Dignity plc

Interim results for the 26 week period ended 1 July 2022

Progress made against strategy delivery, and well prepared for new funeral plan regulation.

Dignity plc (Dignity, the Company or the Group), one of the UK's largest national providers of funeral plans and end of life services, announces its unaudited interim results for the 26 week period ended 1 July 2022.

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 IFRS, APMs are necessary to enable users of the financial statements to fully understand the trading performance and financial position of the Group. The APMs provided are aligned with those used in the day-to-day management of the Group and allow for greater comparability across periods. For this reason, the APMs provided exclude the impact of consolidating the Trusts and the changes which relate to the application of IFRS 15, as well as non-underlying items comprising certain non-recurring and non-trading transactions. Further detail may be found on pages 49 to 57.

Key points

·      We continue to implement our new strategy and are seeing early signs of this coming through in market share, whilst also recognising the initial adverse impact on profitability

·      As explained in the 2021 Annual Report, the Company reported a potential adverse impact on underlying revenue and underlying operating profit. This is due to a combination of factors, including fluctuations in the death rate, partnered with a change in our pricing strategy and introduction of a direct cremation service through our funeral network

·      Delivered our regulatory programme and achieving authorisation by the Financial Conduct Authority ('FCA') under new funeral plan rules, which came into effect on 29 July 2022

·      Development and launch of our innovative new funeral plan proposition, and the creation of a new trust to support this

·      Organisational restructure continues, supported by the new brand strategy

·      Confirmed our commitment to be net zero across the Dignity network by 2038

·      Launched and now embedding our new guiding principles, which will be the framework for culture change at the Company, including ensuring salaries are industry competitive for client facing roles

·      Continuation of a large capital expenditure programme linked to delayed works from previous years during the pandemic as well as a property portfolio programme that is prioritising key investment needs across our estate  

·      Total impairment of £62.9 million of the Group's non-current assets following slower funeral market share growth combined with more branch direct cremations rather than full adult funerals being performed than originally anticipated

·    We successfully reached an agreement with bondholders in September which allows the Group to begin deleveraging and removes some restrictions from the securitisation

Kate Davidson, Chief Executive Officer of Dignity plc, commented:

"Over the past few years our business has risen to the challenges presented by COVID-19. We have continued to deliver excellent customer service whilst also implementing our new strategy as well as preparing and achieving FCA regulatory approval for new funeral plan rules, whilst recognising the short-term adverse impact on our financial performance. Our people have risen to these challenges and, through the embedding of our Principles and values introduced earlier this year, we believe that we are well placed to achieve our key aims of becoming the leading end-of-life service provider in the UK and a deserving and rewarding employer."

For further information please contact:

Kate Davidson, Chief Executive Officer

Dean Moore, Interim Chief Financial Officer

Dignity plc                                                              +44 (0)20 7466 5000

Chris Lane

Hannah Ratcliff

Verity Parker

Buchanan                                                                +44 (0)20 7466 5000

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

Chief Executive Officer's Statement

Financial summary

The impact of the pandemic, combined with pricing and strategic changes implemented at the end of 2021, has continued to make year-on-year comparisons difficult. The death rate in the first half of 2022 was lower than the previous period despite being higher than the five-year average, based on ONS data, potentially due to factors resulting from the pandemic.

Growth in our funeral market share is signalling positive signs that our new strategy is beginning to deliver, especially considering that it comes as we have been rationalising the branch network and closing unviable branches. A significant change in our approach to pricing and product mix at the end of 2021 has resulted in a reported operating loss of £48.3 million (June 2021: operating profit £40.8 million) and lower underlying operating profits of £14.7 million (June 2021: £37.8 million), but an element of this can be attributed to our focus on increasing competitiveness locally and offering direct cremation as a lower priced service. We switched off the vast majority of our marketing activity in January, which may have had a negative impact on volumes and share.

Our growth in market share though is being held back by staff shortages and despite our increased recruitment efforts we still have over 400 vacancies. This is resulting in an increase to the time between death and funeral and is losing us business. We started a new programme of marketing activity from July but we are having to hold back until we can handle the calls and additional work. We have made a number of significant changes in H2 to address this shortage including personnel and remuneration changes.

Lower prices to give increased competitiveness and an investment in all elements of our proposition do lower profitability until such time as growth with operational gearing compensates. Therefore, factors holding back growth like insufficient capacity impact short-term profitability until we reduce them.

We saw cremation market share grow by one per cent, helped by our growing share of direct cremation business. Crematoria operations are not being impacted in the same way by staff shortages.

Consideration has been given to the increasing cost of fuel, and the impact it has on our operations. We are continuing to monitor the situation including the impact of the recently announced government intervention and one potential option is the introduction of a temporary 'fuel surcharge' across our crematoria.

Overall we are seeing rising costs impacting our business, especially employment costs and we will be looking to recover some of that in our next pricing adjustments in October 2022. Central costs are declining.

In those areas of the business where we have done the most to introduce the elements of our new strategy, we see the signs of encouraging results of the market share growth we are seeking. As we covered in the Annual Report and at the AGM, it is growth combined with our operational gearing that will restore the profitability of the business.

The lower death rate reduced revenue across the group by £8.6 million and lower average revenues both from lower prices and the introduction of direct cremations through the branch network, reduced revenue by £17.5 million. Against that, market share growth in funerals and crematoria added £5.6 million.

The impact of the above and the subsequent impact on forward looking cashflows, coupled with an increase in the discount rate from 10.3 per cent to 11.4 per cent since December 2021, has created an impairment of £62.9 million of the Group's non-current assets as at 1 July 2022, including £42.7 million goodwill, £5.5 million trade names, £10.3 million right-of-use assets and £4.4 million property, plant and equipment. The methodology for impairment is based upon the accounting standard which does not permit use of longer-term assumptions which cannot be evidenced. This is not the same as a longer-term strategy based forecast or expectation.

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

Cash position

The Trading Group's period end cash position was £32.9 million versus £55.9 million at 31 December 2021 and £64.8 million (excluding £16.9 million of restricted cash) at 25 June 2021. This decrease is a result of operating losses, increased capital expenditure linked to delayed works from previous years during the pandemic, debt service payments of £16.9 million and a transfer out of the Trading Group to the Trusts of £3.6 million (see page 55 for more details).

Strategic update

Dividends

We continue to work on our plans to improve our capital structure so that the pursuit of the best long-term value for shareholders is not compromised by the covenants attached to our bonds. Until that has been done the Board will not be contemplating dividends. We will make announcements at the appropriate times on this matter.

FCA Regulation of the pre-paid funeral plan sector

We are pleased to confirm that Dignity achieved authorisation by the Financial Conduct Authority (FCA) under the new regulatory regime for pre-paid funeral plans, which came into force on 29 July 2022.

Funeral plan providers in the UK must now be regulated by the FCA to continue to sell or carry out funeral plans. Dignity has long called for statutory oversight of the sector to remove bad actors and to improve the outcome for customers, so it is extremely positive to have seen the regulations come into effect.

The regulation has impacted almost every corner of our business; from compliance and governance, an enhanced focus on customer vulnerability and consumer redress processes, training and people development, as well as a new approach to how we market and sell our products. We have established the UK Funerals (2022) Trust, operated by trustees independent to Dignity, which commenced selling pre-arranged funeral plans on 8 August 2022. The Dignity Trading Group also transferred £1.0 million cash into this new Trust on 11 July 2022 in order to meet FCA regulatory requirements. This requirement means that we must ensure the Trust always remains adequately funded to meet the funeral plan liabilities. A process is underway to combine our existing trusts into this new one.

We have also stood by our commitment to help customers of other plan providers where we can, and as we have with the customers of Safe Hands, we have engaged with a number of firms who will not be regulated to understand any opportunity to help customers. Following Safe Hands going into administration, we have delivered 188 funerals as at 1 July 2022 on behalf of bereaved people impacted by the collapse, at no cost to the family. Had these funerals been delivered at Dignity's current at-need prices, additional revenue of £0.5 million would have been generated.

I would like to thank all of our colleagues that have been involved with the strategic and operational effort that has enabled the delivery of our authorisation. We are proud of what we have achieved to date and recognise the responsibility Dignity has as a market leader to ensure we continue to deliver the high standards expected by the regulator. It is our expectation that FCA regulation will introduce stability to the pre-need sector which will be beneficial for all stakeholders.

New funeral plan proposition

We have taken the opportunity of the start of this new era to completely rethink what a funeral plan should be, drawing on the knowledge and expertise we have within Dignity. Our ambition has been to create a product that inspires people, even those not thinking about funeral plans, and gives them the opportunity to plan the celebration of their life and turn that into a funeral plan that is personal, tailored and as unique as they are. We aim to provide that at a cost and service level that gives them great, and we believe unrivalled, value through our specially trained colleagues.

Organisational restructure

We have continued our focus on restructuring the business, starting with the reorganisation of our network into 12 regions, that delivers a collaborative and integrated end-of-life service across our funeral directors, crematoria and funeral plan proposition. We also set out at our AGM our approach to inverting the organisation, through local empowerment of our new Business Leaders, that are supported by the breadth and scale of the Dignity network.

We have appointed all but one of the Heads of Regions and nine of the 12 regions have moved to the new operational structure. We have also made 202 Business Leader appointments nationally, and anticipate recruitment and restructuring to be complete across the network by the end of the year.

We continue to make progress with the new Business Leaders to develop individual business strategies and plans, which include localised objectives for performance and market share. A newly appointed Head of Regional Development has been focused on developing these plans with the Business Leaders. We will be able to provide more detail on our localised plans in 2023.

A branding exercise has also begun across several of our funeral businesses, creating a new identity that is unique to the heritage of that business and brand. A dedicated creative team has worked with the Business Leaders to develop these brand identities which extends across physical facias, customer and marketing collateral, our digital presence and plans for renovated interiors.

Our people

Dignity's people - our colleagues - are the most important asset in our business, and I am committed to ensuring we fulfil the core element of our vision that seeks to be an inspirational and rewarding employer. We also want to attract and retain the best people, ensuring colleagues are empowered, supported and developed is essential to this, but so is putting an effective reward and recognition framework in place.

Our first step to providing fair and competitive remuneration was delivered through introducing the Living Wage Foundation's real Living Wage to the lowest paid colleagues across the business in January. As part of our review and benchmarking of pay across our own business and the sector, we are in the process of increasing the salaries for key frontline roles to ensure they are competitive and leading in our sector and have also considered the impact on our people due to inflationary rises.

We also must have the right culture in place - empowered people that are driven and inspired by our social purpose, and this is embedded in our new Principles which we launched earlier this year. To support this, we have taken a measure of sentiment and engagement with the Principles, through a colleague engagement survey. This found that in Q1 2022, whilst 77 per cent colleagues felt proud to work for Dignity, 35 per cent did not feel empowered to make their own decisions, and a quarter do not understand how their role supports the business's wider aims. We will be taking a second measure of this at the end of Q4 to understand the extent the Principles are becoming our culture, and in turn the impact of the changes we have made to our structure and improvements to our people approach.

Sustainability

At our AGM we announced Dignity's commitment to be net zero by 2038, which is underpinned by our new Principles that include a dedicated value focused on protecting the environment and prioritising sustainable practices. Our ambition includes reducing carbon emissions from all of our owned operations, funeral branches, crematoria and care centres, to our fleet and a view to mitigating our impact through our supply chain. We are proud to support the introduction of formal climate disclosures mandated for listed firms, through the Taskforce on Climate-related Financial Disclosures ('TCFD'). Dignity was not required to comply with the formal climate disclosures in its 2021 Annual Report, but we elected to take a pragmatic step and complete a voluntary disclosure as we believe TCFD provides a strong framework for our climate pledge and strategy to develop. Dignity is committed to, and is, making progress towards a full, mandatory TCFD submission for the period ending 30 December 2022, which will include climate scenario analysis and interim target setting.

The Board

In January and February respectively, both myself and Kartina Tahir-Thomson were appointed to the Board. Kartina joined as an Independent Non-Executive Director and Chairs the Risk Committee and is a member of the Audit, Remuneration and Nomination Committees. My appointment to the Board was as an Executive Director, in my former role as Dignity's Chief Operating Officer. At the same time, we also confirmed the permanent appointment of Graham Ferguson as an Independent Non-Executive Director and Chair of the Audit and Remuneration Committees and a member of the Nomination and Risk Committees. In June, Gary Channon stood down from the Board, John Castagno stood down from the Audit Committee, and Graham Ferguson was appointed Senior Independent Non-Executive Director. All of these appointments ensure greater compliance with the UK Corporate Governance Code (July 2018).

Whilst early progress had been made in the search for a new Chief Financial Officer, we can now confirm that no appointments have been made and that the recruitment process continues. Dean Moore will therefore continue in his role as an interim CFO, and once a permanent appointment has been made, he will then resume his role as a Non-Executive Director.

Andrew Judd, our Director responsible for the day-to-day provision of funeral services, stood down from the Board and left the Company on 1 April 2022. We would like to thank Andrew for his long and dedicated service to the Company.

And finally, I am honoured to confirm my appointment as Chief Executive Officer from June 2022, when Gary Channon stepped down from the Board and role as CEO. He has remained since this time an integral part of our strategy delivery as an advisor to the Board, focused on our work around the capital structure and the creation of the newly formed trust, and I would like to thank Gary for his dedication and commitment to driving our new strategy forward and his support to me in my transition to the CEO role.

Outlook

We set out at our AGM the impact and progress made towards our strategy, but with the unpredictability of the death rate in 2022, the impact of our strategy implementation, regulatory change and our new funeral plan proposition, we will continue to refrain from giving guidance.

Kate Davidson

Chief Executive Officer

Business and financial review

Introduction

For statutory purposes, the Group has two reporting segments, Funeral services and Crematoria. See note 2 for further details. 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

Deaths were 19 per cent below the prior year in the first quarter as a result of COVID-19 and one per cent below the five-year average (2015-2019). The second quarter is 13 per cent above the prior year and seven per cent above the five-year average (2015-2019). The impact of COVID-19 deaths in 2020 and 2021 could possibly mean we experience a fluctuating number of deaths than originally anticipated by the Office of National Statistics ('ONS') in 2022 and 2023. The Group will not speculate on the most likely outcome.

Funeral operations

At 1 July 2022, the Group operated a network of 756 (June 2021: 789; December 2021: 776) funeral locations throughout the UK, generally operating under established local trading names. The change to the portfolio reflects 23 closures and three openings. This forms part of our new local business strategies and closures occur where a branch is not deemed to be viable in its current location even with our new strategy. The timing of the closures can be impacted by the end dates of leases and of the 23 closures only five were freeholds.

(1)    Represents revenue impact

The table above demonstrates the impact of our new pricing strategy, coupled with the distorting effect of the pandemic on the death rate in the first quarter.  Whilst market share has increased revenue, we can see that a reduction in the number of deaths has reduced revenue by £6.4 million, and the change in pricing strategy and the introduction of direct cremation has reduced it by a further £14.6 million. Cost base changes include a £1.7 million impact from the loss of rates relief, £1.6 million increase in bad debt provision, £0.7 million impact from an increase in coffin raw material prices, an increase of £0.5 million in depreciation and £0.3 million increase in utility costs. Accordingly, the cost to deliver a funeral (see alternative performance measures on page 57 for details on how it is calculated) has increased to £1,902 as an LTM at 1 July 2022 (June 2021 LTM: £1,840; December 2021: £1,814).

Items totalling £56.5 million (2021: £4.3 million) are excluded from underlying profit resulting in a statutory operating loss of £47.8 million (2021: operating profit £35.9 million). These items relate to non-underlying items and the impact of the consolidation of the Trusts and applying IFRS 15. See Non-GAAP measures note for further details.

Market share

In the first half of 2022 the Group conducted 40,000 funerals (26 week period ended June 2021: 41,400; 53 week period ended December 2021: 79,200) in the United Kingdom, a three per cent decrease on the prior period. Approximately 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 2021: 12.0 per cent; December 2021: 11.8 per cent) of total estimated deaths in Great Britain. On a comparable basis, excluding any funerals from locations not contributing to the whole of the first half of 2022 and 2021 and any Safe Hands funerals, market share was 12.2 per cent, compared to 11.8 per cent in 2021.

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. 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, calculations of market share, particularly over shorter periods, may not be comparable.

Funeral mix and average income

The average revenue for funerals has decreased from £2,478 (H1 2021) to £2,115 (H1 2022), (excluding the funerals delivered as part of our Safe Hands rescue support the average in H1 2022 was £2,129), which can be attributed to a combination of the change in our pricing strategy and the change in mix due to the provision of lower cost funeral options, such as direct cremations. This combined with reduced volumes has also impacted the contribution per branch (see alternative performance measures on page 57 for details on how it is calculated) which has decreased to £48,452 as an LTM at 1 July 2022 (June 2021 LTM: £75,547; December 2021: £75,000).

(1)    In September 2021, funeral services introduced an Attended Funeral at prices from £1,595 to £2,495 (excluding extras) across the network and implemented the Unattended Funeral (direct cremation), and the simple funeral was removed (apart from our location in Jersey). As such, the historical full service average and the simple and direct cremation average are no longer comparable. In order to have comparability the full-service and the simple averages have been blended to give a new Attended average and the direct cremation, previously included as simple and direct cremation, has been restated to Unattended to make both comparable.

Crematoria operations

The Group remains the largest single independent operator of crematoria in Great Britain operating 46 crematoria (June 2021: 46; December 2021: 46).

(1)      Represents revenue impact

Non-underlying costs of £0.5 million (2021: £0.7 million) are excluded from underlying profit resulting in statutory operating profit of £21.1 million (2021: £24.5 million). See Non-GAAP measures note for further details.

The Group performed 39,300 cremations (June 2021: 38,900; December 2021: 74,800) in the period. These volumes represent approximately 12.3 per cent (June 2021: 11.4 per cent; December 2021: 11.3 per cent) of total estimated deaths in Great Britain. Average price per cremation has decreased to £862 (June 2021: £892, December 2021: £887), yield per crematoria (see alternative performance measures on page 57 for details on how it is calculated) has decreased to £1,056,522 as an LTM at 1 July 2022 (June 2021 LTM: £1,076,087; December 2021: £1,126,087) and average ancillary revenue per cremation has decreased to £219 (June 2021: £272, December 2021: £269) which reflects an increase in the percentage of direct cremations being performed. As the number of unattended cremations increases this will impact the averages when comparing to the prior period.

Crematoria remains a stable and cash generative aspect of the Group's operations.

Pre-arranged operations

Dignity continues to remain focused on selling high-quality funeral plans, in ways consistent with the strong reputation of the Group and the high standards expected by our customers. During the first half of 2022, we have remained focused on being ready for the FCA regulation and on 29 July 2022 we were approved by the FCA so are now regulated and as such sales of the new Dignity funeral plan have commenced with focused distribution through our network of local branches.

As a result of the above, sales of pre-arranged funeral plans were low in the first half of 2022, resulting in low growth in the total number of active pre-arranged funeral plans of 582,000 compared to 581,000 at December 2021 and 580,000 at the end of June 2021. 

As previously stated, the Group can claim a marketing and administration allowance from the trusts for plans sold in the period (up to a maximum amount per plan sold), which historically resulted in a profit in the pre-need division. In 2019, the Group decided to restrict this allowance from the trusts to only recover the costs incurred in the selling of the funeral plans and therefore, the pre-need division has not contributed any profit or loss since 2019 due to these under recoveries. However, as plan sales were low in the first half of 2022, the Group would not have been able to recover all of the costs incurred in the selling and administration from funeral plans sold in the current period but has been able to utilise under recoveries from previous years sales to cover the current year operating costs.

We expect the sales of pre-arranged funeral plans to increase during the second half of 2022.

The financial position of the Trusts holding members' monies is crucial, given the Group ultimately guarantees the promises made to members. At the end of June 2022, the Trusts had average assets per plan of £3,405 (June 2021: £3,564; December 2021: £3,650) in respect of trust based funeral plans.  Average assets per plan are greater than the amount currently received by the Trading Group for performing a funeral.

The latest actuarial valuations of the Trusts (at 24 September 2021) showed them to have a surplus of £147.3 million (25 September 2020: surplus £4.0 million), based on assumptions by the Trusts' actuary. 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.

Return on Trust assets of (2.5) per cent has been achieved for the 12 month period to 1 July 2022 (June 2021: 11.2 per cent; December 2021: 9.1 per cent). The decrease from prior periods is due to the decline in equity markets and foreign exchange movements. It is a measure that must be judged over multiple years and our long-term goal is to exceed the rise in funeral cost inflation by three per cent per annum. See alternative performance measures on page 56 for how it is calculated.

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, HR, 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, considered annually for over 100 managers across the business.

Underlying costs in the period were £15.6 million (2021: £19.0 million). The table below summarises the key movements:

Salaries have reduced year-on-year primarily due to the prior period including a performance bonus accrual of £1.0 million. Central overheads are expected to reduce as part of the new strategy.

Non-underlying items of £6.0 million (2021: £0.6 million) are excluded from underlying costs resulting in total central costs of £21.6 million (2021: £19.6 million). Of the £6.0 million non-underlying items, £3.4 million relates to external transaction costs which includes costs associated with the current capital structure work, £2.3 million of redundancy costs relating to the new strategy and £0.3 million of onerous provisions relating to the ongoing operational restructure.

Corporate development activity

The Group has planning permission for six new crematoria. The total capital expenditure for these six projects is expected to be approximately £56.0 million, with £12.0 million of this amount having already been invested. Each of the locations with planning permission will take five to seven years to reach maturity once construction has been completed, performing 800 to 1,000 cremations per year.

In addition, the Group also has one location that is currently in the planning process.

The Group's strategic review for corporate development activity is underway which will determine the next course of action for these locations.

Earnings per share

Underlying earnings per share decreased to a loss of 1.2 pence per Ordinary Share (June 2021: 36.2 pence; December 2021: 42.8 pence), principally driven by the 61 per cent decrease in underlying operating profit.     

Alternative performance measures

The alternative performance measures are stated before non-underlying items and the effect of consolidation of the Trusts and applying IFRS 15 as defined on page 49. 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.

Non-underlying items excluded from alternative performance measures includes £62.9 million impairment charge which has arisen due to a fall in short-term forecasts since the impairment review performed for the 53 week period ended 31 December 2021 following slower funeral market share growth combined with more branch direct cremations rather than full adult funerals being performed than originally anticipated, together with an increase in the discount rate from 10.3 per cent to 11.4 per cent since December 2021. The slower market share growth is a result of the new strategy taking longer to implement partly due to staff shortages. The Group is currently suffering like many other businesses with a shortage of workforce and a difficulty in recruiting which is causing us to be unable to do funerals in a timeframe soon enough for some families. We are confident that our market share would have increased if we were not struggling with this challenge. We are currently addressing the vacancy issue by increasing the salaries within operations to be more competitive in the market, which should enable us to recruit and retain staff.

For more detailed information on non-underlying items including a reconciliation of statutory revenue to underlying revenue is set out on pages 31 and 49 to 57.

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

(a) Further details of alternative performance measures can be found on pages 49 to 57.

(b)                   Prior year comparatives have been restated for the 53 week period ended 31 December 2021 due to a reclassification of foreign exchange movements. See Note 1 for further details.

Cash flow

Underlying cash generated from operations was £24.4 million (June 2021: £56.6 million) and has decreased as a result of lower operating profits and increased capital expenditure linked to delayed works from previous years during the pandemic. Other working capital changes were consistent with the Group's experience of converting profits into cash, subject to timing differences.

In addition to the corporate development activity in the period, the Group spent a net £13.3 million (June 2021: £9.9 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.

(b)      Property disposals in 2022 includes £0.4 million of insurance proceeds received.

Cash flow and cash balances for the Trading Group

Cash balances held by the Trading Group at the end of the period were £32.9 million (June 2021: £81.7 million; December 2021: £55.9 million). This includes £0.3 million of restricted cash (June 2021: £16.9 million; December 2021: £nil), see note 10. The amount of restricted cash held at June 2022 and December 2021 differs from June 2021 due to the timing of interest and principal repayments on the Group's class A and B Secured Notes. Of the remaining amount, £23.7 million (June 2021: £33.6 million; December 2021: £44.6 million) was held by Dignity plc. Please see the terminology section on page 28 for the definitions of the Trading Group and the Securitisation Group.

Taxation

The Group's effective tax rate for 2022 is expected to be approximately 22 per cent before the effect of non-underlying items. The effective rate for 2023 and beyond is expected to be approximately two to three per cent above the headline rate of Corporation Tax for the relevant period principally due to the effects of non-deductible expenses. This expected effective rate excludes the impact of corporate interest rate restrictions.

The Group's effective tax rate on losses at 1 July 2022 is 17 per cent (June 2021: charge on profits of 38 per cent) which is lower than the underlying effective tax rate primarily due to £0.7 million of disallowable taxation on external transaction costs, £10.7 million of disallowable taxation on the goodwill, trade name, right-of-use asset and property, plant and equipment impairments and a £5.2 million credit in relation to Trusts.

A judgement has been taken by management in relation to the June 2022 corporate interest restriction ('CIR') charge. The restriction is calculated using the fixed ratio and is based upon an estimated full year tax EBITDA calculation which is aligned to the forecasts used within the Group's impairment and going concern assessments for interim reporting. Consequently, a charge of £1.0 million (June 2021: £2.1 million; December 2021: £1.5 million) has been recognised within the consolidated income statement. The CIR charge has been included within underlying taxation as the charge has arisen due to the level of profitability of the Trading Group. In prior periods, the charge has been included within "other adjustments" as non-underlying as the charge arose due to the level of fair value gains on the Trust bond portfolio as all Trust related items are included as non-underlying.

Capital structure

The Group has continued to work on a long-term solution to improve the Group's capital structure and on 7 September 2022 a consent solicitation with approximately 61 per cent support from its class A Noteholders was launched. This is seeking certain consents from Noteholders for a potential transaction involving the realisation of value from selected crematoria assets, with the expected proceeds of such a transaction being applied in a partial redemption of the Class A Notes, as required by the current documentation. The necessary quorum was achieved on 29 September 2022 (with 99.92 per cent of the aggregate principal amount of the Notes for the time being outstanding being represented and with 94.42 per cent of the votes being cast in favour of the proposal) and the consent to the proposal applies for a 12 month period to 29 September 2023. Once the transaction is complete, an outcome the board expects within the 12 months allowed, there are amendments to the documents that will allow further equity cures, with restrictions, to be made going forward should they be required.

As part of the proposed agreement with Noteholders, Dignity will be required to inject a minimum of £70.0 million into the Securitisation Group companies to partially repay some of the Class A Notes outstanding in consideration for assets leaving the Securitisation group. This will result in a deleveraging of the Group and a positive impact on the underlying financial ratios and covenant calculations. Funds for this injection are expected to be realised from a capital transaction relating to the sale of certain crematoria assets but the agreement with bondholders does not limit where the funds come from.

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:

(1)       Rating affirmed on 1 July 2022.

(2)       Rating affirmed on 25 October 2021 and credit watch negative was also removed.

The Secured Notes have an annual debt service obligation (principal and interest) of circa £33.2 million. Net amounts owing on the Secured Notes is £521.4 million (June 2021: £536.7 million; December 2021: £526.6 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.

As set out in note 12, the Group's gross amounts owing on its debt obligations were £521.8 million (June 2021: £537.2 million; December 2021: £527.1 million). Net debt was £488.9 million (June 2021: £467.4 million; December 2021: £471.2 million).

The market value of the Secured Notes at the balance sheet date was £488.6 million (June 2021: £549.2 million; December 2021: £574.9 million).

Should the Group wish to repay all amounts due under the Secured Notes, the cost to do so at 1 July 2022 would have been approximately £627.4 million (Class A Notes: £177.4 million; Class B Notes: £450.0 million) (June 2021: £759.7 million (Class A Notes: £211.6 million; Class B Notes: £548.1 million); December 2021: £757.4 million (Class A Notes: £202.8 million; Class B Notes: £554.6 million)).

The Group also has access to a £55.0 million liquidity facility relating to the Class A and B Secured Notes, which attracts floating interest rates once drawn. This facility may only be used to repay interest and principal on the Secured Notes in the event of insufficient cash to service these instruments. The facility is subject to annual renewal. However, if the bank providing the facility does not renew it, then the provider is required to place £55.0 million in a bank account, which the Group may access as if it represented a borrowing facility on the same terms. The facility is available on these terms until the Secured Notes have been repaid in full. At 1 July 2022 £nil (June 2021: £nil; December 2021: £nil) was drawn on this facility.

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. During the temporary covenant waiver period that was approved by bonds holders in March 2022, any cash transferred into the Securitisation Group can be included within the EBITDA to debt service ratio for the following 12 months. The waiver allows for cash to be transferred at any covenant measurement point up to and including 31 December 2022. £15.1 million has been transferred in June 2022 which has resulted in a ratio of 1.86 times at 1 July 2022 (June 2021: 2.12 times; December 2021: 2.13 times). Excluding this cash transfer the ratio at 1 July 2022 was 1.42 times.

If this primary financial covenant is not achieved, then this may lead to an Event of Default under the terms of the Secured Notes, which could result in the Security Trustee taking control of the Securitisation Group on behalf of the Secured Note holders. Refer to Note 1 to the interim financial statements for further details.

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, Save As You Earn Scheme and Long-Term Incentive Plan Scheme costs) to be adjusted from an accounting basis to a cash basis.

(b)    Prior year comparatives have been restated for the 53 week period ended 31 December 2021 due to a reclassification of foreign exchange movements. See Note 1 for further details

Whilst not a covenant, in order for the Group to transfer excess cash 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 2022 was 1.04 times (June 2021: 1.74 times; December 2021: 1.76 times). These combined requirements are known as the Restricted Payment Condition ('RPC'). Given the ratios achieved, the RPC was not achieved at June 2022. Failure to pass the RPC is not a covenant breach and does not cause an acceleration of any debt repayments. Any cash not permitted to be transferred whilst the RPC is not achieved will be available to be transferred at a later date once the RPC requirement is achieved but otherwise can be used within the Securitisation Group with no restrictions. 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').

Cash return on Core Capital

In the 2021 Annual Report we introduced a measure we call Cash Return on Core Capital ('CROCC'). In June 2022 the CROCC fell to (0.4) per cent (June 2021: 8.5 per cent; December 2021: 9.7 per cent). The fall in 2022 reflects the reduced underlying operating profits and higher capital expenditure offset by lower cash tax payments.  See alternative performance measures on page 56 for how it is calculated and why we use it.

Trust balances

At the balance sheet date, the Trusts had £960.9 million (June 2021: £1,006.8 million; December 2021: £1,043.1 million) of financial assets and £15.7 million (June 2021: £23.6 million; December 2021: £19.8 million) of cash, which has been recognised in the consolidated balance sheet. The movement in financial assets from December 2021 to June 2022 is primarily attributable to remeasurement loss recognised in the consolidated income statement of £68.0 million (June 2021: remeasurement gain of £45.8 million; December 2021: remeasurement gain of £85.0 million) and net disposals of financial assets of £14.1 million (June 2021: net disposals of £5.8 million; December 2021: net disposals of £12.2 million). This reduction in assets is reflective of current market conditions, should this decrease continue, it is likely to have an adverse impact on the next actuarial valuation due in September 2022.

Aggregated contract liabilities totalled £1,330.6 million (June 2021: £1,330.5 million; December 2021: £1,337.5 million) with the primary movement from December 2021 to June 2022 being sales of new plans of £29.0 million (June 2021: £48.6 million; December 2021: £86.3 million), increases due to significant financing of £25.6 million (June 2021: £25.9 million; December 2021: £51.6 million) and releases due to death or cancellation totalling £61.5 million (June 2021: £61.5 million; December 2021: £117.9 million).

The accounting position is not the same as the actuarial position which reflects the solvency of the Trusts. As of the last actuarial valuations in September 2021, the Trusts had assets of £1,114.4 million and liabilities of £967.1 million to give a net surplus of £147.3 million.

Impairment

A total impairment of £62.9 million has been charged in the period (June 2021: £nil million; December 2021: £39.2 million), of which £42.7 million (June 2021: £nil million; December 2021: £36.4 million) to goodwill, £5.5 million (June 2021: £nil million; December 2021: £2.8 million) relates to trades names, £10.3 million (June 2021: £nil million; December 2021: £nil million) to right-of-use assets and £4.4 million (June 2021: £nil million; December 2021: £nil million) to property, plant and equipment.

The impairment has arisen within the funeral services division primarily due to slower funeral market share growth combined with more branch direct cremations rather than full adult funerals being performed than originally anticipated which impacts the short-term forecasts used within the impairment models, together with an increase in the Group's discount rate from 10.3 per cent to 11.4 per cent since December 2021. Slower market share growth is attributable to a shortage in workforce and a difficultly in recruiting which is causing the Group to be unable to perform funerals in a timeframe soon enough for some families.

Whilst the Group expects long-term market share growth from the new strategy, the accounting standard (IAS 36) for impairment assessments does not allow forecasts to be used where assumptions cannot be evidenced or have not yet been implemented (e.g., cost savings). As a result, whilst the Group is focused on committing to delivering its market share growth ambitions, given the infancy of the strategic plan implementation and the available evidence to demonstrate this growth as at the interim reporting date when the impairment assessment is made, the full extent of potential longer-term gains is not reflected in the impairment modelling. The impairment of right-of-use assets and property, plant and equipment includes a level of estimation in the interim reporting. Note 6 in the interim report provides sensitivity analysis based on the calculated impairment and a detailed explanation of these estimations.

Post balance sheet events

Capital structure - consent solicitation with bondholders

On 7 September 2022 a consent solicitation with approximately 61 per cent support from its class A Noteholders was launched. This sought certain consents from Noteholders for a potential transaction involving the realisation of value from selected crematoria assets, with the proceeds of such a transaction being applied in a partial redemption of the Class A Notes, as required by the current documentation. The necessary quorum was achieved on 29 September 2022 (with 99.92 per cent of the aggregate principal amount of the Notes for the time being outstanding being represented and the Extraordinary Resolution being passed with 94.42 per cent of the votes being cast in favour) and the consents referred to above apply for 12 month period to 29 September 2023.

Dignity will be required to inject a minimum of £70 million into the Securitisation Group to partially repay some of the Class A Notes outstanding in consideration for assets leaving the Securitisation Group. If the transaction completes in Q2 2023 and £70m is the net realisation then this will result in a deleveraging of the Group and a positive impact of £5.7 million on the DSCR covenant calculations, i.e., a reduction of the DSCR from c.£51 million to c.£45.3 million in 2023. If the transaction takes longer to complete and is completed in Q3 2023 there will be no positive impact in 2023 as the first possible date for repayment will be 29 December 2023. It would have a full year impact of £11.7 million on the DSCR covenant calculations, i.e., a reduction of the DSCR from c.£51 million to c.£39.3 million in 2024.

In addition, upon completion of the proposed transaction within the timeframe permitted by the noteholder consent, there are amendments to the documents that will allow further equity cures, with restrictions, to be made going forward should they be required. This can be used to supplement any EBITDA shortfall at 31 December 2023.

UK Funerals (2022) Trust established

We have established the UK Funerals (2022) Trust, operated by trustees independent to Dignity, which commenced selling pre-arranged funeral plans on 8 August 2022. £1.0 million cash was transferred into this new Trust on 11 July 2022 at the request of the FCA in order to meet a requirement of the new regulation.

Forward-looking statements

Certain statements in this Interim Report are forward-looking. Please see page 60 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 Group as well as alternative sources of financing that might reasonably be assumed to be available.

The Group has carried out a diligent going concern analysis. Full details of this analysis are set out in Note 1 to the interim 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 through 30 September 2023, being 12 months from the date of these interim financial statements. The Directors formally considered this matter at the Board meeting held on 27 September 2022. 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 2021 relates to the 26 weeks ended 25 June 2021.

(b)             FY 2021 relates to the 53 weeks ended 31 December 2021.

Maintaining consistent high-quality and standards

We are proud of how we care for our clients and families and aim to continuously improve our approach to delivering high quality services and standards.

Our mission is to drive forward positive change in the sector and become a true market leader with an unrivalled focus on quality, transparency and choice. To achieve this, we recognise the importance of investing in our people, digital platforms, and facilities; as well as empowering our colleagues to make the right decisions that deliver a positive experience and outcome for our clients.

Dignity has supported calls for stronger oversight of the standards delivered by the funeral and crematoria profession for some time, but we recognise there is still work to be done to ensure that we ourselves are delivering truly market leading best practice. We have supported formation of the Independent Funeral Standards Organisation (IFSO), and the progress it has made to finalise recommended quality and standards framework for the sector for England and Wales. We have also worked closely with Scottish Government to develop its approach to regulation of the sector and provision of services, including the anticipated implementation of a new Code of Practice for Funeral Directors that will sit under a legal framework in Scotland.

Understanding our customers

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 140,000 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.

We are currently reviewing the way that we gather feedback from our customers and the public. Our new approach will seek to attain a deeper understanding of the needs, wants and trends amongst bereaved families, communities and funeral plan customers, using this insight to understand how we can improve our services. This means we are likely to change the way we report that feedback in the future.

The Dignity Customer Survey 2022