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Good morning, and welcome to the Dignity Q1 Results Call.[Operator Instructions] Just to remind you, this conference call is being recorded.Today, I am pleased to present Mike McCollum, Chief Executive; and Steve Whittern, Finance Director. Please begin your meeting.
Good morning, everyone. Thanks for dialing in.So you'll have seen our first quarter announcement. As you're aware, we put out an early announcement giving a lot of this information about a month ago, but there is some additional information today, so what I propose to do is go through and just pick out some of the information in the announcement. And then we'll hand it over for any questions.So revenues slightly up on prior year, as we've previously said about a month ago; operating profits flat, slightly down if you adjust for adjustments and accruals in head office, which we've highlighted in the report, but nonetheless, as we've previously said, a much stronger performance than initially anticipated when we made our announcement in January that we were going to reassess the pricing in the funeral business. The improvement -- the level of performance is driven really by 3 main things and the first being that the number of deaths is significantly higher than we were anticipating. In the first quarter alone, we saw 181,000 deaths compared to 167,000 deaths last year, and that's had a significant impact on the profitability of the business.The second impact is the funeral mix. So we'd estimated that simple funerals, where we reduced the price, would go from 7% of our overall percentage of funerals to 20%. That was back in January. And we've previously said that moved very rapidly but settled at about a 15% run rate. So that has had an impact on our average income. And essentially by estimating 20% simple funerals, as you can see in the table in the announcement, we were basically saying we expected our overall average income to fall by approximately GBP 350 as a result of all of the changes that we discussed in January. In reality, in the first quarter, that average income has dropped by a lot less than that. And that, of course, has contributed to the profitability. Now some of that is because we reduced our prices in the middle of January. We generally book funerals anything up to a month ahead. And therefore, really of the 3 months that we're reporting on here, only 2 of them were in the new pricing regime. And the first month of January was under the old pricing regime. You can see that in the fact we've broken out simple funerals in the quarter where only 12% is what we reported, but the run rate is 15%. The 12% just reflects the January of the old percentage. So the deaths have had a profound impact on our profitability in the first quarter of the year. We would expect a high level of deaths to slow down as the year goes on, albeit it does look like deaths will be relatively at least consistent with last year during this year. And the mix shift has had a big impact in the first quarter.Picking out a couple of numbers.So we performed 21,400 funerals compared to 20,100 last year, so 11.8% market share in the first quarter compared to 12% in the first quarter last year. The full year market share for 2017 in funerals was 11.5% market share, so the 11.8% is an increase. To some extent, you can't read too much into a single quarter. And also, we did make some acquisitions last year that have flowed through into these numbers, but nonetheless we do highlight in the announcement that, in March and April, we saw our funeral market share performing in quite a promising way. And although it's far too early to say with great confidence, there are some signs that the changing pricing strategy that we introduced has had an impact on our funeral volumes in a positive way, which of course was why we reduced that pricing. But it is still early days. And as we've said several times in here, don't extrapolate things too much. Don't draw too many conclusions from it, but the initial signs are volume and the market share is responding to some extent to the price changes that we've made.Then we talk a bit about further price trials. So the way that we'd described this before is for 2018, up to -- up until fairly recently, we felt we had a strong handle on the relationship between the price in our funeral business and the volume in our funeral business. Then as we've talked about before, we saw the rates of volume attrition in our funeral business accelerate in 2016 and 2017, and that's what we're responding to. So 2018 in many ways is developing a clear understanding of the new relationship between price, volume and promotional spend. Our objective is to stabilize our funeral volumes. The unknowns, the things we're trying to discover are what average income is consistent with stable volumes, what level of promotional spend is consistent with stable volumes. In the past, we've spent very little promoting the business. We relied very heavily on word of mouth, very heavily indeed. And looking into the future, with the objective being to stabilize volumes, promotional spend, particularly digital promotional spend, will become a significant part of our costs looking into the future. So what level of average income and promotional spend is consistent with our objective of stable volumes? And in 2018, through a number of tests and work that we're doing, that's what we need to establish.So we've given you some information in here about the tests that we're doing. In essence, in certainty -- and we're doing this across our business. So about 1/4 of the business is the controlled cell, and then 3 individual quarters are test cells. And there are various combinations of introducing a package between our full-price traditional funeral and the newly reduced price simple. What does that do? Does that take people up from the simple and improve our average, or does it just drag more people down from the traditional? And the other thing we're testing is what happens if we reduce the traditional price; and we put a cap on there of -- excluding limousine and disbursements, of GBP 3,395. So any of our businesses in the test cells where the starting price for a full traditional funeral is above that has been capped at GBP 3,395 starting price. Obviously the overall average will be higher because there are some choices that people make.So those are the things that we're testing. It's -- the tests have been in for 3 or 4 weeks. It's too early to say. We can draw some conclusions from them, which the most important one being that what we've seen in the results so far don't give us any cause for panic for the rest of the year; and the expectations, the financial expectations, that are in the market, we're not seeing anything in the tests that would make us feel unhappy about those financial expectations. But after only a month of data, it's very difficult to draw real meaningful, full conclusions on either average incomes or the volumes that we're getting as -- in response to the different prices that we're offering. And in many ways, we've been asked a few times why don't we just test in a very small way. And the problem in the funeral business is, with an average of 90 funerals per location per year, and although national deaths are quite stable over a 1-year period, at a local level they can bounce around 20-plus percent per year, separating noise, what's going on with local deaths, from what's happened as a result of the changes that we've made is difficult. You need bigger numbers, which is why we're testing these things in a pretty major way.So those are the tests we are running. We expect those to continue for another month or 2, and then we'll reevaluate them. And I think realistically, throughout the whole of 2018, there will be various other things that we will be trying and testing. Notwithstanding that we still and will give you the update of our strategic review, our internal operational review in August, this year will continue to be understanding what average income and what level of promotional spend are consistent with our objective of stabilizing our volumes.Then a couple of comments just on digital.So I've mentioned that promotional spend is likely to increase. We spent GBP 1 million on digital in addition to what we would normally spend on promotion in 2017. We said we expect to spend another GBP 2 million in 2018. And my sense already, looking at some of the things we are doing and the people that we're putting in place, is that the spend on promotion is only going to increase over time and could become quite a material number. Again not inconsistent with expectations that are in the market at the moment, but the amount that we spend -- and it will be primarily digital marketing, not exclusively but primarily. The amount that we spend on digital, I think, is likely to be more than the GBP 2 million that we've talked about so far and is likely to increase over time.We are making other changes in our business. One of the interesting ones is improving the way we handle inbound telephone quotes. So we've noticed and commented that more and more people are shopping around, looking for pricing information. And one of the reasons we reduced our prices was to put ourselves back in the game so that, when we receive an inbound phone quote, we've got something to offer. We're improving the technology that's available to our staff out in the fields so that when they receive one of those phone quotes, they are able to give the information in a punchy way, follow it up immediately with an outbound marketing e-mail and then follow that up. So there's a lot of training going around, 800-plus branches. It takes a while, but we expect the training for that new piece of kit and software to be completed by the end of June. And again, it's aimed at just making sure that we make the most of what is essentially an inbound sales call when somebody calls to talk to us about the price of a funeral.And we've also -- again we've talked about this before, but having launched our Simplicity unattended direct cremation service about a year and a bit ago, we've now added the option of attending one of our 45 crematoriums for a short committal-only service. That's just launched recently and very much aimed at competing with low-priced operators who are growing in number in the market. We are able -- because we own our -- we have the service centers to support our funeral businesses, we're able to collect deceased and look after the deceased. We have 45 crematoriums around the country. We're able to cremate people and provide a venue for people to attend the funeral. And this allows us without really very much or any incremental cost to our business to compete in the cheap end of the market on reduced-service funerals outside of our branches very effectively, with growing businesses there. So we've added the ability to attend a short committal service. And I expect later on this year that we will have the ability to have a full -- typically an hour, 45 minutes to an hour, a full attended service at one of our 45 crematoriums, again specifically aimed at the very low-priced end of the market, not catered to in our existing 826 funeral branches.We talk about regulation. The funeral business is completely unregulated. The pre-arranged business is completely unregulated. We've been calling for regulation in the funeral business. And also, more specifically we launched a white paper in April calling for formal regulation of the prepaid funeral market. And we've also been supporting Fairer Finance, who continue to comment there and say that the pre-arranged market should be fully regulated.We've mentioned previously that we are conducting a full operational review of our business. How do we present ourselves to our clients? How do we configure our network of 800-plus funeral locations in a more efficient way? And what kind of central resource do we need to support that? It's likely that we may seek to get more efficiency out of our network, and we may see some increase in our central resource to support a more efficient network. Our costs at the end of the day are people, process and property. People are over half the costs of our business, although certainly we will find ways of using improved IT to support the logistics of our business. And that'll be the main way that we're able to both improve the service that we're providing to people and take costs out of the business.So we've said that, in August, we will update you on the work that we are doing. And I expect in August that what we will be saying is there will be investment required in our business: as I said, IT, particularly to make our processes and the way we deliver our service more seamless, more efficient, frankly, more up to date. There will be expense involved in doing that. Also, there will be time involved in doing that. When we get the results of the operational review in August, I'm expecting that we will set out how much money we think it's going to cost and also how quickly we will do it, but I will say now that I expect it to be a multiyear plan. We're not talking about a quick sticking class through in August and it's all done by Christmas. We're talking about a pretty comprehensive -- or a very comprehensive review of the way that we operate our business, the processes, the IT support that's necessary for it. And it will be a multiyear plan to transform the operations of our business. And we're still very much on track with reporting on the results of deliberations in August when we announce our interim results.So very quickly, just to conclude.It's a very strong first quarter. The numbers are flattered by the number of deaths, which we would expect to slow down later in the year, but there are signs of optimism. The tests we're doing, so far, are not producing average incomes that are inconsistent with our full year expectations and beyond. There are signs that our market share is responding to the pricing initiatives that we've taken. And we're making good progress on looking at the operating costs side of the business as well, but you cannot extrapolate a single quarter to the end of the year. So there is a note of caution there that just says this year, 2018, is about understanding the relationship between price, volume, and promotional spend and underlying costs. And therefore, there will be a degree of volatility. And there are bound to be some surprises as the year wears on. But as I sit here today, I'm pleased with the progress that we've made so far, and I look forward to reporting on further progress in August.So I'll hand it over for any questions.
[Operator Instructions] Our first question comes from the line of Michael Donnelly from Panmure.
Mike, just a quick one for me. And of the 826, and I guess it's now 827, branches that you've got, is there any more color you can share with us on roughly what proportion of them you think, for example, are doing fewer than a couple of funerals a week? Or anything that can help us segment those in our minds?
Not at this stage. I mean the stuff that we -- I've just said there. So we average 90 funerals roughly per location. You would expect that, that 90 isn't split evenly. It's not a perfect 80-20 distribution in terms of volumes and locations. I think I'd say it's about 1/3 of our locations do 2/3 of our volumes, so it does mean that there are a significant number of really very small locations doing one funeral or less per week. But at the moment, pretty much all of those locations are profitable at an operating profit -- at a contribution level, at a branch contribution level. So it's not that there is like an easy win where you just shut a load of locations and interest -- instantly the profit pops. There are all profitable as things stand. Or mostly profitable as things stand, but we do have a lot of locations with very small volumes of funerals.
Our next question comes from the line of Cora McCallum from Investec.
You referred to your pilot study on the traditional funeral products where the starting price is no more than GBP 3,395. As you point out, this is the bespoke package, so the average price is likely to be higher. Can you give us an indication of what the average price was for the trial in April and the comparable starting price for the current traditional funeral outside of the trial so we get -- we can put that in context?
At the moment, I mean, it's not information that we put in the announcement, and therefore I'm afraid the answer to that is no. I'm just trying to think of a way to be helpful within what I can and can't say. I mean in some cases applying the cap of GBP 3,395 -- so this is the starting price for the most basic coffin excluding a limousine; excluding any disbursements, so the cremation fee and things like that. So in some cases, a good number of our locations are already below that level and therefore are unaffected by this piece of the test, but for some of the locations that are affected it's quite a material reduction in their full-price traditional funeral. I mean obviously what the percentage of overall location is affected and how much it's affected by has gone into the maths of what we've done in formulating the test. So it's -- in some places it is quite a material reduction. And it'll be interesting to see what, if any, volume reaction we get to that. But other than that, I can't really give you any more granular detail at the moment, I'm afraid.
Okay, understood. And just for clarity: When you talk about the limo, this is in addition to the hearse that is already included in the package price, right? So that's more for the mourners.
Yes, yes, yes. The price includes the price of the hearse, but if you want to pay for a limo for attending family members to go in the cortege, then that's in addition. And about half of our funerals, people will choose a limo.
Our next question comes from the line of Franc Gregori from Trinity Delta.
Just a couple of points. When you talk about this pricing trial, I'm intrigued. I realize you say it's only 1 month into it, so it's difficult to extrapolate anything, but what type of results are you seeing? Are there any clear demographic shifts? Is it down to the area, the wealth? Is it regional? Can you give any color on that? Also, looking at your pipeline of acquisitions. You've only made one in the period, but are the valuations, the prices that you're playing -- paying that much less than they were? Can you give a feel for what you are now paying for these things?
Okay, so on the demographic front, I'm afraid again it's the answer is no. We haven't included any more granularity. And it really is too early to say. When you start looking at the numbers, even doing 1 quarter or 3, well, 4 quarters, being the 4 test cells, there's about 1,000 funerals, roughly 1,000 funerals, in each test cell so far, roughly. And even those numbers are just too small to draw any really detailed, granular conclusions from. So there's nothing very much more to report on that. On the acquisition side, no is the answer. So the prices that other people in the market seem to be willing to pay for funeral acquisitions continue to be at about the level they always were. Whether that will change over time, I don't know. We've always been quite picky about the acquisitions that we buy. We've had a clear -- we've had clear criteria for what we think will work once it's taken away from the private owners and what won't. We go back and we retest our assumptions very regularly. And I continue to look right back to 2002, which predates our IPO; and the things we bought in those days; and how they're performing now against the financial expectations we had for them at the time. And so we will continue to be very careful in our selection of acquisition targets. And history suggests we've done a good job in the past, by the way, a very good job in the past, so we'll continue to apply our strict criteria. And if anything, we will apply those criteria even more strictly than we have been recently. And acquisitions, generally we'll continue to keep a watching brief on them. So at the moment, when you make an acquisition, what you're buying is previous goodwill, goodwill that somebody has built up over a generation or generations in a local community. That's essentially what we're buying. 2/3 of our business continues to be word of mouth, and therefore against that backdrop, making acquisitions of well-established family funeral businesses continues to make sense for us, we think, as a good use of our capital, but obviously we will continue to evaluate that. And if it becomes clear that we are able to attract new customers in quantifiable ways; and in a way that makes financial sense via digital marketing, for example, then it may be that making acquisitions of funeral businesses in the future doesn't make so much sense. I think it'll take us a long time to get there. And therefore as things stand, making acquisitions of well-established businesses continues to make sense, but we're aware of the fact that might not be the case a few years from now.
Our next question comes from the line of Charles Hall from Peel Hunt.
A few questions. So firstly, with the -- when the -- when you finish the trials, should we assume that the price points that you've set out here will be the eventual price points you stick on? Or are these still up for grabs in the trials, i.e. that could you alter them post the trial period? Or could you introduce new price points?
So yes, very much these are our first stab, hopefully an educated guess, about what might work or might not, but over time, our thinking will evolve. So we can withdraw what we've been trying, try at different price points. Everything is still up for grabs.
You can see us trialing more price points, Charles, before we go completing that.
Yes.
Okay, got it. Secondly, may be a too short a time period to judge, but just wondering if there were any implications from the pre-need volume being 28% in Q1, a fair bit shy of your expectation for the full year; and also ancillary revenue being a fair bit lower in Q1 compared to prior year and your expectations.
So the pre-need bits, it's hard to say. We know that, each year, pre-need -- in the past, pre-need as a percentage of the whole has increased. Our pre-need backlog continues to increase, so you'd expect the number of funerals we do each year to grow. It hasn't, as a percentage of the whole, increased quite as much as we expected. It's gone up a bit but not so much, 28% rather than 30%. Is that symptomatic of the fact that the rest of the business is doing a bit better than we might otherwise thought? It might be, but as we said, there has to be a note of caution. And we are saying that we think the market share is looking positive, but it's only over a 2-month period. It's far too early to say that, that might be a conclusion of why the pre-need, the percentage, isn't quite as high as it might otherwise have been.
And could it be just because there have been more deaths in the period that, that could skew the numbers?
You'd think, whether you had a pre-need plan or didn't have a pre-need plan, that the overall number of deaths will affect both groups the same...
Depends how prepared you are [indiscernible], I suppose.
Yes. So it's -- I would expect normally, if there's more deaths, then it's the number of pre-arranged funerals that we do will go up. It follows the number of deaths. We don't see that many cancellations in our trust-based pre-arranged plans. The -- that part of the backlog [ remains ] the vast majority of it. So pre-need is usually a pretty good indicator of where our volumes are at, and -- but it does bounce around a little bit over a short period of time.
Yes. And when you said -- say strong market share data in March and April, just to put that in context. Obviously you have been losing market share, so when you say strong market share, does that mean your market share reduction is just narrowing? Or are you actually meaning that you're in line with the market or ahead of the market?
To be honest, on a monthly basis it bounces around far too much, but it's just a slight feeling of -- it's just behaved -- it's behaved better than we might have thought. And that's pretty much all I can say.
I.e. so you do still expect to lose market share but just not as much.
I think a working assumption of losing market share is sensible. Our overall objective eventually has to be and is to stabilize our volumes, but I don't think that's the work at the moment.
Yes, okay. And then just lastly, on number of locations. With more people shopping around, changing market environment, does that make you question more the number of locations, with the ones doing a small number becoming more marginal? Or -- and if you were to reduce the number of locations, how much of an impact do you think that would have on your overall volumes?
So one of the questions we are working hard at is what is the purpose of our branches. And they have 2 purposes. Number one is they're effectively a great big sign, so they're effectively billboards, inviting people to come in and use our business. So they produce revenue, from that point of view. And the other is they're a means for us to provide our service to our clients, so it's a place to meet and arrange funeral. And it's a place for you to come and pay respects to the deceased person if that's what you want to do. If the only purpose of a branch was the latter, the servicing the clients, then you could just take a map and you could say, okay, we need branches in these places because we've got the kind of coverage and the drive times that we need, but they clearly do have a revenue-generating impact. So when we look at the branches -- and we may in the end map out a sort of pro forma branch network for the future, but I think going from where we are to maybe a theoretically perfect branch network is that's quite a long-term thing. That's several years. It's not the work at -- of a moment because they do produce revenues. And they are, as I've said, by and large, profitable as we speak at a branch level. So I think pruning the branches -- whilst it's very much something we're looking at, pruning the branches is -- it's not at the top of the list.
[Operator Instructions] Our next question comes from the line of Calum Battersby from Berenberg.
Mike, Steve, 2 questions from me. Firstly, can you provide any more color on the acquisition made in the period? GBP 3.8 million is obviously a fair bit higher than the average [indiscernible] on a single site, so can you provide any color on the multiple paid for that? And secondly, wondering. With the simple funerals, since beginning this exercise, have you found you've been able to take out any costs from that process to improve the gross margin on that type of service related to the full-service funeral?
Okay, if I do the Simple Funeral bit, first. The way I think about the costs of our business, we have a large -- a high degree of fixed costs in the business. And so we've got our branches. We've got the people in the branches. Then we've got 100 or so service centers that -- connected to the logistical centers, I suppose. They collect the deceased. That's where the mortuaries are. They then transport the deceased on to there, the funerals. We've got our crematoriums. And we've got our head office function with our out of hours call service. So costs largely fixed. So the way I look at it is, pretty much any revenue that comes through the door, the gross margin on that revenue is exceptionally high. So whether it's GBP 1,995 for a Simple Funeral or GBP 3,800 for our average full-priced funeral, the gross margin, the cost of delivering the funeral is really quite low. The real costs are the fixed costs in the infrastructure of our business. So in terms of taking costs out of the Simple Funeral, no, not really. Where the costs -- if there are costs to be taken out, and I believe there are, they will come out of the fixed-cost structure of our business. And of course, average costs reflect volumes. If we can improve the volumes or stabilize the volumes, average costs start -- average cost per funeral starts to look a lot more healthy. And so in terms of direct costs at the Simple Funeral, no, not really. And I don't really materially expect those direct costs to change over time. It's volumes and fixed costs that are things we need to look at. On the acquisition front, we look for well established, so well-established, bigger-than-average businesses. And generally we don't identify the acquisitions that we make. And there's only the one here. All I can say is it's been -- it's consistent with what we've looked for in the past. It's a well-established, good-quality business. We expect it to be successful for us. The multiple that we paid would be in line with what we've traditionally paid, which we sort of said is 10x EBIT, 10x-plus of what we expect the first year operating profits to be, EBITDA less maintenance CapEx, so the sort of cash EBIT measure. So both from a qualitative point of view and in terms of the numbers, the valuation, it's very much consistent with what we've done in the past.
Our next question comes from the line of Nick Spoliar from WH Ireland.
Just a quick one from me just on expectations and volume expectations. I think you're saying that your overall expectations remain unchanged. Clearly, in terms of volume expectations, Q1 didn't turn out the way you'd expected. I don't know why you made the particular -- you have these particular volume expectations, but particularly you've highlighted where we are on the simple services that's quite a long way adrift. So irrespective of your overall expectations, your volume expectations for FY '18, are they still the same as they were before? Or are you saying they may be the same or they may change. We are going to wait and see how the portfolio mix works out in the different regions where we're trying different things?
So when we came out with the early announcement that the Q1 was strong, we saw an increase in expectations in the market for operating profit for this year, and so there was very much a reaction at the time to that information. And some of that reaction was volume based, and some of it was average income based. So in the round, we're happy enough with what's out there, but we're not really able -- or we're not willing to be too precise because there are lots of moving pieces. At the end of the day, our revenues are a function of average and volumes. And our objective in the longer-term has to be to stabilize our volumes. The average is maybe the more moving piece. So yes, we are saying that market share -- based on very small period of time is there are signs for optimism there. And that would feed through into volumes, and -- but in the round there are a lot of moving pieces that go into our profits. And isolating one particular aspect of it probably is too much.
Yes, so -- great, Mike. So in terms of the moving parts, it seems to me that the 1 part and the 3 parts, the 3 part -- the shape of those different portfolios must be quite complex as the moving parts. How do you manage to make the portfolios representative as it were?
So we've -- in a perfect world we would have done a strip from North to South. We would have a bit in Scotland. We'd have a bit in the North of the country, a bit in the middle and a bit in the South. We operate our business in 10 individual regions, and we've essentially taken those 10 regions and allocated them as best as we can to achieve that objective of North, middle south in the overall portfolios. Isolating -- but there is a lot of just regional differences in the numbers when you start getting into it. It's there's a lot of noise in the numbers. So we've done our best to be pragmatic and think about the tests, and as we get bigger numbers, things will stabilize a bit. Just Steve is the mathematician, more so than me, but at the end of the day, bigger numbers give you more stable outputs. And that's what we're looking for. So that's why we've done it. One -- there's 4 quarters of the business. Each of them has a different test cell. So 1 of them is the control. And we've tried to adjust the geography as best we can given the practicalities of our operations.
And presumably you could get certain market share arbitrage between different parts of the same region, dependent on what trial that they were offering.
I guess you could, right on the margin, but the funeral business tends to be a very small localized business. So typically you would see 80% of the volumes of our non-London branches come within 5 miles of our branches. So they really are geographically pretty specific. So yes, technically I guess you're right. There'll be some overlap between regions, but it's not that material.
Thank you. As there are no further questions, I will return the conference back to the speakers for the final comments.
Great. Well, thank you for dialing in.It's a positive start to the year. We're seeing positive information coming out of the changes that we've made to pricing and the trials that we have initiated. There's a lot more testing and trials to come during the year. And in August, we will reveal the results of our operational/strategic review of our business, of our funeral business. So in the round I would say we feel pretty positive about how things are looking notwithstanding the fact that we've made some pretty significant changes to the way that we present our business and the prices of the business.Thank you very much.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.