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Dignity plc

Preliminary results for the 52 week period ended 28 December 2018

Dignity plc (Dignity, the Company or the Group), the UK's only listed provider of funeral related services, announces its preliminary results for the 52 week period ended 28 December 2018.

Financial highlights

Alternative performance measures

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

Key points

· Number of deaths as expected;

· Comparable funeral market share increased slightly following significant declines in 2016 and 2017;

· Simple funeral pricing reset;

· Unbundled funeral replacing full service package;

· Simplicity service offering expanded;

· Transformation team in place;

· 3 year detailed Transformation Plan established;

· Good performance from crematoria; and

· Pre-need environment remains challenging.

Mike McCollum, Chief Executive of Dignity plc, commented:

"2018 marked the beginning of a period of radical change for Dignity. We reduced our funeral prices, created a broader range of choices for clients and embarked on plans to transform the business by the end of 2021.

Our vision is to lead the funeral sector in terms of quality, standards and value-for-money. To achieve this we are building a more coherent, cohesive and technology-enabled business, one geared to meeting the changing needs of our customers. I am pleased with the progress we made during the year, we built momentum and our Transformation Plan is on track. A lot of work remains to be done, but I am confident that with our highly experienced staff and the new transformation expertise we have brought in, we will achieve our goals.

2019 is likely to mark the start of the Competition and Markets Authority's ('CMA's) investigation into our industry. Our surveys demonstrate that the majority of clients assume the funeral industry is regulated, when it is not. Some may assume that they will receive the same quality of service from different operators irrespective of price. They will not. I am proud that underpinning all of the changes we are making to our business is a continued, relentless commitment to the highest levels of client service. This commitment makes me confident that we have the quality necessary to achieve our ambition of getting ahead of the competitive curve, leading the industry and providing sustainable growth."

For more information

Mike McCollum, Chief Executive

Steve Whittern, Finance Director

Dignity plc +44 (0)20 7466 5000

Richard Oldworth

Chris Lane

Catriona Flint

Buchanan +44 (0)20 7466 5000

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

Notes

An analysts' briefing will be held at 9:00 am this morning at the offices of Buchanan, 107 Cheapside, London, EC2V 6DN. A live audio webcast and conference call facility will be available.

The webcast link and conference call will be listen only. A webcast replay facility will be available after the analyst meeting via the same link.

Dignity's preliminary results and corporate presentation are available at https://www.dignityfunerals.co.uk/corporate/investors/.

For further information, please contact dignity@buchanan.uk.com.

Chairman's statement

Overview

In 2018 we delivered a resilient performance, ahead of market expectations in what was a challenging and transitional year. Against a backdrop of continued change in the funeral market we began the transformation of our business while remaining focused and committed to our customers, shareholders and wider stakeholders.

The Group is undergoing radical change. We have built momentum and our plan is on track. The Board is confident that we will achieve our goal of transforming the Group as planned over the next three years.

Along with change has come opportunity and a renewed vision and ambition for the Group. Quite simply, the Board's vision is to lead the funeral sector in terms of quality, standards and value-for-money. To achieve this we are building a more coherent, cohesive and technology-enabled business, one geared to meet the changing needs of our customers.

Our ambition is to fully reposition Dignity in the funeral market and ensure a sustainable and successful long-term future. Offering customers an enhanced and very competitive range of services and price options is at the core of this change.

Industry regulation

More broadly, we have continued to advocate that the funeral industry must also change. Regulation is needed and we support moves to bring this about. Customers must be treated fairly and be assured of minimum acceptable standards whichever funeral director they choose.

We therefore noted with great interest the Competition and Markets Authority's ('CMA') proposal in November 2018 to launch a full investigation into the funeral market as part of its interim report into the industry. At the time of writing, that full investigation has not yet been confirmed. We have made public our support for such an investigation if it happens and believe it could help improve standards across the sector and deliver better outcomes for customers. We are also keen to work closely with the CMA and help them understand the challenges of providing a quality funeral service.

In addition, we have made the following points to the CMA:

On competition: the funerals market is already competitive, however, more can be done to improve the ability of customers to exercise the choice that exists, especially through greater pricing transparency.

On improvements in the sector: we hope that the CMA will take more account of the lower prices and greater transparency that already exists in the sector, including Dignity's own pricing structure which has already changed significantly over the past year. We believe it is essential that the CMA clearly acknowledges the variation in quality among different funeral providers.

On vulnerable consumers: we are especially keen to work with the CMA to improve the experience of all customers organising a funeral, and ensure they are given the appropriate support to take informed decisions.

On regulation: research indicates that 92 per cent of consumers believe the industry is already regulated, and many are surprised that it is not. We hope that the CMA investigation will examine how regulation can improve standards and transparency in the sector.

In short, we want to continue to play a leading role as a responsible and progressive corporate citizen in the funeral industry as it undergoes long overdue change.

Dividends

The Board is proposing a final dividend of 15.74 pence (2017: 15.74 pence) per share, which, subject to approval at the AGM, will be paid on 28 June 2019 to shareholders on the register at close of business on 17 May 2019. This will bring the total dividend for the year to 24.38 pence (2017: 24.38 pence) per share.

Company Secretary change

During the period, Richard Portman relinquished his role as Company Secretary while continuing as Corporate Services Director. He was replaced as Company Secretary by Tim George, who joined the Group in 2018.

My role as Chairman

The Board has been seeking my successor following the announcement of my intention to retire in 2019. The Board is in the process of conducting an extensive search and will announce my successor in due course.

Our people and resources

I want to thank our people for continuing to deliver outstanding customer service in what has been an uncertain and challenging year. This speaks volumes for their professionalism and commitment to our customers. Their continued loyalty and commitment will be essential if we are to deliver our Transformation Plan.

Executive performance and remuneration

A new Remuneration Policy will be presented to the annual general meeting for approval. This follows a period of consultation with our significant shareholders and institutional voting services.

Planned change of name

Given the increasing focus on our brands across our entire business, the Company will, as permitted by its Articles of Association, change its name. The Company will confirm its new name later in the year. This change will help to remove confusion between our trading brands and our corporate profile.

Outlook for 2019 and beyond

The Board's expectations for the year ahead are unchanged from the most recent guidance. 2019 is likely to see underlying profitability lower than 2018 but in line with market expectations. In the medium-term the Board believes that targeting solid single digit increases in underlying EPS is appropriate and achievable.

Governance during a time of change

The Company continues to pride itself on the strength and effectiveness of its governance. It is of particular importance during a time of change within the Company and when there is increasing scrutiny of the industry as a whole.

Good governance is the basis on which we as a business build an environment of trust, transparency and accountability. As such it provides assurance and confidence to our customers and fosters long-term investment, financial stability and business integrity. As a Board we are therefore committed to maintaining our high standards of corporate governance and ensuring there is a high level of cultural integrity embedded within the way we operate.

Board priorities

The Board provides strategic leadership to the Group within a framework of robust corporate governance and internal control, setting values and standards that are embedded throughout the business to deliver long-term sustainable growth for the benefit of our shareholders and other stakeholders.

Compliance

Our governance framework, which is shaped by the UK Corporate Governance Code, the Companies Act 2006 and secondary legislation and Financial Conduct Authority rules and guidance, sets out standards of good practice in relation to Board leadership and effectiveness, remuneration, accountability and relations with shareholders.

Peter Hindley

Chairman

13 March 2019

Chief Executive's review

Overview

In 2018 we exceeded market expectations and following the significant decline in funeral market share seen in the previous two years, our comparable funeral market share increased slightly in 2018. This was a key objective of the year and I am delighted with the progression we made in 2018. Encouragingly, comparable market share increased to 11.2 per cent from 11.1 per cent in the previous year. However, as anticipated, underlying operating profit decreased by 23 per cent (to £80.2 million) and average income per funeral reduced to £2,973 from £3,222 in the previous year, reflecting the 25 per cent reduction in our simple funeral price and the full service price reductions we have made so far. The funeral mix continues to evolve in the light of new service offers and ongoing pricing trials and we have made good progress in identifying the best balance between price and service offer.

As the Chairman has said in his statement we are on track with our Transformation Plan; we have built good momentum and the Board is confident of achieving its goals. The fundamentals of our business remain compelling and strong. We are confident we have the platform, focus and ambition to get ahead of the competitive curve and to continue to provide sustainable growth while maintaining the highest possible standards of client service. However, we recognise that we are still in the early stages of a three year journey and the Board does not underestimate the scale of the challenge the Group faces.

In his statement the Chairman also discussed the CMA's consultation on a full investigation into the funeral market, following its market study. On pages 8 to 10 we publish extracts from our responses to the CMA over the past few months. In them we have made clear our support for such an investigation in the interest of helping to create a properly regulated industry while highlighting a number of important issues.

What is also clear is that such an investigation (if it takes place) will most likely last 18 months to two years and, if other market investigations are a guide, will generate much interest and comment, some of it hostile towards major industry players like ourselves. We will remain focussed on the final outcome and findings of the investigation, not the inevitable twists, turns and comments that such a process will trigger. We will remain calm and helpful throughout what could be a high profile and testing period, ensuring that the CMA sees all sides of any issues.

Where we are now

Radical transformation

In 2018 we began a period of radical transformation for the Group. During and after this change we will remain a caring business with core values built around quality and providing excellent customer service. We have a long-term commitment to the customer and we are shaping our services around their evolving needs; we are committed to change and are responding to change.

A major opportunity

This change presents a major opportunity for the Group to become the pre-eminent modern funeral services business in the UK once the Transformation Plan is complete. We will build on our existing strong market positions, quality, and scale and the Board is determined to seize this opportunity.

How people remember their loved ones is changing which means funerals are changing. Dignity is responding by offering greater flexibility and choice and taking alternative types of funerals into the mainstream. For example, in 2018 the Group launched a TV campaign for its low-cost cremation service Simplicity.

Updates

We have made good progress in 2018 and built the momentum necessary to begin executing our Transformation Plan:

· Our market share stabilised following our price changes;

· Our websites continue to improve, with increasing numbers of people selecting our websites from searches they make;

· We have updated our Simplicity brand, relaunching it with modern marketing, including a TV campaign;

· We have made great progress on our Dignity brand and expect to report significant developments on this during 2019; and

· Our Transformation Plan has an excellent base. As of the end of 2018, there was a team of 17 experienced individuals in the business to support our ambitious plans and this number is expected to grow.

Our Transformation Plan

The core components of our Transformation Plan are:

· Modernise the client proposition;

· Invest in and simplify the operating model; and

· Streamline central support and invest in technology to centralise and automate administrative processes.

Transformation Plan summary update

So far our focus has been in the following areas:

· Engaging the senior leadership team within Funeral Operations including creating a new national role to focus on service delivery;

· Completing a thorough review of the current IT applications and support model for the funeral business against the requirements of the Transformation Plan and agreeing the IT architecture for the future;

· Monitoring and developing trials of the Group's funeral services leading to the unbundling of services offered within bespoke funeral arrangements;

· Managing the ongoing development of the brand identity for the Group's Simplicity offering; and

· Finalising the number and structure of efficient branch networks in advance of the testing of our new operating model.

In 2019, we began to execute the broader plan following this detailed work.

Financial objectives

As we set out in August 2018, we expect to invest £50 million (partly funded by £17 million of surplus property disposals) in our business and achieve annualised net cost savings of £8 million per year by the end of 2021, increasing to £13 million per year by the end of 2028.

Our purpose - to serve our customers

Our customers are at the heart of what we do. We are here to help them at one of the most difficult times in their lives and we are honoured to serve the communities we are part of.

Listening to our customers and understanding their changing attitudes and lifestyles must drive what we do as a business.

Our brands, products, services and technology must reflect those changes and are the reason why we now offer enhanced choice and value-for-money. The high-quality of our offering, competitively priced, is how we will differentiate ourselves from the competition, both nationally and locally.

Every day we want to meet and exceed our customers' expectations. We aim to do this by delivering excellent client service through the continued dedication of our people and by serving our customers with expertise, compassion and commitment.

Our customer insights and research mean we are in a strong position to develop the services they want and become an informed and valuable commentator on emerging societal trends with regard to death and funerals.

This year we have introduced the following services and price points:

· Simplicity extended its offering beyond unattended direct cremation to allow options for a small gathering at the point of cremation and for a full cremation service. With all Simplicity offerings, traditional elements, such as the use of a hearse or procession into the crematorium, are not provided. Simplicity is available from £995 and is also available as a pre-arranged funeral plan.

· Dignity has been trialling a tailored funeral, where clients can choose to pay for additional services to personalise their requirements, rather than paying a single package price.

· In January 2018, our Simple funeral was reduced to £1,995 (plus disbursements) in England and Wales and to £1,695 (plus disbursements) in Scotland.

· With effect from January 2019, all of our locations offer a full service funeral for no more than £3,545 plus disbursements.

Our vision

Our vision is to lead the funeral sector in terms of quality, standards and value-for-money. As the Chairman said in his statement, to achieve this we are building a more coherent, cohesive and technology-enabled business, one geared to meet the changing needs of our customers.

In addition, we have always taken our role as a responsible corporate citizen extremely seriously and recognised that our broader role in society goes beyond just creating value for our shareholders. We will therefore continue to be a responsible and sustainable business, determined to meet both our social responsibilities and the expectations of all our stakeholders.

Quality of care for the deceased is a critical aspect of funeral provision. The need for proper facilities is more important today than ever. The biggest factor missing from conversations around the funeral sector is quality when it comes to caring for the deceased.

Our vision for the funeral industry is for it to be properly regulated. There is a misconception that the funeral sector is already regulated or operates to a minimum standard. It does not. We therefore continue to lead the call for change as we seek a regulated market that will be good for clients and society.

Dignity is working collaboratively with industry partners and other stakeholders to improve standards across the sector. At the end of 2018 we initiated a round table discussion and invited the CMA and other representatives from the funeral sector, co-operating together to try and find a solution. The Chairman has commented on the CMA and its proposed full market investigation into the funeral industry and there is more background on page 10 of this review.

Major research on funerals and crematoria

In 2018 we commissioned and published two pieces of research, one on funerals and the other on crematoria. The first, 'Time to talk about quality and standards', is the most comprehensive study of funeral directors ever in the UK, exploring how families perceive the funeral sector and expect funeral directors to operate. The report forms the basis of discussions and debate that the Group wants to stimulate on the best way to protect consumers and achieve appropriate quality standards.

We also published the results of a report on UK crematoria entitled, 'Cost, Quality, Seclusion and Time.' Our research shows that while price is important, customers consider time or the length of a service as often more valuable.

As one of the leading funeral providers in the UK, we believe it is important to understand what consumers think and to raise issues that are of concern to them and need addressing by policy makers and politicians beyond the funeral industry.

People and culture

We have always been a people business, helping families at an extremely difficult time in their lives. Our plans to transform the business mean that we are setting the bar even higher and asking more of our staff. I am pleased with how positively employees have responded so far and thank them for their support during this time of change.

The CMA report into the funeral market

The Competition and Markets Authority is the UK's primary competition authority. It is an independent, non-ministerial government department with responsibility for carrying out investigations into mergers, markets and the regulated industries and enforcing competition and consumer law. In June 2018 the CMA announced a market study into the funeral industry "to review how well the market works and whether consumers are getting a good deal." In November 2018 it published its interim report and consultation, part of which proposed that the funerals market should be referred to a CMA Group for a full market investigation. Such an investigation has not yet been confirmed but a decision must be reached by the end of May 2019.

As a leading player in the funeral industry and a long-standing campaigner for its regulation, Dignity welcomed the CMA's interest in the funeral sector and has made two public statements in response. The first, in November 2018 was an immediate response on the day of the release of the CMA's interim report. The second, in January 2019, was in response to an invitation by the CMA for views from interested parties on the issues raised in its report.

CMA funeral market study interim report: Dignity's response

November 2018 statement

These are some of the key points from Dignity's November 2018 CMA statement:

Dignity plc, the UK's only listed provider of funeral-related services, acknowledges today's announcement from the Competition and Markets Authority regarding the provisional findings of its study into the funerals market and notes its proposal to carry out a full market investigation. Dignity is considering the recommendations in detail and notes the key findings. Dignity has engaged constructively with the CMA since the market study was announced in June 2018 and strongly supports the opportunity to improve standards within the sector and meet the expectations of consumers.

Greater choice for consumers

Dignity welcomes the focus in the report on transparency and competition.

Dignity believes there is a need for greater transparency on pricing, more consumer choice and high levels of quality across the sector. The Group has acknowledged that there is rising consumer demand for lower-cost funeral options and has already been making considerable steps to provide a wider range of choice for its customers.

In January 2018, in advance of the CMA market study being announced, the Group implemented a new pricing policy and continues to test and consider a range of new price points and services for its customers, while preserving Dignity's unrivalled levels of service and quality. Delivering excellent client service remains a key strategic priority and means that the Group can offer best-quality service at each price point and market segment in which it chooses to operate.

Leading the call for regulation and higher standards

Dignity has led calls for greater regulation of both at need and pre-paid funeral sectors for some time, while continuing to set the standard for what constitutes best practice in the industry.

The CMA's work in the sector provides a significant opportunity to improve standards and protect consumers. The Group welcomes the CMA's initial focus on this area, and would encourage them to explore this further.

UK consumers assume all funeral directors are the same, that their market is already regulated and each of them is operating to a consistent set of professional standards, when in fact none of these statements are true. Dignity's research showed that 92 per cent of consumers did not know that funeral directors were not regulated in the UK, but once aware 80 per cent supported regulation to ensure minimum standards.

Dignity believes the funeral industry will benefit significantly from proper regulation to ensure that clients can assume minimum standards, and effectively assess and compare what a funeral service includes. The Group would welcome regulation which sets out minimum standards for core activities such as the care of the deceased, minimum standards of facilities and also operating procedures in crematoria.

The Group has shared its research and supporting information with the CMA and will continue to make the case for agreed minimum higher standards. As part of this the Group is leading a cross-industry initiative, bringing together industry, consumer bodies and policymakers, to develop collaborative long-term solutions to improve standards and transparency across the sector.

These are some of the key points from Dignity's letter in January 2019 to the CMA:

Given the concerns that the CMA has identified, Dignity supports a market investigation which will enable the CMA to undertake a thorough analysis of the market. We recognise that there are specific challenges relating to vulnerable customers, particularly those who are financially vulnerable and would welcome thoughts about how to ensure the market works better for them.

A competitive market that works for customers

In many respects the funeral market is highly competitive: there are many competitors; no single provider has a market share greater than approximately 16 per cent; and the number of funeral directors has increased significantly in recent years. There is also growing evidence that customers have started to more actively 'shop around', driven in part by an increase in online searches for funeral directors.

In our view, a key issue the CMA should address is how best to improve the ability of customers to exercise the choice that already exists, providing them with clear and relevant information on prices, the range of different products available, and quality, in a way that will make comparisons easy for customers, allowing them to make informed choices.

Price lists are available in our locations and over the phone. We have already posted our crematoria prices online and have basic pricing available online for all funeral services.

Central to transparency and greater information for customers must be a recognition that there is significant variation in the quality of funeral services, and quality differentials are not always visible to customers. Funeral services are not a homogenous commodity. We would encourage the CMA to explore ways to allow customers to compare the different service providers and their respective facilities and services.

Resulting in better outcomes for customers for the long-term

We note that there is a significant focus on historic pricing in their interim report. Price is hugely important for our customers, and we are committed to offering fairness and transparency in our pricing structure. While we understand the CMA has some concerns in this area, we believe there are some key points that warrant further consideration and clarification in a market investigation.

First, we have taken steps to reduce prices and change our pricing structure both on simple and full funeral services. Structural factors that contributed to historic price rises in the sector are now changing. We therefore envisage a sustained, long-term change of approach to pricing and have communicated this to our investors.

Second, we believe that many of our customers are price aware and actively exercise informed choice. In many cases where death is anticipated, the decision process can begin earlier.

Third, we believe it is important to take into account quality in any analysis of how competition works in this market. Many aspects of quality are not observable to the customer in advance, and it may be the case that customers use pricing as a guide to quality in addition to recommendations from others. We would encourage the CMA to think about how best to measure customers' preferences for quality and to understand the costs of quality in terms of operating costs, capital expenditure on maintenance and investment in both front of house and back of house facilities.

We consider that their interim report does not sufficiently consider these issues and see the full investigation as an opportunity to undertake a more thorough analysis.

Supporting financially vulnerable customers

We recognise that some customers face particular challenges in relation to funeral affordability.

We already have processes in place to support these customers, including affordability checks and signposting to more affordable options where appropriate. We have a longstanding policy of providing child funerals for free across both our funeral and crematoria businesses, with around 1,000 child funerals performed at no cost each year. We have introduced a number of new low-cost, affordable options which increase choice for customers and in October 2018 introduced the lowest price, nationally available, attended cremation service through our Simplicity proposition.

HM Treasury's consultation on the funeral plan sector

HM Treasury is continuing its consultation into the pre-paid funeral plan market, which it announced in June 2018. Dignity has led calls in recent years for regulation and its research, published together with Fairer Finance, has highlighted the poor sales practices and financial management risks that certain providers engage in. An update from HM Treasury is expected in the first half of 2019 and Dignity hopes HM Treasury acts swiftly to regulate the market and minimise further consumer detriment.

The UK funeral market

The UK funeral market is getting more complex. The internet continues to change everything, and consumer behaviour is evolving rapidly. Until 2015, the death rate slowly decreased while the number of funeral directors has increased rapidly.

Scale and structure of the market

The funeral director market remains very fragmented, with approximately two thirds of funeral directors being small owner- manager businesses. There are approximately 290 crematoria in the UK, with around 66 per cent owned by local authorities. It is estimated that three quarters of all funerals result in a cremation with the remainder being burials.

In 2018 the initial publication of recorded total estimated deaths in Britain for 52 weeks was 599,000, a small increase on 2017. Some of the Group's key performance indicators rely on the total number of estimated deaths for each period and this information is obtained from the Office for National Statistics (ONS). The ONS expects long-term increases in the number of deaths, reaching approximately 700,000 per year by 2040.

Increasing competition

The funeral market is already extremely competitive, however, more can be done to improve the ability of customers to exercise the choice that exists, especially through greater pricing transparency.

The pre-paid funeral plan market environment

The UK pre-paid funeral plan market declined in 2018. New plan sale volumes for providers registered with the Funeral Planning Authority, which represents more than 90 per cent of the market, were 177,000 in 2018, a reduction of 15 per cent against the 207,700 plans sold in 2017.

Consumers have become wary of the market following heightened negative press surrounding poor industry practices and HM Treasury announcing a consultation considering formal FCA regulation of the market.

Price competition intensified in 2018, with many of the leading providers cutting their prices. The majority of plans continue to be sold directly through funeral directors, but significant plan volumes are still being written by online lead generators and outbound call centre operations.

Our Transformation Plan

Our Transformation Plan has been developed following a major strategic review in 2018. The Board has appointed a Transformation Director who is driving change with full project management support. Execution of the Transformation Plan is scheduled to be complete by the end of 2021.

The need for change

The combination of increased price competition and more demanding consumers requires a new approach, namely, a radical transformation of our business and business model.

The landscape in our industry has changed, with a growth in lower-quality providers, lower-cost funeral alternatives and with online channels driving increased price transparency.

Consumers are becoming more demanding and sophisticated. Values are changing, there is increased secularism and a growing demand for personalised, lower-cost services, supported with online resources. There are fewer visits to the High Street and more online research and shopping around.

Market opportunity

While this degree of change could be seen as unnerving, we chose to see it as an opportunity. Our response will be to build a lower-cost model and build recognisable national brands associated with quality in support of competitive prices. Specifically, we will grow our presence in the low-cost cremation market.

We will embrace online and build a leading digital presence; unbundling our full service funeral pricing to create a more compelling proposition and greater flexibility for clients; and further develop our low-cost Simplicity Cremations service.

Strategic review

The strategic review took place over the first half of 2018. It involved focus groups and quantitative surveys with clients, consumers and other stakeholders from across the market. The company analysed data spanning the last 10 years on clients, transactions, fleet, property and people. It involved a review of our branch network footprint and service delivery model. And we engaged, naturally, with staff to gather their insights and perspectives.

1. Modernise the client proposition 

Adapting our service model to better suit evolving client needs and to improve efficiency

We will provide client-facing staff with better tools to improve service levels and efficiency. This will include having vehicles and mobile devices to support arrangements at a location of the client's choice.

We will reward the delivery of key objectives such as exceptional client service and will drive increased front line productivity through more flexible ways of working.

A new tiered proposition providing greater flexibility to meet individual client needs

We will implement across our business a structure of services that gives clients the most appropriate range of choices. This will be achieved through ongoing testing of different propositions to ensure their appropriateness.

Building our national brands leverages our scale and addresses the needs of increasingly digital clients

We will build known, national brands to leverage our scale advantage in the digital age. We will market our commitment to high standards of care, quality of service delivery and competitive entry prices.

In our full service offer we will increase the prominence of the national brand over local brands while retaining strong local names. In the low-cost market we will grow Simplicity into the leading national provider of low-cost cremations.

Areas of focus in 2019

Building on the successes of 2018, the focus will be on:

• Implementing trials of new technologies in simplified forms to test client responses;

• Further trials of different service propositions;

• Relaunch the Dignity brand; and

• Further support and marketing of the Simplicity brand.

2. Invest in and simplify the operating model

Enabling specialisation and efficiency gains by separating front and back of house activities

Front of house

This will increase the focus on client service and community engagement, will establish a flexible arrangement model to meet changing consumer needs as these migrate from local to digital, and will enable us to move to more appropriately-sized locations.

Back of house

This will increase the focus on operational efficiency, create a superior operational platform for future growth and leverage organisational scale to realise operational efficiency benefits.

The existing network will be right-sized and enhanced and greater efficiency in funeral delivery will be achieved by leveraging scale and better allocating resources.

We expect to reduce the number of branch networks we operate from more than 120 to approximately 75. The average number of funeral locations per network will increase and we plan to move from a mix of distributed and centralised operations to centralised operations where appropriate.

3. Streamline central support and invest in technology to centralise and automate administrative processes

Consistency and focus in management roles

We will introduce consistent management roles nationwide in support of the strategy. There will be operational focus with managers unencumbered by non-management tasks. We will create specialised front and back of house roles to support process excellence and introduce clearly defined KPIs to assist management. We will also provide greater recognition of strong performance and reduce overall costs.

Central investment will enable improved support function effectiveness

Finance will automate and centralise supplier/client payments and produce standardised reporting. The marketing function will produce centrally created marketing materials and improve the targeting of digital spend. There will be centralised HR capabilities to reduce management time spent on non-core activities. We will also realise savings in key procurement activities such as mortuary equipment and stationery.

New IT capabilities to improve operational efficiency and enable delivery of plan

Our CRM System will enable consistent and informed communication and support for clients along the full journey from initial contact to final follow up, potential referrals or returning clients.

Our tablet based arrangement software will capture funeral arrangement data digitally to maximise accuracy and efficiency (versus the existing paper based process) and provide rich, relevant visual content e.g. choice of flowers. A workflow management tool will implement a new end-to-end workflow system to optimise funeral arrangements and the delivery process. Resource management will optimise the scheduling of limousines and hearses to maximise usage and also optimise the rostering of funeral director and support staff.

Areas of focus in 2019

In order to support efficient operational activity, it is essential that central processes are streamlined. Focus will therefore be on:

• Introduction of consistent management roles nationwide;

• Finalisation of the overall IT strategy and selection of relevant IT partners to support change;

• Modernisation of business intelligence reporting to support operational activities; and

• Implementation of a modern purchase-to-pay solution for all procurement activities.

IT roadmap established

As so much of our Transformation Journey will rely on having the right IT solutions we have laid out a clear IT roadmap.

This addresses:

• A full maturity assessment of our IT systems and services today;

• The plan of where we will invest in our IT capabilities to support the delivery of our strategy;

• Review of alternative overarching architecture options;

• Prioritisation and selection of individual applications to enable the strategy; and

• Selection of partners to work with on our implementation plans.

People are central to realising our Transformation

Our people

Our people will be central to the success of our Transformation. Perhaps the most crucial group will be those who have direct contact with our customers. It is essential that our service levels, of which we are justly proud, do not falter.

Managers across the business also have a major responsibility during this time of change to keep close to their teams. To encourage and to lead by example. The same is true of the Board. We have a duty to make the best decisions we can but also to make sure that we communicate well and lead by example. This may well be the biggest test that we have faced in the last 20 years.

A strong management team

The Board acted decisively at the beginning of 2018, recognising that the business had to change radically. Since that decision was taken the senior management team across the Group has responded swiftly and well in supporting this decision. I am confident that we are on the front foot as we face what will be a challenging and testing time.

An enhanced communications strategy

One of the consequences of the decisions taken last year has been to review the way we communicate and explain ourselves. While we have always done this with investors, we are now increasingly reaching out to other groups; policy makers, regulators and the general public, to cite just three. Above all, we are looking to improve the quality of our dialogue internally.

Why culture matters

The culture of a company matters, no more so than in one which is in contact with people at one of the most difficult times of their lives. We already have a strong and caring culture. It is essential that this culture remains rooted and strong as the Group transforms. The transformation is about the type of service and value-for-money that we offer customers. We have demonstrated significant flexibility with our prices over the past year and this will continue. What is not negotiable is the care and attention we give our customers. That compassionate culture has grown and strengthened over many years and is the cornerstone of who we are.

Engaging with and managing the expectations of wider stakeholders

While our employees are crucial to the success of our plan we are also mindful of our wider stakeholders. These include shareholders, customers, industry bodies and politicians and as industry scrutiny grows, this last group will become increasingly important. Explaining ourselves and the industry, while also continuing to call for regulation, will remain an important strand to our communications.

Shaping the future

Leadership

Our focus at present is on transforming the Group and securing a sustainable and successful future. But we also want to help shape the future beyond the four walls of our Group. We see the bigger picture of a changing industry, one in need of minimum standards and regulation.

Standards, quality and regulation

We are proud of the stand we have taken with regard to campaigning and arguing for minimum standards, quality and regulation in our industry. But we will not be content until this becomes a reality.

As an industry leader

We are one of the largest companies in the funeral sector and as such have a responsibility as a good corporate citizen to lead. This means listening to customers and finding out what they want, along with making their and our case to the powers that be.

Our broader societal purpose

As a leader we have to take account of broader issues than just our own performance as a business. Of course it is essential that we deliver value to our shareholders. But it is also important that we provide value to our customers and make a positive contribution to society at large. As a funeral company, we are involved in a fundamental and timeless human ritual and we are mindful of the responsibility this places on us.

Research and insight

Societal trends over the next ten years

Our recent research projects mean that we have a good understanding of trends in society with regard to funerals. One might assume that in the next ten years almost universal digitisation and individualisation of funerals is inevitable and becomes the norm. One might predict a rapid increase in "green" funerals. But we might be wrong on at least one of those counts, which means we will continue to research and test our assumptions and remain alert to the unexpected.

In 2018 we published two significant research projects which helped us understand the big picture as well as crucial smaller details. For example, our major research project into funerals revealed that 92 per cent of people were unaware that funeral directors are not already regulated and 80 per cent of participants supported regulation of minimum professional standards. At a more granular level, our crematoria research revealed that 59 per cent of people felt that 30 minutes for a service was not long enough. 13 per cent of all crematoria have times of 30 minutes or less and 30 per cent have times of less than 45 minutes. Approximately 72 per cent of Dignity's own crematoria allocate 60 minutes, with the remainder of locations offering 45 minutes for a standard service.

Operating Review

FUNERAL SERVICES

Performance

As at 28 December 2018, the Group operated a network of 831 (2017: 826) funeral locations throughout the United Kingdom, generally trading under local established names.

During the period, the Group conducted 72,300 funerals compared to 68,800 in 2017.

Underlying operating profit was £62.2 million (2017: £79.5 million), reflecting lower average incomes from the Group's strategic changes in January 2018.

Non-underlying items of £7.4 million (2017: £2.5 million) excluded from underlying operating profit resulted in statutory operating profit of £54.8 million (2017: £77.0 million).

Progress and Developments

Market share

Approximately one per cent of all funerals were conducted in Northern Ireland. Excluding Northern Ireland, these funerals represented approximately 11.9 per cent (2017: 11.5 per cent) of total estimated deaths in 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.

On a comparable basis, excluding any funerals from locations not contributing to the whole of 2017 and 2018, market share was 11.2 per cent, compared to 11.1 per cent in 2017. Given market share has reduced in previous periods, this shows a very positive response to the Group's introduction of a broader range of funeral choices, combined with lower prices. It demonstrates significant progress in a key objective of the year: to understand the changing relationship between price, choice and consumer demand.

Funeral mix

The trial in part of the country of a limited funeral in 2018 resulted in a smaller proportion of full service funerals than expected. Given the introduction of the Group's Tailored funeral, which provides even greater choice to customers and which will be introduced to all locations during 2019, the limited service funeral is no longer necessary and trials of this type of service have ceased.

Average income

In the final quarter of 2018, average income per funeral reduced to £2,897, slightly ahead of the Board's expectations at the start of the year. Higher than anticipated average incomes throughout the year resulted in a full year performance approximately £100 per funeral higher than originally anticipated.

Investment

Significant cash resources continue to be used to maintain the Group's locations and fleet. In 2018, £10.4 million was invested in maintenance capital expenditure.

The Group also acquired four funeral locations for consideration of £5.4 million. There were a total of nine other openings and eight closures in the year.

In November 2018, the Group announced that acquisitions of small funeral businesses were inconsistent with the Group's strategy and current plans for the future. Should opportunities of larger, more established businesses become available, the Group will consider these on a case by case basis.

Transparency

The Group is very supportive of improving transparency across the industry to ensure consumers can properly understand differences in facilities, standards of care, service and price. Since the year end, the Group's website publishes prices for the various types of services offered.

Outlook

The Group plans to continue trialling various changes to its service offerings during 2019. As part of this, it anticipates continuing to roll out its Tailored funeral offering, where customers can select relevant services for their needs with support from the Group's outstanding funeral arranging staff. The Group anticipates overall average income per funeral to be approximately £2,940.

CREMATORIA

Performance

The Group remains the largest single operator of crematoria in Britain, operating 46 (2017: 45) crematoria as at 28 December 2018. The Group performed 65,200 cremations (2017: 63,400) in the period, representing 10.9 per cent (2017: 10.7 per cent) of total estimated deaths in Britain.

The Group did not increase its cremation fees during the year.

Sales of memorials and other items have been robust, equating to approximately £276 per cremation compared to £270 in the previous period.

These factors, combined with costs increasing in line with the Group's expectations resulted in underlying operating profit of £40.3 million (2017: £40.0 million), broadly flat year-on-year.

Non-underlying items of £0.7 million (2017: £1.8 million) excluded from underlying operating profit resulted in statutory operating profit of £39.6 million (2017: £38.2 million).

Progress and Developments

The Group has invested £4.5 million maintaining its locations in the period.

The Group's 46th crematorium opened in July 2018, representing a total investment of £5.2 million.

The Group now has planning permission for three new crematoria, following the acquisition of a third location in 2018. Two of these locations are due to open in late 2019 and the third is expected to be operational in 2020. The total capital commitment for these three projects is expected to be approximately £20 million to £21 million, with £4.3 million of this amount having already been invested. Each of the locations with planning permission will take five to seven years to reach maturity, performing 800 to 1,000 cremations per year.

The Group has two locations where it is appealing the planning decisions and another two that are currently in the planning process.

During the period, the Group re-branded its crematoria business as 'The Crematorium and Memorial Group'.

Outlook

We remain confident about the future of our crematoria business. The continued growth of the Group's Simplicity Cremations business should generate further opportunity to help more families in a way that suits them.

The capital invested in new crematoria developments is expected to generate an after tax return of approximately 13 per cent. Developments will take five to seven years to reach maturity.

PRE-ARRANGED FUNERAL PLANS

Performance

The Group continues to have a strong market presence in pre-arranged funeral plans. These plans represent potential future incremental business for the funeral division, as the Group expects to perform the majority of these funerals.

Underlying operating profit was £2.8 million compared to £8.0 million in the previous year. As previously announced, this reflects the Group's conclusion that it should reduce the level of marketing allowance it seeks to claim from the trusts when it makes a plan sale, thereby leaving a greater proportion of the plan's sales value in the trust available for when the plan holder dies and the plan is used. The Group believes that it has long led the industry in best practice and given its calls for higher levels of capital solvency to protect consumers, feels this is the appropriate course of action.

Non-underlying items of £0.2 million (2017: £0.2 million) excluded from underlying operating profit resulted in statutory operating profit of £2.6 million (2017: £7.8 million).

In overall terms, approximately 58,000 (2017: 69,000) new plan sales were made and the number of active pre-arranged funeral plans increased to 486,000 (2017: 450,000) as at 28 December 2018. Trust based sales in the year were 24,000 (2017: 34,000).

Of the sales in the period 34,000 (2017: 35,000) represent plans linked to life assurance plans with third parties rather than trust based plan sales and 134,000 (2017: 102,000) active insurance plans are in place at 28 December 2018. Not all of these insurance backed plans include an obligation to provide a guaranteed funeral and we anticipate the cancellation experience to be significantly higher than is witnessed on trust based sales.

Whilst the contribution to this year's operating profit from the marketing activity is reported at the time of sale, it is important to recognise that the sales made represent significant potential future revenues for the funeral division.

These amounts will be recognised as and when the funerals are performed. As with all the Group's divisions, pre-arranged funeral plan profits broadly reflect the cash generated by that activity. This will change in 2019 when the Group adopts IFRS 15.

The adoption of IFRS 15 will change the Group's accounting policy for the pre-need business, impacting statutory and non-statutory measures of financial performance.

Progress and Developments

The increase in the number of active plans follows plans sold in the year. The market has been particularly competitive, with the internet and 'cold calling' featuring extensively in activity by competitors. Dignity has remained focused on selling high-quality business, in ways that support the strong reputation of the Group.

The Group has continued to work hard at developing its portfolio of affinity partners and has formed a number of new partnerships in the period with organisations in the retail and financial services arena with further trials expected in 2019.

The financial position of the independent trusts holding members' monies is crucial, given the Group ultimately guarantees the promises made to members. At the end of 2018, the Trusts held approximately £928 million of assets in respect of 308,000 trust based funeral plans. Average assets per plan are greater than the amount currently received for performing a funeral.

The latest actuarial valuations of the pre-arranged funeral plan trusts (at 28 September 2018) showed them to have a surplus of £33.0 million, based on prudent assumptions. If the discount rate used had equalled the long-term investment target of the trust funds, then the trusts would have reported aggregate surpluses of approximately £160 million.

Crucially, each plan sold creates additional headroom, since the funds paid in are more at the point of sale than those received by the Group if the member died immediately.

Outlook

The Group's approach to lower marketing allowances will continue for the foreseeable future, meaning the Group's trust based pre-need marketing activity is expected to be cash flow neutral in 2019 and beyond.

As detailed elsewhere, the consultation and likely regulation of the pre-need division is likely to develop in 2019 and the Group will actively participate in that process.

The Trusts' investment strategies are expected to provide returns in excess of inflation in the longer-term but will, however, potentially result in greater volatility year-on-year in the reported value of the Trusts' assets. The current allocation that is subject to annual review by the independent Trustees with support from their investment advisers, is summarised below.

Pre-arranged funerals represent a stable source of incremental funerals for the Group, providing high-levels of certainty of cash flows as existing plans mature.

The Group intends to continue to sell as many plans as is commercially possible and economically sensible.

CENTRAL OVERHEADS

Overview

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 records 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.

Developments

Underlying costs in the period were £25.1 million (2017: £22.9 million).

Non-underlying items of £5.6 million (2017: £2.1 million) excluded from underlying costs resulted in costs of £30.7 million (2017: £25.0 million).

On-going marketing activity represented an increased cost of approximately £3 million year-on-year. This investment will continue to increase.

Investment in central overheads continues in order to respond to the activities of the Group. Additional staff costs of approximately £1.5 million were incurred to support ongoing activities. Other costs, including depreciation and general administrative costs were approximately £1 million higher year-on-year. Offsetting this, incentive costs, including LTIP costs and cash bonuses, were £1.7 million (2017: £5.2 million). The current period includes a release of £1.7 million in respect of Executive Directors' bonuses earned in 2017 but waived in 2018.

Maintenance capital expenditure of £1.2 million has been incurred on central projects predominantly relating to IT that will help the business as a whole operate more efficiently.

Outlook

The Group will continue to invest in central functions and marketing activity to support the Group's plans, through the recruitment of more employees and increased marketing online and in other media. Underlying central overheads are therefore anticipated to increase by 25 to 30 per cent in 2019.

Mike McCollum

Chief Executive

13 March 2019

Financial Review

Introduction

These results have been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted in the EU.

Financial highlights

The Group's financial performance is summarised below:

(a) Further details of alternative performance measures can be found on page 44.

The Board has proposed a dividend of 15.74 pence per Ordinary Share as a final distribution of profits relating to 2018 to be paid on 28 June 2019, subject to shareholder approval.

Alternative performance measures

The Group's alternative performance measures exclude non-underlying items. 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. Detailed information on non-underlying items is set out on pages 44 and 45.

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 page 44.

Earnings per share

The Group's statutory profit after tax was £31.5 million (2017: £57.8 million). Basic earnings per share were 63.0 pence per share (2017: 115.8 pence per share). Underlying profit after tax was £42.9 million (2017: £64.0 million), giving underlying earnings per share of 85.8 pence per share (2017: 128.3 pence per share), a reduction of 33 per cent.

Key changes in the profitability of the Group's funeral business

Underlying operating profit was £62.2 million (2017: £79.5 million), a reduction of 22 per cent. In broad terms, this can be explained by the following factors:

Transformation Plan

Costs incurred in 2018

The Group incurred significant costs in 2018 to support the revisions to its strategy and to start the Transformation Plan. They can be summarised as follows:

The overall cost and benefit of the Transformation Plan

The Group's view of the overall cost of the Plan remain unchanged from that detailed in its 2018 interim results:

Costs

The Group anticipates a total investment of £50 million by the end of 2021 to deliver the Transformation Plan:

£35 million of this investment is expected to be capital in nature. Approximately £17 million of this investment will be funded from surplus property disposals.

In addition to these non-recurring amounts, the Group anticipates £7 million per year of incremental costs:

Benefits

The Transformation Plan is expected to realise the following net operating profit benefits:

Other items excluded from underlying operating profit

Amortisation of acquisition related intangibles

Amortisation of acquisition related intangibles reflects the write-off of acquired intangibles over the term of its useful life.

External transaction costs

External transaction costs reflects amounts paid to external parties for legal, tax and other advice in respect of the Group's acquisitions.

Operating and competition review costs

In the first half of 2018 the Group incurred costs with external advisors to aid its operational review. Costs were also incurred with external advisors to support the Group's response to the CMA's funeral market study and HM Treasury's consultation on the funeral plan sector.

GMP past service cost

This represents the estimate for the impact of the implementation of Guaranteed Minimum Pension ('GMP') equalisation.

Trade name write-off

During the period, the Group closed the last location trading under a particular trading name. As this trading name had specific intangible assets related to it, they were required to be written-off.

Loss on sale of fixed assets

Losses from the sale of fixed assets are excluded as they are unconnected with the trading performance in the period.

Capital expenditure

Capital expenditure on property, plant and equipment and intangible assets was £25.0 million (2017: £27.0 million).

This is analysed as:

(a) Maintenance capital expenditure includes vehicle replacement programme, improvements to locations and purchases of other tangible and intangible assets.

The Group will continue to invest in the maintenance of its existing portfolio of vehicles and funeral and crematoria locations. The Group's Transformation Plan will capture the majority of planned capital expenditure on its funeral business. Consequently capital maintenance expenditure in 2019 is expected to be lower than 2018.

Cash flow and cash balances

Underlying cash generated from operations was £101.9 million (2017: £115.4 million).

During the period, the Group invested £6.5 million in the acquisition of established funeral businesses. £5 million was invested in acquiring a further equity stake in Funeral Zone Limited which is a UK online funeral resource for funeral directors and clients. This brought the Group's total equity interest in Funeral Zone Limited to 23.8 per cent. Consequently, this investment is accounted for as an associate.

Other working capital changes were consistent with the Group's experience of converting profits into cash. These changes fluctuate year-on-year as a result of timings of the Group's year end and the level of bonuses paid.

Cash balances at the end of the period were £66.9 million (2017: £49.3 million). In its planning, the Group sets aside approximately £22.2 million for future corporation tax and dividend payments expected to be spent in 2019.

Further details and analysis of the Group's cash balances are included in note 15 to the consolidated financial statements.

Pensions

The balance sheet shows a deficit of £25.2 million before deferred tax (2017: deficit of £24.0 million). As previously announced, during the period, the Group agreed a schedule of contributions with the pension scheme trustees following completion of the triennial valuation to April 2017. This has resulted in an annual cash obligation of £2.2 million with effect from 2018.

Following the Lloyds GMP equalisation case in October 2018, which ruled that treatment of men and women be brought in line for schemes with a guaranteed minimum pension, the Group has been required to recalculate member benefits. This has resulted in the Group recognising a past service cost of £1.4 million in the current year income statement, representing approximately 1.1 per cent of the Group's defined benefit pension liability.

Taxation

The Group's effective tax rate on underlying profits in the period was 21.2 per cent (2017: 17.7 per cent).

The current period underlying effective tax rate is higher due to the effects of prior year items, option schemes and permanent disallowables, with a tax impact totalling £1.4 million.

In 2019, the Group expects its underlying effective tax rate to be approximately one and a half to two per cent above the headline rate of corporation tax. This translates to an underlying effective rate of between 20.5 per cent and 21.0 per cent.

Capital structure and financing

Secured Notes

The Group's principal source of long-term debt financing is the Secured A Notes and the Secured B Notes. 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:

The Secured Notes have an annual debt service obligation (principal and interest) of circa £33.2 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. In any event, the Group does not have any requirement to issue any further Secured Notes for the foreseeable future. This position will be reassessed following the completion of the Group's Transformation Plan.

Financial Covenant

The Group's primary financial covenant under the Secured Notes requires EBITDA to total debt service to be above 1.5 times. The ratio at 28 December 2018 was 2.55 times (2017: 3.24 times). This covenant calculation uses a prescribed definition of EBITDA detailed in the loan documentation and only represents the profit of a sub group of the Group which is party to the loans (the 'securitisation group'). EBITDA for this calculation can be reconciled to the Group's statutory operating profit as follows:

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

Revolving Credit Facility

The Group has the benefit of a £50 million Revolving Credit Facility ('RCF'), provided by the Royal Bank of Scotland, which is secured against certain trade and assets held by legal entities outside of the Group's securitisation structure. The RCF can be drawn down subject to a set of financial tests applied to these legal entities.

The facility is available until July 2021, with the option to renew, subject to the bank's consent at the time, by a further year. The margin on the facility ranges from 150 to 225 basis points depending on the resulting gross leverage.

This provides the Group ongoing flexibility in a cost effective manner, as if undrawn, the facility represents an annual cost of approximately £0.3 million. Given the Group's healthy cash balances, the RCF is undrawn at the time of the release of this announcement and as at the year end.

Net debt

The Group's net debt is analysed as:

The Group's gross debt outstanding was £561.2 million (2017: £565.7 million). Net debt was £506.8 million (2017: £516.9 million).

The market value of the Secured Notes at the balance sheet date was £531.6 million (2017: £686.5 million).

Whilst the Group has no plans to do so, should it wish to repay all amounts due under the Secured Notes, the cost to do so at the year end would have been approximately £751.6 million.

Net finance costs

The Group's underlying finance costs substantially consist of the interest on the Secured Notes and ancillary instruments. The net finance cost in the period relating to these instruments was £24.8 million (2017: £25.1 million).

Finance costs of £nil million (2017: £0.4 million) were incurred in respect of the Crematoria Acquisition Facility.

Other ongoing finance costs incurred in the period amounted to £1.2 million (2017: £1.4 million), including the unwinding of discounts on the Group's provisions and other financial liabilities.

Interest receivable on bank deposits was £0.2 million (2017: £0.1 million).

IFRS 15, Revenue from contracts with customers

The Group has completed its assessment of this accounting standard, which is effective for its 2019 accounting period. The standard will result in a change to the Group's accounting policies for the sale of trust based pre-arranged funeral plans.

The Group plans to apply the modified retrospective application approach, meaning that comparative periods will not be restated according to IFRS 15. Instead, the cumulative effect of the application of the standard will be recognised in the opening balance sheet reserves for 2019.

Further details are included on page 43.

The Group intends as a consequence of these changes to update its definition of underlying operating profit. This is set out in the section on alternative performance measures on page 44 and details the revised underlying operating profit that will be used by the Group for comparative purposes when it announces its 2019 results, beginning with the first quarter trading update in May 2019.

Steve Whittern

Finance Director

13 March 2019

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.

Maintaining consistently high-quality and standards

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 160,000 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.

The Dignity Client Survey 2018

Reputation and recommendation

98.9% (2017: 99.0%)

98.9 per cent of respondents said that we met or exceeded their expectations.

97.7% (2017: 97.7%)

97.7 per cent of respondents would recommend us.

Quality of service and care

99.9% (2017: 99.9%)

99.9 per cent thought our staff were respectful.

99.6% (2017: 99.7%)

99.6 per cent thought our staff listened to their needs and wishes.

99.1% (2017: 99.1%)

99.1 per cent agreed that our staff were compassionate and caring.

High Standards of facilities and fleet

99.8% (2017: 99.8%)

99.8 per cent thought our premises were clean and tidy.

99.7% (2017: 99.8%)

99.7 per cent thought our vehicles were clean and comfortable.

In the detail

99.2% (2017: 99.3%)

99.2 per cent of clients agreed that our staff had fully explained what would happen before and during the funeral.

99.1% (2017: 99.0%)

99.1 per cent said that the funeral service took place on time.

98.4% (2017: 98.0%)

98.4 per cent said that the final invoice matched the estimate provided.

Consolidated income statement

for the 52 week period ended 28 December 2018

Consolidated statement of comprehensive income

for the 52 week period ended 28 December 2018

Consolidated balance sheet

as at 28 December 2018

Consolidated statement of changes in equity

for the 52 week period ended 28 December 2018

The above amounts relate to transactions with owners of the Company except for the items reported within total comprehensive income.

Capital redemption reserve

The capital redemption reserve represents £80,002,465 B Shares that were issued on 2 August 2006 and redeemed for cash on the same day, £19,274,610 B Shares that were issued on 10 October 2010 and redeemed for cash on 11 October 2010, and £22,263,112 B Shares that were issued on 12 August 2013 and redeemed for cash on 20 August 2013 and £20,154,070 B Shares that were issued and redeemed for cash in November 2014.

Other reserves

Other reserves includes movements relating to the Group's SAYE and LTIP schemes and associated tax, together with a £12.3 million merger reserve.

Consolidated statement of cash flows

for the 52 week period ended 28 December 2018

 (1) Maintenance capital expenditure includes vehicle replacement programme, improvements to locations and purchases of other tangible and intangible assets.

1 Revenue and segmental analysis

Operating segments are reported in a manner consistent with internal reporting provided to the chief operating decision maker who is responsible for allocating resources and assessing performance of the operating segments. The chief operating decision maker of the Group has been identified as the three Executive Directors. The Group has three reporting segments, funeral services, crematoria and pre-arranged funeral plans. The Group also reports central overheads, which comprise unallocated central expenses.

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 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 and the marketing and administration costs associated with making such sales.

Substantially all Group revenue is derived from, and substantially all of the Group's net assets and liabilities are located in, the United Kingdom and Channel Islands and relates to services provided. Overseas transactions are not material.

Underlying operating profit is stated before non-underlying items as defined on page 44.

The revenue and operating profit/ (loss), by segment, was as follows:

52 week period ended 28 December 2018

52 week period ended 29 December 2017

2 Net finance costs

3 Taxation

4 Earnings per share

The calculation of basic earnings per Ordinary Share has been based on the profit attributable to equity shareholders for the relevant period.

For diluted earnings per Ordinary Share, the weighted average number of Ordinary Shares in issue is adjusted to assume conversion of any dilutive potential Ordinary Shares.

The Group has two classes of potentially dilutive Ordinary Shares being those share options granted to employees under the Group's SAYE Scheme and the contingently issuable shares under the Group's LTIP Schemes. At the balance sheet date, the performance criteria for the vesting of the awards under the LTIP Schemes, including any deferred annual bonus, are assessed, as required by IAS 33, and to the extent that the performance criteria have been met those contingently issuable shares are included within the diluted EPS calculations.

The Group's underlying measures of profitability exclude non-underlying items as set out on page 44. 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. 

Accordingly, the Board believes that earnings per share calculated by reference to this underlying profit after taxation is also a useful indicator of financial performance.

Reconciliations of the earnings and the weighted average number of shares used in the calculations are set out below:

5 Dividends

The interim dividend represents the interim dividend that was approved and paid in the period out of earnings generated in the same period.

The final dividend represents the final dividend that was approved and paid in the period relating to the earnings generated in the previous period.

Consequently, total dividends recognised in the period were £12.2 million, 24.38 pence per share (2017: £12.2 million, 24.38 pence per share).

A final dividend of 15.74 pence per share, in respect of 2018, has been proposed by the Board. Based on the number of shares in issue at the date of signing this report the total final dividend payment is approximately £7.9 million. This will be paid on 28 June 2019 provided that approval is gained from shareholders at the Annual General Meeting on 13 June 2019 and will be paid to shareholders on the register at close of business on 17 May 2019.

6 Cash and cash equivalents

Amounts set aside for debt service payments

This amount was transferred to restricted bank accounts which could only be used for the payment of the interest and principal on the Secured Notes, the repayment of liabilities due on the Group's commitment fees due on its undrawn borrowing facilities and for no other purpose. Consequently, this amount did not meet the definition of cash and cash equivalents in IAS 7, Statement of Cash Flows. This amount was used to pay these respective parties on 31 December 2018. Of this amount, £12.3 million (2017: £0.3 million) is shown within the Statement of Cash Flows as 'Payments to restricted bank accounts for finance costs' and £4.6 million (2017: £nil million) is shown within 'Financing activities' as 'Payments to restricted bank accounts for repayment of borrowings'.

7 Net debt