generally. The Group looks forward to the publication of the CMA's working papers in due course.

 

HM Treasury

There are no further developments to report since the Group's interim results. The Group continues to anticipate regulation of pre-arranged funerals and is preparing accordingly.

 

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 September 2019 was 2.04 times (September 2018: 2.88 times; December 2018: 2.55 times). 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 September 2019 was 1.52 times (September 2018: 2.29 times; December 2018 1.98 times). These combined requirements are known as the Restricted Payment Condition ('RPC'). Given the ratios achieved, the RPC was achieved at September 2019. 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 (the 'securitisation group'). EBITDA for this calculation uses the last twelve months ('LTM') results and can be reconciled to the Group's statutory operating profit as follows:

	Q3 YTD 2019	LTM  27 Sept 2019
	£m	£m
EBITDA per covenant calculation – securitisation group	55.0	69.0
Add: EBITDA of entities outside securitisation group	8.7	11.7
Add: Non cash items(a)	(0.9)	(1.4)
Underlying operating profit before depreciation and amortisation – Group	62.8	79.3
Underlying depreciation and amortisation	(14.9)	(19.8)
Non-underlying items	(13.4)	(20.4)
Effect of IFRS 15	(1.4)	(1.4)
Operating profit	33.1	37.7

Notes

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

 

Outlook

The Board's expectations for 2019 remain unchanged from the time of the interim results in July. Operating performance in 2020 will rely heavily on the number of deaths, which may or may not revert to higher levels witnessed in previous years compared to the 576,000 seen in the last twelve months to September 2019. In addition, following the appointment of Clive Whiley as Chairman, the Board is also reviewing its current strategy in the context of the current challenges within the industry.

 

Mike McCollum, Chief Executive of Dignity, commented:

“I am pleased with the Group's progress so far this year. Although deaths are lower, market share remains robust, the Transformation Plan remains on track and our journey to build a more modern technologically enabled business that offers clients a high-quality service at a variety of price points remains firmly intact.”