© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello. And welcome to the Dignity Plc Q3 Trading Update Call. [Operator Instructions] Today, I'm pleased to present Mike McCollum and Steve Whittern. Please go ahead with your meeting.
Thank you. Good morning, everyone. Thanks for dialing in.I'm going to make a few brief opening comments and then we'll hand over to the Q&A. So Q3, I'd say I'm pretty pleased with how things are going. We're making good progress on the objectives that we've set ourselves for the year. And to briefly recap, our 2 main objectives were to continue to explore and understand the relationship between price and market share, and then to continue to implement our transformation plan.Looking at price and market share, you can see the numbers, averages have worked out, well, I say the price, it's overall average mix. Overall average revenue achieved. You can see that our average income remains very consistent with what we've expected for the year, and there are no changes to our thoughts for the rest of the year on average income. And market share broadly stable. And again, compared to what we saw in particularly 2016 and 2017, where there was significant market share reductions, that stability in the market share for the second year running, it's reassuring. So price versus market share. I'm not saying we're all of the way there, but we're beginning to get a reasonable feel for where things sit at the moment in the market.On the transformation side, the objective is to streamline our operations. We've had a very decentralized and fragmented business as a result of acquisitions, and deliberately so. So streamlining the operations out in the field and centralizing admin. And again, we continue to make good progress on that. And in terms of timing and extent of what we hope to achieve, no changes to our thinking that we remain on track with the transformation plan.When I look -- the thing that is very different is the number of deaths. So we've seen the last 12 months to September, 576,000 deaths compared to 600,000 deaths in 2018, and that's a big reduction. What we have seen is deaths. So at the end of March, after a very quiet first quarter, where deaths were 12% down on the previous year, we said we expected broadly based on previous experience that deaths would come in around somewhere 580,000 for the year. So it's 576,000 LTM to the end of September. The deaths in the third quarter were slightly ahead of the prior year. So broadly, that 580,000-ish, it might be a fraction below that, but that's not millions of miles away.As a consequence, we updated our thoughts in terms of profitability for the year on the back of that very first -- on the back of the first quarter deaths. And there remain no changes to our expectations for 2019 in terms of profitability because it looks like the deaths are going to come broadly when we expected. So no changes for 2019.The other thing I'd draw attention to is, we continue to add central expense. So if our transformation plan is geared around automating and centralizing administrative functions that we currently do out in the field, we have to build that capability centrally before we can take that cost out of the field.So although it feels slightly uncomfortable to us, you're seeing an increase in the central expenses of the business. This is planned. This is consistent with what we've said previously and is necessary to allow us to take -- to streamline the operation out in the field and to take cost out of the field. So it is noticeable that central expenses continue to increase, but it is entirely consistent with the transformation plan that we've previously explained.So in the round, things are going as we expected and are pleasing. And as we look to next year -- well, there are 4 -- essentially, there are 4 moving parts. So the number of deaths. What's going to happen with the number of deaths? Generally, where we see a big reduction in deaths as we have this year compared to prior year. You often see a bounce back. Now that may or may not happen, but you do often see a bounce back. It's noticeable that the ONS have recently revised their population forecast, which include their death forecasts and have increased their expectations for the number of deaths over the coming years, but quite where the number of deaths will be next year is unknown to any of us. Your guess is as good as mine, but will have a big impact on the overall profitability of the business in 2020.The other 2 main things in terms of revenues, our average incomes and market share. And as I've said, market share has somewhat stabilized. I'm not going to sit here and say it's job done. There's still a lot of work to be done in terms of our promotional activity, in terms of achieving consistent market share and ultimately, growing market share, which is the objective. But so far, the relationship between average income and market share in 2019 looks reasonably stable. And then costs are the last component of what might happen next year.Transformation continues. And as a reminder, the objective for transformation is to have an annualized run rate of GBP 8 million savings compared to where we otherwise would have been by the end of 2021. And we're investing a net GBP 33 million of incremental CapEx to achieve that. And as I said previously, no changes to that, that continues. But in 2020, any savings are likely to be towards the end of the year. And overall, reductions in costs in 2020, as we previously said, are going to be relatively modest. But we should, by the end of 2020, be well on our way to the overall GBP 8 million of savings to jump off at the end of 2021.So pretty pleased with how things are going. No major changes to our assumptions. Big question mark about the number of deaths though for next year as this year, the number of deaths have been lower than expected. But broadly pretty content with how things are going at the moment.And then my last comment is, we have a new Chairman, Clive Whiley. He's just joined us. Very experienced Chairman. I'm delighted to have him on board. He has good shareholder backing as well. Fresh set of eyes, which is very important and very welcome. So clearly, as you'd expect, having arrived, he will be taking a good close look at everything we're doing in terms of our current plan. Are we doing the right things. Are we doing enough. Are we doing it fast enough. We should have more news on his thinking when we come out with our premiums in March. But as I said, very experienced Chairman and a very welcome addition. So that's the end of my comments, and I'll hand over to questions now.
[Operator Instructions] Our first question is from Matthew Webb from Panmure Gordon.
I was just wondering whether you would be able at this point to offer any sort of guidance on the kind of average income you'd be expecting next year? I know it's relatively early, and I appreciate there are lots of moving parts and various other uncertainties. But would you be able to offer any guidance at this stage?
It's a little tricky. Obviously, our thoughts are turning to next year. But when you look at 2019 -- so our thoughts for the rest of this year are that there'll be no change this year to our average income, and market share seems broadly stable. So I would have thought that's a good starting point.
And given you've seen in the past, when we were increasing average incomes, we saw declining market share, Matt, there's clearly an interaction between the 2. But like we say, at the moment, we've got a stable average income and alongside it, broadly stable market share.
Okay. I mean, like I guess at some point -- the fact that we obviously live in a world where inflation is ticking along at whatever it is at the moment, 2%, 2.5%. I guess at some point you might hope to start taking some modest increases, but I guess it's a little bit early to be doing that now, would that be a fair interpretation?
At the end of the day, the market remains very competitive. And so you've got the co-op at 16%, and you've got the vast majority of the market are small independent operators. And there continues to be a lot of, I would say pretty vigorous price competition in the market. So clearly, we don't operate in a vacuum. Anything we do has to be taken in the context of what our competitors do. And to some extent, we need to see what they do and see what the general direction of travel is. What we've seen looking at some of the pricing in the market is that we've seen small independent operators from our internal research, increased their prices somewhat in the last 12 months.Anecdotally, we've heard people are finding it a little bit difficult because the number of deaths is much lower than anybody expected for the year. And clearly, that puts -- this is a fixed cost business, so it puts pressure on everyone. Co-op's prices seem to have remained stable during the year. And when you look at full-service funerals, you can see that ours came down somewhat in the year, our full-service average has come down. So it's -- the reality is we don't feel in a position to give any very clear ideas as to which way our prices may go next year, but it remains a very competitive market.
Got it. Okay. Can I also just ask on your comment about where possible you're delaying the construction of new crematoria ahead of the CMA investigation? I mean, so in terms of specific sites and numbers, can you go into any sort of detail there? I mean are we talking about kind of -- is this sort of only really affecting 1 or 2 situations? Or is it broader than that? And what sort of -- well, I guess the time is going to -- dependent when the CMA reports, isn't it? But can you comment any more on that decision? And is that new? Or is that something that you've effectively been keeping a little bit of a hold on for a little while now?
So we have 3 sites with planning consent at the moment where we are effectively on the site. We have a number of other prospects. So what we are not doing is stopping prospecting. So our prospecting activity, submitting new planning applications, keeping filling the pipeline of new crematorium developments remains completely unchanged. What we are doing, though, with the 3 that are -- have planning consent and where we're on-site, before committing to the main construction project. So in each case, probably circa GBP 5 million of investment. We're just pausing, pending more clarity from the CMA next year. We expect next year to know which way they're headed before we crack on with signing the contracts for the full construction piece.So we fully -- we expect those crematorium sites to be developed. We're not stopping our prospecting, but we're just making I think the pragmatic decision to just make sure that something crazy doesn't come out the CMA that would render those -- the return on those investments not viable, in which case, we wouldn't proceed. But I don't expect that, but it just feels like the pragmatic correct thing to do. So it's just a pause before committing to the full construction side of those 3 sites under development.
Sure. No, that makes a lot of sense. Are there any costs in delaying? And would there be any significant costs if you decided in the end not to proceed with those as a result of what came out of the CMA?
Nothing that's not already gone through. So the vast majority of the costs of those developments lies ahead rather than behind us. So what we've spent on clearly planning applications and just initial bits of work, they are what they are. Those are some costs, but the vast majority of the cost of developing those sites is ahead of us.
[Operator Instructions] Our next question is from Charles Hall from Peel Hunt.
A couple of questions. Could you just flesh out a bit more the differences in the 3 pilot networks and what you're looking to deliver there? And secondly, on the covenant notes that you've highlighted, where you're getting closer to the covenant, is there any practical difference if you actually drop through those covenants in terms of actually how you run the business? Obviously, we are not paying a dividend now, so that issue has gone. But is there anything else to think about?
Okay. So on the pilots, there are 3 networks that geographically are next to each other that are now joined, in the new world would run as a single network. They've been chosen very deliberately because although this -- we're implementing changes there, the physical property infrastructure was broadly what would be okay. We've had to invest in a -- in the service center. But as a way of testing the new ways of working, a lot of the bits were already there. So it's in Lincolnshire, it's about 1,800 funerals. It affects 60 full-time employees and some part-times as well. And really, what we're trying to see there is the new ways of working.So we've separated the front and the back of house. So back of house being the logistics, the vehicles, collecting the deceased, the mortuary and then the vehicles on the day of the funeral. So it's very much the logistics operation. We have our new resource management system, which will be in place for that, which is the way of organizing the fleeting and scheduling the out of hours ambulance crews, those sorts of things. So it's testing that.And then front of house is mobilizing the funeral ranges now called funeral managers so that each client essentially has a dedicated funeral manager. We can come to your house and arrange the funeral rather than you come to our branch, which is much more convenient and a much better quality of service, and then imposing some performance measurement KPIs on that front of house client-facing operation. So in the past, you'd have had one manager responsible for the logistics and the client-facing piece. The vast majority of resources in the future will be client-facing and then specialists and logistics. So it's really just primarily making sure that we haven't missed something, that there isn't a great big dot here when we put it all into practice, that there's a job that somebody used to do or something that used to happen that now has fallen between the cracks. So it's really just testing the new ways of working for before we roll out across the rest of the country.
And the fact that there are 3 of them, what are the differences between the 3?
Well, they're effectively 1 now. In our old world, they were 3 separate businesses, effectively, but now geographically are next to each other and now operate as one network as would be described in our new world. So there are 3 right next to each other, now operating as 1 business.
And then on the covenants, Charles, I mean you get into a couple of points of detail around how you can use money set aside in certain accounts on property developments. Alongside that, I think it's public record, may have described it before. Your ability to buy back bonds is a little bit more restricted. So as things done, once you passed the RPC, you can buy back bonds of to the most senior class of notes at any price. If you don't pass the RPC, then you can only buy back the most senior class if they're trading below par. What you don't have, though, for example, is whilst you can't move the cash around the group, which will be small given we're spending it all on the transformation. What you don't hit is a time line where that money is forced to be used for activities we might not want to otherwise take. It simply sits there until the next time that we pass the RPC, and then we're back to having an unfettered position.
Okay. So from a cash flow point of view, assuming that the profits come through, then it has no impact on the way you run the business in the medium term?
Yes. I mean we're busy trying to spend that operating cash flow on the transformation. We're not reliant on cash in plc, that's not our first port of call for funding the transformation. So naturally, even like the cash left over every 6 months to sweep up to plc will be lower anyway. So for example, at the end of this year, I don't think we can necessarily expect there to be much cash at all, actually, to be free either way, just given the activities we're undertaking.
[Operator Instructions] And as there are no further questions, I will hand the word back to the speakers for any final comments.
Okay. Well, thank you for dialing in. Nothing further to add at this end, and we'll be out with our prelims in early March. Thank you.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.