For immediate release                                                                                                                    27 July 2016

Dignity plc

Interim results for the 26 week period ended 24 June 2016

Dignity plc (Dignity or the Group), the UK's only listed provider of funeral related services, announces its unaudited interim results for the 26 week period ended 24 June 2016.

(a)   Underlying profit is calculated as profit excluding profit (or loss) on sale of fixed assets and external transaction costs.

(b)   Underlying earnings per share is calculated as profit on ordinary activities after taxation, before profit (or loss) on sale of fixed assets, external transaction costs and exceptional items (all net of tax), divided by the weighted average number of Ordinary Shares in issue in the period. See note 2.

(c)   Cash generated from operations excludes external transaction costs.

The results for the first half of 2016 were slightly ahead of the Board's expectations. Underlying operating profits in the second quarter of 2016 are £0.6 million higher than the same period in 2015. Its full year expectations remain unchanged.

Compared to long term trends, the number of deaths in 2015 was abnormally high, helping the Group deliver an exceptional result in 2015. The Group continues to expect this unprecedented increase in deaths to reverse in 2016. Its current assumption remains that the number of deaths in 2016 will be broadly comparable to 2014.

Although as expected underlying operating performance in the first half of the year was lower than in 2015, underlying operating profit was approximately 22 per cent higher than the same period in 2014 (when the Group reported £45.6 million) and underlying earnings per share was approximately 45 per cent higher (when the Group reported 46.7 pence).

The Group's expectations for the year remain unchanged. Although this would mean reported underlying operating profit in 2016 slightly below the prior year, the Group remains committed to its target of increasing earnings per share by an average of 10 per cent per year over the medium-term.

The Group has acquired six funeral locations for an aggregate investment of £5.4 million and has opened five satellite locations in the period to 24 June 2016. Since this date, the Group has acquired one funeral location and opened three satellite locations. In addition and as previously announced on 28 June 2016, the Group completed the acquisition of three freehold crematoria from Funeral Services Limited (trading as Co-op Funeralcare) as part of an agreement to acquire five locations from them for consideration of £43 million. On 22 July 2016, the Group completed the acquisition of one of the two leasehold crematoria from Funeral Services Limited.

Mike McCollum, Chief Executive of Dignity plc commented:

"The Group has performed well in the first half of 2016 and traded slightly ahead of our expectations. The Group's expectations for the full year remain unchanged."

For more information

Chairman's statement

Results

As anticipated, the first half of 2016 witnessed a significant reduction in the number of deaths at 302,000, 4.7 per cent lower than the same period in 2015. This was the principal cause of the Group's underlying operating profits being 6.9 per cent lower at £55.6 million (2015: £59.7 million).

Underlying earnings per share decreased 8.5 per cent to 67.7 pence per share (2015: 74.0 pence per share), reflecting the impact of a fixed finance charge on reduced operating profits.

Basic earnings per share were 65.9 pence per share (2015: 71.0 pence per share), a decrease of 7.2 per cent.

Update on crematoria acquisition from Funeral Services Limited (trading as Co-op Funeralcare)

I was delighted that we were able to announce the proposed acquisition of five crematoria from Funeral Services Limited (trading as Co-op Funeralcare) for £43 million on 31 May 2016. The three freehold locations being acquired completed on 27 June 2016 (after the balance sheet date). The leasehold location in Shropshire was acquired on 22 July 2016. The remaining leasehold location is progressing towards completion, with consent being required from the relevant local authority. It is now expected to complete during September 2016.

Dividends

The Group paid a final dividend of 14.31 pence per Ordinary Share on 24 June 2016.

The Group proposes to pay an interim dividend of 7.85 pence per Ordinary Share (2015: 7.14 pence) on 28 October 2016 to shareholders on the register at 23 September 2016.  This is a 10 per cent increase on the previous year.

Our staff

Our customer survey results continue to demonstrate the outstanding work being done by our staff. In all parts of our business, they remain focused on performing their roles to the best of their ability, allowing the Group to help so many families at a difficult time. 

Outlook

The Group continues to expect that the high number of deaths seen in 2015 will normalise in 2016. Although, as expected, this would lead to a slight reduction in operating profit during the year, the Group remains committed to its medium-term target of increasing its earnings per share by an average of 10 per cent per annum.

Peter Hindley

Chairman

27 July 2016

Business and Financial Review

Introduction

The Group's 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 the Group's crematoria and cemeteries. Pre-arranged funeral plans represent the sale of funerals to customers wishing to make their own funeral arrangements in advance.

Office for National Statistics Data

Some of the Group's key performance indicators rely on the total number of estimated deaths for each period. This information is obtained from the Office for National Statistics ('ONS') and helps to provide good general background to the Group's performance. Historically, the ONS has updated these estimates from time to time. As in previous years, the Group does not restate any of its key performance indicators when these figures are restated in the following year.

Initial estimated deaths in Britain for the first half of 2016 were 302,000 (2015: 317,000), a decrease of 4.7 per cent. The Group's operating results should therefore be considered in that context.

Funeral services

At 24 June 2016, the Group operated a network of 777 (June 2015: 729; December 2015: 767) funeral locations throughout the UK generally trading under established local trading names.  The change to the portfolio reflects the acquisition of six additional funeral locations, five new satellite locations and one closure.

In the first half of 2016, the Group conducted 36,700 funerals (2015: 39,500) in the United Kingdom; a reduction of seven per cent. Approximately one and a half per cent of these funerals were performed in Northern Ireland (2015: two per cent). Excluding Northern Ireland, these funerals represented approximately 12.0 per cent (June 2015: 12.3 per cent; December 2015: 12.3 per cent) of total estimated deaths in Great Britain. Whilst funerals divided by estimated deaths is a reasonable measure of our market share, the Group does not have a complete national presence and consequently, this calculation can only ever be an estimate. That said, the market share reduction since the end of 2015 was slightly more than the Board expected but followed market share for 2015 being recorded at a slightly higher level than anticipated by the Board.

Underlying operating profit was £44.1 million (2015: £46.6 million), 5.4 per cent lower than the same period in 2015. This is a direct consequence of the number of funerals performed. Average incomes have increased in line with the Board's expectations and costs continue to be well controlled. Some investment is being made to ensure the division has sufficient staffing to support the network following its expansion over the last two to three years.

Crematoria

The Group operated 39 crematoria (June 2015: 39; December 2015: 39) and is the largest single operator of crematoria in Great Britain. The Group performed 28,900 cremations (2015: 31,500) in the period.

These volumes represent approximately 9.6 per cent (June 2015: 9.9 per cent; December 2015: 9.8 per cent) of total estimated deaths in Great Britain.

Underlying operating profit was £18.3 million (2015: £19.5 million), a decrease of 6.2 per cent. This operating performance is broadly consistent with the reduction in cremation volumes. Sales of memorials and other items equated to £270 per cremation (2015: £261 per cremation).

Pre-arranged funeral plans

Active pre-arranged funeral plans were approximately 384,000 at the end of the period (June 2015: 354,000; December 2015: 374,000). These plans continue to represent future potential incremental business for the funeral division.

Underlying operating profits were flat on the previous half year at £4.0 million, reflecting a similar number of trust plan sales in each period. The Group continues to seek additional partners and to increase funeral plan sales.

Central overheads

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

Costs were £10.8 million in the period (2015: £10.4 million). This includes an accrual of £1.6 million (June 2015: £2.8 million) in respect of annual performance bonuses for the middle and senior management within the business. Overall bonus arrangements are unchanged from the prior period, save for the changes approved by shareholders to Directors' remuneration at the annual general meeting on 9 June 2016. The decrease in the accrual reflects the relative performance in the current period compared to the prior period.

Investment continues to ensure the Group's central functions can appropriately support the continuing growth of the network of locations operated by the Group.

The Group remains on target and on budget to go live with its upgraded accounting software at the end of 2016 at a capital cost of approximately £3 million.

Corporate development activity

The Group has invested £5.4 million in acquiring six established funeral locations during the period and has also invested £0.4 million on satellite locations.  The satellite locations mirror the 81 locations opened up to 2015 which have shown themselves as a project to be successful generating pre tax operating profits of approximately £1.2 million on the £4.1 million of capital invested. These locations are selected to be close enough to existing business centres to use their specialist vehicles and mortuary equipment. In this way, the locations provide the same outstanding levels of client service without the need for significant capital investments. The Group anticipates approximately 10 to 15 satellite locations in total being opened in 2016 and approximately 15 to 20 per annum thereafter.

The Group is also actively working to finalise construction plans on the two crematoria locations for which it has planning permission. These locations are expected to open in late 2017/ 2018. Capital expenditure of approximately £7 million is committed in respect of these projects. Two other planning applications remain under appeal, with decisions expected in 2017.

Earnings per share

As a consequence of the reduction in operating profits, underlying earnings per share decreased 8.5 per cent to 67.7 pence per Ordinary Share.

Cash flow and cash balances

The Group continues to be strongly cash generative. Cash generated from operations, before external transaction costs, was £64.6 million (2015: £71.0 million), reflecting operating performance.

In addition to the corporate development activity in the period, the Group spent £7.1 million (2015: £8.8 million) on purchases of property, plant and equipment.

Capital expenditure in the period to June 2015 on branch relocations included the purchase of the freehold interest of one of the Group's main service centres in London. This secured a key support facility for the local businesses in the area, where suitable alternative premises were scarce.

Cash balances at the end of the period were £120.7 million. This included £16.9 million set aside for the debt service payments made on 30 June 2016.

This significant cash balance will be used to fund the acquisition of the five crematoria from Funeral Services Limited for £43 million, whilst leaving the Group the ability to fund other corporate development opportunities and meet its expected dividend and tax liabilities for the next 12 months.

Other working capital movements in the period reflect the payment of larger bonuses to the Group's employees compared to the previous period, as described more fully in the Group's 2015 Annual Report.

Pensions

As a result of the significant reduction in AA rated bond yields, which was to some extent offset by good investment returns, the Group's pension scheme deficit has increased to £15.0 million (June 2015: £9.0 million; December 2015: £12.5 million).

Taxation

The Group's effective tax rate for 2016 is expected to be 21.0 per cent before exceptional items. The effective rate for 2017 and beyond is expected to be approximately one per cent higher than the headline rate of Corporation Tax for the period.

Capital structure and financing

Drawn facilities

The Group's principal source of long-term debt financing continues to be the New Class A and B Secured Notes issued in 2014. They are rated A and BBB respectively by both Standard & Poor's and Fitch.

The Board considers that maintaining a leveraged balance sheet is appropriate for the Group, given the relatively stable and predictable nature of its cash flows. This predictability is reflected in the Secured Notes. The principal amortises fully over their life and is scheduled to be repaid by 2049. The interest rate is fixed for the life of the Secured Notes and interest is calculated on the outstanding principal.

This has the benefit of enhancing shareholder returns, whilst leaving sufficient flexibility to invest in the growth of the business.

The Group's primary financial covenant under the Secured Notes (which is applicable to the securitised subgroup of Dignity) requires EBITDA to total debt service to be above 1.5 times. The ratio at 24 June 2016 was 3.19 times (June 2015: 4.37 times; December 2015: 3.35 times). Further details may be found in note 8. The reported ratio for June 2015 does not include a full year's debt service within the calculation, as the New Notes were issued in October 2014. If the debt service was annualised, the June 2015 ratio would have been 3.38 times.

As described in the Group's 2015 Annual Report, the Group is also fully drawn on a £15.8 million Crematoria Acquisition Facility, which is repayable in 2018, with interest fixed at approximately 3.3 per cent pre tax.

As set out in note 8, the Group's gross amounts owing on its debt obligations were £598.9 million (June 2015: £607.1 million; December 2015: £603.0 million). Net debt was £490.9 million (June 2015: £496.9 million; December 2015: £517.1 million).

The balance sheet includes £583.1 million of gross amounts owing on all Secured Notes. At the balance sheet date, the market value of the Secured Notes was £652.9 million.

Undrawn committed facilities

The Group has a £26.25 million debt facility with the Royal Bank of Scotland. It is capable of being drawn in up to six tranches with interest payable at between 125 and 165 basis points above LIBOR (depending on the ratio of EBITDA to gross debt). Amounts drawn under the facility may be used by the entire Group for any purpose. Any element of the facility not drawn by the end of 2016 will be cancelled. The facility is repayable in June 2019. Whilst undrawn, the facility will incur a non utilisation fee of circa £150,000 per annum. This facility therefore provides the Group with an efficient and flexible source of additional funding if required.

Post balance sheet events

See note 13 for further details.

Forward-looking statements

Certain statements in this Interim Report are forward-looking. Although the Board believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements.

Going concern

The Directors receive and review regularly management accounts, cash balances, forecasts and the annual budget together, with covenant reporting. After careful consideration and mindful of the current market conditions, the Directors confirm they are satisfied that the Group has adequate resources to continue operating for the foreseeable future. The Directors formally considered this matter at the Board meeting held on 21 July 2016.  For this reason, they continue to adopt the going concern basis for preparing the Interim Report.