DTY.L Regulatory News (DTY)

Dignity plc

Preliminary results for the 53 week period ended 31 December 2021

Dignity plc (Dignity, the Company or the Group), the only end-of-life provider in the UK that is uniquely positioned to provide all the required elements of a funeral service, announces its preliminary results for the 53 week period ended 31 December 2021.

Financial highlights

(1) Underlying performance measures throughout this announcement for December 2020 have been restated to reflect the application of IFRS 16, Leases. This standard was adopted in 2020 using the modified retrospective adoption which meant 2019 comparatives were not restated. As a result, the Group chose to exclude it from its underlying performance measures reported in 2020 in order to retain comparability. Therefore, the underlying performance measures reported above in both periods includes the application of IFRS 16. See note 1 for further details.

Alternative performance measures ('APMs')

The Board believes that whilst statutory reporting measures provide financial performance of the Group under IFRS, APMs are necessary to enable users of the financial statements to fully understand the trading performance and financial position of the Group. The APMs provided are aligned with those used in the day-to-day management of the Group and allow for greater comparability across periods. For this reason, the APMs provided exclude the impact of consolidating the Trusts and the changes which relate to the application of IFRS 15, as well as non-underlying items comprising certain non-recurring and non-trading transactions. Further detail may be found on pages 48 to 53.

Key points

· 2021, like 2020, was another year heavily impacted by the pandemic with an elevated death rate

· Underlying operating profit fell seven per cent as a combination of rising costs and lower prices impacted margins

· New strategy was agreed, and good progress made in implementation

· Focus groups and insight gathering to develop Dignity's new Principles; the guiding framework that once embedded will become the organisations new culture

· Reviewed and repositioned pricing for our at-need services to ensure we offer the best value-for-money locally

· Inverted the organisation through a new organisational structure with 12 regions; focuses on removing management hierarchy and replacing this with a locally empowered leadership structure

· Focused programme of work to prepare Dignity for Financial Conduct Authority regulation of the pre-paid funeral plan market (which comes into force July 2022), including submission of our application to the regulator

· Progress made to invest back into our funeral branches and crematoria; aiming to bring the Group's property portfolio to a high standard

· The Board agreed a formal climate commitment, pledging for the Group to be net-zero (across Scope 1 & 2 emissions) by 2038, following an initial sustainability and ESG assessment

· Progress made to ensure a balanced, Corporate Governance Code compliant, Board composition, with the appointments of John Castagno as new Non-executive Chairman and Graham Ferguson as an independent NED. Kate Davidson and Kartina Tahir Thomson were also welcomed to the Board in 2022

· In March 2022 we agreed a 12 month waiver to our main financial covenant with noteholders to protect us from a post pandemic drop in the death rate

Gary Channon, Chief Executive of Dignity plc, commented:

"2021 was a year of great change at Dignity as we set out and started implementing the new strategy which at its core promotes a culture focused on serving families and communities in all their end-of-life needs. There isn't a part of Dignity that hasn't been affected by the transformation so far as we inverted the whole organisation, empowered those serving clients and organised ourselves in a more collaborative structure.

I would like to call out the hard work, dedication and commitment of all our colleagues who continued to respond to the challenges of the COVID-19 pandemic whilst coping with the rapid pace of organisational change that Dignity has gone through.

Although there is still much work to do to complete the restructuring, we know what we need to do."

For further information please contact:

Gary Channon, Chief Executive

Dean Moore, Interim Chief Financial Officer

Dignity plc +44 (0)20 7466 5000

Richard Oldworth

Chris Lane

Tilly Abraham

Verity Parker

Buchanan +44 (0)20 7466 5000

www.buchanan.uk.com dignity@buchanan.uk.com

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

Chairman's statementGiovanni ('John') Castagno, Non-Executive Chairman

I joined Dignity in July 2021 at a pivotal time for the Group.

With the backdrop of the on-going COVID-19 pandemic, the Executive team, led by Gary, had embarked on an ambitious plan to grow the business by further improving our operating model to better serve the bereaved as well as implementing the changes required by the Competition and Markets Authority ('CMA') whilst simultaneously preparing for future Financial Conduct Authority ('FCA') regulations.

Our People

Our people responded splendidly to these challenges and on behalf of the Board, I would like to publicly thank all our colleagues and everyone in the sector for the way they have supported the bereaved. Our people are vital to Dignity's success and in the challenging circumstances created by COVID-19 they have demonstrated the utmost dedication and resilience by continuing to provide an excellent and respectful service. Whilst they may not have received, or sought, the public recognition that has been bestowed on other keyworkers, their quiet, selfless commitment has been admired by everyone that experiences their actions. This thanks extends across the entire funeral, crematoria and bereavement sector.

It is these colleagues who are at the centre of our new strategy as it is they who provide a caring and high-quality service to our clients and are at the heart of our communities each day. I am confident that by empowering and trusting our people, and providing them with the right tools and resources, the business can approach the future with great optimism.

Strategic overview

I would also like to thank Gary and his team for executing the first stage of our ambitious plan which has been to restructure our branch and crematoria network to better serve the bereaved. Notwithstanding the difficult trading environment of the pandemic, we have created 12 integrated trading regions, empowering all colleagues so that their expertise can be applied with greater focus and speed to the needs of those communities. The support departments based in Sutton Coldfield have also been reorganised and refocused, so they are better aligned to servicing the needs of our front-line colleagues. These changes lay the foundations of the vision to be a federation of respected local businesses supported by a strong national brand.

During this period, we have also complied with the changes introduced by the CMA and are preparing for regulation by the FCA having submitted our formal application to continue selling pre-need Funeral Plans.

I believe that the new strategy, the cultural change being implemented by the Executive Committee and supported by the Board and the forthcoming regulatory framework will create opportunities for Dignity. The Principles developed and launched by the Executive Committee will underpin the cultural change being implemented and will further support the growth ambitions of the business. But this optimism for growth should be tempered by volatility expected in the medium-term mortality rates which are likely to be lower than those experienced during the pandemic and the historic five-year average rate.

The volatility expected in the mortality rate and the investment needed in executing the strategy will impact cash generation. It is therefore appropriate that the Board considers options available to review Dignity's current capital structure and to that end, we continue to make good progress.

The Board recognises the role of Environmental, Social and Governance ('ESG') in creating value for all stakeholders. This year we committed to a formal climate pledge, to be net-zero across the Group by 2038. We are committed to engaging with these issues and to transparency of actions and disclosure. Consequently, the Board will receive frequent reports from management on ESG matters.

Governance during a time of change

During this period of significant change, having appropriate corporate governance is of great importance. When I joined Dignity, I committed to strengthen governance and make the business Code compliant as well as introducing diversity to the Board.

To this end, I'm pleased to report that in addition to my appointment, we have secured the support of Graham Ferguson and Kartina Tahir Thomson as Independent Non-Executive Directors and chairs of the Audit, Remuneration and the newly constituted Risk Committee. I'm also delighted that Kate Davidson, who previously sat on the Executive Committee, joined the Board in January 2022 as Chief Operating Officer. I welcome Graham, Kartina and Kate to the Board and look forward to working closely with them.

We continue our search for a new Chief Financial Officer and hope to make an appointment soon. Once this appointment is made, it is the intention for Dean Moore to regain his position as an Independent Chair of the Remuneration Committee. This will ensure a smooth hand over to the newly appointed Chief Financial Officer. This is subject to appropriate review and approval by the Board.

Gary Channon was appointed to Executive Chairman following a General Meeting in April 2021, and subsequently to Chief Executive at the time of my appointment. In line with Gary's undertakings at the time of the General Meeting at the appropriate time, the Board will seek to replace Gary as the Chief Executive, with a process for identifying Gary's replacement now underway. Again, ensuring a smooth transfer to new Chief Executive will be central to the Board's plans.

Dividend policy

Dignity has not paid a dividend since June 2019 and the Directors do not expect to do so until the business has returned to a more sustainable financial footing. We retain significant cash resources, continue to be cash generative and understand the importance of optimising total shareholder return whilst maintaining a balance between different stakeholders, and it is the Directors' intention to return to paying a dividend as soon as we believe it is financially prudent to do so.

John Castagno

Non-Executive Chairman

22 March 2022

Strategic review

Gary Channon, Chief Executive

This is my first report to shareholders since being appointed in April 2021, and it is likely to be my last. I want to take this opportunity to set out what has been happening at Dignity over the past year and why; what happens next and how we are going to measure our progress against our objectives going forward.

The Plan

"We strive to be the most trusted, respected and valued end-of-life provider in the UK, and the most inspirational and rewarding employer for those who serve this goal."

Our vision is for Dignity to be a confederation of strong local businesses serving their communities backed up by the strength of a national organisation. We need to bring the benefits from that scale without the bureaucracy, costs and hierarchy that can go with it. We are liberating and empowering local businesses to serve their communities individually whilst being able to call upon and utilise the knowledge and resources of the wider Group. We seek to serve all end-of-life needs and are uniquely placed to do that.

Although complex, we believe this model will best succeed because it is based upon clients and their needs. Ultimately our service is delivered by our people, and they make the difference. There isn't a person who spends time around Dignity who isn't struck by the compassionate and empathetic nature of our colleagues.

We receive a lot of positive and thankful feedback about our service, and it almost always refers to the people. Therefore, the first thing we need to do is be a place where those drawn to and interested in our industry want to come to work, grow and thrive. We haven't been strong in this area and have enjoyed loyalty beyond what we probably deserved in the past because of the strength of the calling. We have set about redressing that but still have a way to go. We have raised pay levels as part of that process.

As we cultivate an environment that attracts and retains the best people, we empower them to deliver the service that meets the needs and aspirations of the families we serve. We have made significant changes in the past nine months to empower our client-facing colleagues, breaking down some of the barriers to change around trust and decision-making.

Our ongoing regional restructure takes that a step further by creating locally empowered businesses. That will be completed this year and when done will have completely inverted the organisation. We are giving our people the freedom to innovate and make decisions autonomously, to have ideas, and operate the businesses in a way that meets the needs and aspirations of our clients, colleagues and communities.

Once we have the best people and have empowered them, we need to give them the tools to deliver the best proposition in their communities. One element of the proposition is price. We had previously allowed our prices to rise above the market level, which is not the way to serve clients well and doesn't align with colleagues motivated to do the best for their clients. High prices were the single biggest factor causing the underlying business to lose share year after year (before acquisitions) and was leading to likely failure. We changed that in 2021 and have lowered prices substantially.

Our pricing philosophy now is to offer the best value-for-money and not have price be the reason for not choosing us. This is a big change for Dignity and the effect of lowering prices is to reduce how much we earn per funeral. However, our experience since we changed prices has been that the market share loss stops and then reverses, and so in time we expect that revenue loss to be more than compensated by volume growth, especially when combined with all the other elements of our strategy.

After people, empowerment and price, we come to our premises. We need to have the facilities to match our proposition and therefore have embarked on a much-needed programme of capital expenditure across the estate. This has begun but we have a long way to go considering the scale of our organisation with over 800 locations at the time of reporting.

Next, our products. In addition to delivering funeral and cremation services for families at the time of need, our other services include pre-arranged funeral plans. An important part of our end-of-life service proposition, in this area we are working on innovations, redesigns and new introductions to better serve the needs of our customers. We believe that the world of funeral plans is about to change dramatically for the better as it will fall under the FCA rules and regulations which apply from July 2022. It is a big undertaking to prepare for but holds significant potential for Dignity, as greater trust by consumers in the products from regulation and the withdrawal of unregulated competitors will give us an opportunity to grow the market and our business. As the original innovator in the funeral plan sector since 1985, and as the UK's largest end-of-life business we have a great opportunity in this new era.

We are uniquely placed as the only national operator carrying out funerals and cremations, whilst also manufacturing our own coffins at our facility in the North East and offering memorial services through our crematoria.

Vehicles are another important ingredient to having the best proposition. Whether clients are seeking to add a personal touch to the service with a motorcycle or campervan hearse or choosing a traditional hearse, vehicles form a key focal point for a funeral, and we used our vehicles 98,000 times in 2021. Along with our people and premises, vehicles are a key part of the overall impression families and attendees form of our funeral businesses on the day of a service. We have 1,659 vehicles in our fleet, yet we have underspent capital expenditure in our fleet by around £25 million in the past five years. We also do not organise our fleet in a way that gets best overall utilisation. We have started to increase the investment in the fleet, and we will introduce new ways of organising it to gain a benefit from our scale.

Element One of our strategy, as outlined above, is to have the Best Proposition and that comes from getting People, Empowerment, Price, Premises, Products & Vehicles right.

The most ambitious element of our strategy is to introduce, foster and embed a culture which will enable us to deliver that best proposition and keep adapting and learning as we do. After an internal process over six months, we crafted our Principles. They set out all the key attitudes, priorities, values and philosophies consistent with a culture that we think will make Dignity a special and successful organisation. They are written for ourselves, they are for colleagues, they are about who we are, how we conduct ourselves, and how we aspire to be but let me explain their purpose from a shareholder perspective.

We aim to be a learning organisation, in other words an organisation that is able to continuously learn from experience, including and especially by learning from our failures. Such a culture creates a safe environment for trying new ways of working, knowing that both success and failure contain lessons from which to grow. If we do this then the business will continuously adapt to the changing needs and aspirations of clients. With so many businesses empowered to do things their own way, if we achieve this culture then we will have a constant source of learning in variance, in other words different outcomes in different places. Good ideas can then be spread around the organisation as well as lessons learned from failure.

You will see that the Principles embed a strongly ethical culture that will build a strong long-term reputation which will attract clients, employees and benefit the owners of the business.

The specific Principle for shareholders is:

WE ARE GOOD STEWARDS OF OUR OWNER'S CAPITAL

Our goal is to create excellent long-term value for our shareholders. We will allocate capital wisely, organise ourselves prudently, spend money frugally and report openly and honestly.

The leading principle that will drive the focus of many of the decisions of the organisation is the focus on our clients, the families and communities we serve. If we apply that properly, and have it drive all that we do, we will be a formidable competitor.

Element Two of our strategy is to have a strong Culture that focuses on Clients, creates a Learning Organisation and embeds good values.

If we have the Best Proposition ('Element One') then we make the task of acquiring new clients easier. There are many routes to conversion and the very best is the word-of-mouth repeat business from families who trust us. Approximately one in eight of all funerals were handled by one of our funeral directors, and if we include cremations in our crematoria then we were involved in approximately one in five of all funerals in the UK in 2021. Doing our very best for those clients is our best source of future business.

Increasingly many other routes are used to choose a funeral director and the internet now plays a large part in that. Having an effective digital strategy aligned with our local propositions is an essential part of our effort to grow our share of funerals and cremations in all areas. We have a number of changes coming in this area in 2022. To really get the benefits of these efforts you need the Best Proposition.

Funeral Plans are one of the most effective ways for us to acquire a potential future funeral and forms part of that acquisition strategy. We would like to engage our customers when they are still alive to deal with their end-of-life wishes and requirements. We believe that the very best way for anyone to share and capture their wishes for a funeral is to do so personally - enabling a truly personal and reflective funeral that meets their needs as well as those of their families.

Element Three of our strategy is to have an effective Customer Acquisition Strategy aligned with our Best Proposition.

Dignity is an amalgamation of hundreds of businesses bought and combined over the past few decades. However, in the way that we were organised we had not achieved any benefits from scale, underlying central costs bloating from 7.5 per cent of underlying revenues in 2016 to 12.6 per cent of underlying revenues in 2021. We have been reorganising the group to make the centre smaller, more cost effective and more aligned with the new strategy. We made some painful decisions in January 2022 and lost some loyal and capable colleagues who had done nothing wrong. That was the most difficult step we have had to take so far. We attempted to do it in the least painful way for all concerned and to get it done quickly.

We need to show that there is a benefit to scale. There are excellent independent funeral directors thriving without the need for any national organisation behind them. If there isn't a benefit in being part of Dignity then we lose our raison d'être. We believe if done correctly that this should create advantage from factors like pooled sourcing, manufacturing, digital capabilities, property expertise, dealing with regulatory needs, shared learnings, shared resources, training and development, marketing expertise and recruitment. Most of these are identified and are in the early stages of being implemented for the new strategy.

Element Four of our strategy is to be organised to gain the Benefits of Scale and Breadth.

Those are the key elements but there are other ingredients like Dignity Ventures, a new division that we set up in 2021 to back innovative businesses in the end-of-life space who might benefit from working with the Dignity organisation without becoming part of it, and in our property division we believe we have value and income potential within the property estate. At our coffin manufacturing facility in East Yorkshire, we believe we have the capability to grow our business outside of Dignity.

Business Model

We are confident that as the strategy works then the business should grow, increase its share of the market and through growth increase its competitiveness and profitability. An important feature of our business model is the operational leverage. Around two thirds of our cost of doing a funeral is fixed cost and so the marginal cost of every unit of growth is only one third of the overall cost. On our current numbers (taking total funeral overhead costs and dividing them by the funerals undertaken in 2021) it costs us £1,830 to deliver a funeral.

If we grow volumes by say, 20 per cent, then that cost would drop to £1,520 which we could use to be either more competitive or more profitable. The success of the strategy lies in its ability to create this virtuous circle of improvement, and these are the numbers we will focus on along with the underlying average revenue on funerals (£2,548 in 2021 versus £2,522 in 2020) and cremations (£887 in 2021 versus £885 in 2020).

The business model for us, whether it is for funerals or cremations, is quite simply a function of volume multiplied by the difference between the average revenue per funeral or cremation less the cost of carrying out funerals and cremations and the cost of acquiring clients. From that result you take off the central overhead. We will give you the building blocks of the business model so you can judge how we are getting on.

When it comes to funeral plans their contribution comes from any surplus that can be generated by holding the proceeds of plan sales in trust less the cost of acquiring plans and the ultimate cost of a funeral. In 2021 a strong return on the Trust assets of 9.1 per cent (£88.2 million on starting assets of £967.1 million) was generated but that came after a lower return last year of 4.0 per cent (£38.3 million on £947.5 million). It's a measure that must be judged over multiple years and our long-term goal is to exceed the rise in funeral cost inflation by three per cent per annum. See alternative performance measures on page 52 for how it's calculated.

The returns that the business makes need to be judged against the capital used to make them. To assist this we have developed a measure we call Cash Return on Core Capital ('CROCC'). In 2021 the CROCC fell to 9.7 per cent from 16.9 per cent in 2020. Returns that are not distributed are retained in the business and it is one of the key responsibilities of the Chief Executive to see that they are allocated wisely. See alternative performance measures on page 52 and 53 for how it's calculated and why we use it.

Capital Structure

The performance of the business is supported by the capital supplied by shareholders and bondholders. We have previously discussed our desire to operate a lower level of indebtedness. We currently owe £527.1 million on our bonds and have Trading Group cash of £55.9 million. In February, we sought and were granted in March a waiver on the application of the covenants on our bonds for 12 months. We took this prudent measure to mitigate the uncertainty and potential for a drop in the death rate following the pandemic.

It is still our intention to address the capital structure most likely by use of the crematoria portfolio but to do it in a way that does not change the integrated nature of the Group.

Outlook

The strategy as set out above is likely to lead to lower profits in the short-term as we see a full year effect of the lower prices we have been using since September. Costs have been rising as we have raised the pay of our lowest paid staff. Conversely, there will be a benefit coming through from a reduction in the central costs. The biggest factor affecting us is likely to be the death rate and there is a real risk that after COVID-19 passes the excess death effect of the past two years starts to reverse itself which it will do at some point.

The business is likely to use more cash than it generates as we are investing in our facilities to make up for past under investment and to roll out our new strategy and local branding programmes. Investment is also needed in technology to improve our productivity in many areas and the implementation of new procedures and controls associated with the impending FCA regime.

These financial headwinds are a predictable consequence of the strategy execution. We can fix competitiveness quickly but the benefits of that in terms of growth and greater productivity come after. We need to look through to the long-term value being created by turning Dignity from a business perpetually losing share in structural decline into a successful and growing business. The nature of our business model and its vertically integrated structure means that growth delivers and compounds value.

We still expect to do some form of transaction to ease the leverage in the capital structure and to align it with the long-term strategy.

We have a stream to cross at the bottom of the valley before we start our climb to higher ground.

Annual General Meeting ('AGM')

At last year's AGM we explained the rationale and underpinnings for the change of strategy and this year we intend to show you what has been achieved so far. 2021's accounts have been compiled in a way consistent with 2020, and at the 2022 AGM we want to share with you how we will be reporting to you from 2022 onwards. Like last year we will make a presentation on the strategy.

Last year we had to hold the meeting remotely but this year we expect to do it in person. If you are able to, please come. We will again do our best to answer all your questions candidly. We will also bring along colleagues from within the business who will give you a perspective from beyond the Board. You own shares in a very special company, come and learn more.

Gary Channon

Chief Executive

22 March 2022

Financial review

Dean Moore, Interim Chief Financial Officer

Our performance in 2021 reflects the continued impact of COVID-19 and the implementation of the new strategy in quarter four. As a result, underlying operating profit decreased by seven per cent to £55.8 million. Allowing for the fact that 2021 represents a 53 week period for the Group means that, on a 52 week comparable basis, deaths were 14,000 lower in the period. Therefore, although 2021 has an additional week of underlying revenue compared to 2020, total deaths including week 53 were broadly comparable.

Our market share slightly decreased on funeral services and there was a strong market share performance by our crematoria business.

Cash generation remained strong in the year and will enable us to continue to invest in our strategic objectives in the future.

Introduction

These results have been prepared in accordance with International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006.

Statutory operating profit was £17.8 million (2020: £15.9 million), an increase of £1.9 million. Gross margin was broadly in line with prior year. Administrative expenses were £2.5 million lower, largely driven by a decreased impairment charge of £4.8 million on goodwill and trade names compared to last year, a further trade name write-off of £2.5 million and after incurring additional central overheads of £3.1 million relating to digital expenditure and other costs. This was partially offset by a reduction in other non-underlying items, primarily in respect of £4.7 million less spent on the Transformation Plan which has been abrogated, £2.9 million less spent on the Operating and competition review and £1.6 million less spent on Directors' severance pay. See table on page 10 for further details on the impacts to statutory and underlying operating profit.

A total impairment of £39.2 million has been charged in the period (2020: £44.0 million), of which £2.8 million (2020: £15.3 million) relates to trades names and £36.4 million (2020: £28.7 million) to goodwill. The impairment has arisen within the funeral services division primarily due to the reduced average revenues following the new pricing strategy for the Group. Whilst the Group expects long-term market share growth from the new strategy, the accounting standard (IAS 36) for impairment assessments does not allow forecasts to be used where assumptions cannot be evidenced or have not yet been implemented (e.g. cost savings). As a result, whilst the Group is focussed on committing to delivering its market share growth ambitions, given the infancy of the strategic plan implementation and the available evidence to demonstrate this growth as at the year end when the impairment assessment is made, the full extent of potential longer-term gains are not reflected in the impairment modelling. Note 6 in the accounts provides sensitivity analysis based on the calculated impairment.

In addition to the impairment described above, a further trade name write-off of £2.5 million (2020: £nil) has been charged in the period following the withdrawal of seven trading names from use following part of the Group's strategic review.

The Group's net finance income was £14.2 million (2020: net finance costs £35.5 million), a £49.7 million movement primarily due to the increase in fair value movements of the financial assets held by the Trusts of £43.7 million.

The above has resulted in profit before tax for the Group of £32.0 million (2020 loss: £19.6 million).

Financial highlights

The Group's financial performance is summarised below:

(a) Further details of alternative performance measures can be found on pages 48 to 53.

(b) Underlying reporting measures for the 52 week period ended 25 December 2020 have been restated to include the application of IFRS 16 which were previously included within other adjustments. See pages 25 and 26 for further details

Alternative performance measures

The alternative performance measures are stated before non-underlying items and the effect of consolidation of the Trusts and applying IFRS 15 as defined on page 48. 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 48 to 53 and a reconciliation of statutory revenue to underlying revenue is detailed in note 2.

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

(a) The £4.7 million costs incurred in 2020 reflects expenditure up to the point of the Transformation Plan being abrogated.

(b) Further details of alternative performance measures can be found on pages 48 to 53.

(c) The 52 week period ended 25 December 2020 has been restated to include the application of IFRS 16 within underlying operating profit which were previously included within other adjustments. See pages 25 to26 for further details. A presentation adjustment has also been made to separately pull out the marketing costs in relation to trials.

Earnings per share

Statutory profit after tax was £12.1 million (2020: loss of £25.5 million). Basic earnings per share were 24.2 pence per share (2020 loss: 51.0 pence per share). Underlying profit after tax was £21.4 million (2020: restated £23.2 million), giving underlying earnings per share of 42.8 pence per share (2020: restated 46.4 pence per share), a reduction of eight per cent.

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 their useful life.

External transaction costs

External transaction costs primarily reflect amounts paid to external parties for legal, tax and other advice in respect of the Group's acquisitions and unsuccessful crematoria planning developments.

Profit on sale of fixed assets

Profits or losses arising from the sale of fixed assets (net of any insurance proceeds received) are excluded as they are unconnected with the trading performance in the period.

Transformation Plan costs

Cost incurred in relation to the Group's now abrogated Transformation Plan has resulted in significant, directly attributable non-recurring costs.

Directors' severance pay

Following the departure of Mike McCollum, Steve Whittern and Richard Portman in 2020, severance packages were agreed and paid and are considered to be a non-recurring cost.

Operating and competition review costs

The Group has incurred costs with external advisers to support the Group's response to the CMA's funerals market investigation and HM Treasury's consultation on the funeral plan sector. Costs were also incurred in 2020 with external advisers to support its operational review.

Trade name write-off

During 2021, the Group withdrew seven trading names from use following part of the Group's strategic review. As the trading names had specific intangible assets related to them, they were required to be written-off.

Trade name impairment

The Group assessed the carrying value of its trade names. In light of the lower level of profitability and lower anticipated average revenue per funeral, an impairment of £2.8 million (2020: £15.3 million) has been recognised.

Goodwill impairment

The Group assessed the carrying value of its goodwill. In light of the lower level of profitability and lower anticipated average revenue per funeral, an impairment of £36.4 million (2020: £28.7 million) has been recognised.

Trust consolidation/IFRS 15

In the prior period the Group changed its accounting policy to consolidate the Trusts and to implement IFRS 15. This adjustment reverses the impact of these policy changes in order to maintain underlying performance measures with those used in the day-to-day management of the business.

Capital expenditure

Capital expenditure on property, plant and equipment and intangible assets was £21.0 million (2020: £11.1 million).

This is analysed as:

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

(b) Property disposals in 2021 includes £0.8 million of insurance proceeds received. Property disposals in 2020 were the result of the now abrogated Transformation Plan.

The Group will continue to invest in the maintenance of its existing portfolio of vehicles and funeral and crematoria locations.

Cash flow and cash balances for the Trading Group

Underlying cash generated from operations was £88.3 million (2020: restated £88.9 million).

Other working capital changes were consistent with the Group's experience of converting profits into cash, subject to timing differences and cash incurred in respect of commission payments.

Cash balances of the Trading Group at the end of the period were £55.9 million (2020: £56.7 million excluding £16.9 million set aside for debt service: total Trading Group cash balances of £73.6 million). Further details and analysis of the Group's cash balances are included in note 7.

Pensions

The balance sheet shows a deficit of £19.7 million before deferred tax (2020: deficit of £36.6 million). Following the triennial valuation performed in April 2020, the scheme will receive future annual cash obligations from the Group from 2022 onwards of £4.5 million.

Taxation

The Group's effective tax rate on underlying profits in the period was 20.2 per cent (2020: restated 24.2 per cent). The current period underlying effective tax rate is higher than the standard rate of corporation tax due to the effects of permanent disallowables and prior year items with a tax impact totalling £0.3 million. The underlying effective tax rate is lower than originally anticipated due to the effects of prior year credits and a lower level of permanent disallowables.

In 2022, the Group expects its underlying effective tax rate to be approximately two to three per cent above the headline rate of corporation tax. This translates to an underlying effective rate of between 21.0 per cent and 22.0 per cent.

The Group's effective tax rate on profits is 62 per cent (2020: charge on losses of 30.0 per cent) which is higher than the underlying effective tax rate primarily due to the £1.5 million corporate interest restriction disallowance, £6.9 million arising on the corporation tax rate change and £6.1 million of disallowable taxation on the goodwill and trade name impairments and write-off.

Prior year restatements

Following a review of the Group's accounting policy for insurance plans in relation to the prepaid balances held on the consolidated balance sheet it has been amended to include a provision for expected future cancellations. It was further noted that a liability was not held for active plans where a known commission is payable in future years. The total impact has been booked into opening reserves at 28 December 2019 and is a reduction to reserves of £3.5 million. Further details of the prior year restatement are set out in note 17.

Comparatives for the 52 week period ended 25 December 2020 have been restated due to a prior year adjustment in relation to the application of IFRS 16. This has impacted the consolidated statement of cashflows and the revenue and segmental analysis. Furthermore, underlying operating profit within divisional results have also been restated. See note 1 for further details.

Capital structure and financing for the Trading Group

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. Net amounts owing on the Secured Notes is £526.6 million (2020: £541.7 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.

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 31 December 2021 was 2.13 times (2020: 1.99 times). The Group therefore had EBITDA headroom of approximately £21.4 million (2020: approximately £16.0 million) against its financial covenants at the end of December. 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'). Furthermore, the calculations are unaffected by the consolidation of the Trusts or the application of IFRS 15 and IFRS 16 described elsewhere, as the Group was able to elect to disregard those changes when making the calculations.

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

In addition, in order for the Group to transfer excess from the Securitisation Group to Dignity plc, it must achieve both a higher EBITDA to total debt service ratio of 1.85 times and achieve a Free Cash Flow to total debt service (a defined term in the securitisation documentation) of at least 1.4 times. This latter ratio at December was 1.76 times (December 2020: 1.57 times). These combined requirements are known as the Restricted Payment Condition ('RPC') which have been met in 2021. Failure to pass the RPC would not be a covenant breach and would not cause an acceleration of any debt repayments. Any cash not permitted to be transferred whilst the RPC is not achieved will be available to be transferred at a later date once the RPC requirement is achieved.

Net debt

The Trading Group has underlying net debt of £471.2 million (2020: £480.6 million) at the balance sheet date. See note 10 for further details.

Should the Group wish to repay all amounts due under the Secured Notes, the cost to do so at the year end would have been approximately £757.4 million, (Class A Notes: £202.8 million; Class B Notes: £554.6 million) (2020: £822.7 million, (Class A Notes: £226.0 million; Class B Notes: £596.7 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 £23.7 million (2020: £24.1 million).

Other ongoing underlying finance costs incurred in the period amounted to £0.8 million (2020: £1.0 million), covering the unwinding of discounts on the Group's provisions and other financial liabilities.

Interest receivable on bank deposits was £nil (2020: £0.1 million).

The Group also incurred £4.5 million (2020: £4.7 million) lease liability interest, under IFRS 16, giving a total underlying net finance cost of £29.0 million (2020: restated £29.7 million).

Shareholders' deficit

Consolidating the Trusts and applying IFRS 15, has a significant impact on our reported results. The recognition of contract liabilities (the majority of which are expected to fall due after one year) in excess of the Trusts' financial assets has caused the Group's balance sheet to show an overall deficit in shareholders' funds.

On consolidation of the Trusts, all funds received from the plan members are deferred until recognised on satisfaction of a funeral obligation or when a plan is cancelled and refunded (subject to an administrative fee). These deferred funds increase under IFRS 15 by a material non-cash significant financing charge. The assets of the Trusts, initially representing the same funds received from plan members less an amount paid to the Trading Group to cover marketing costs, are invested by the Trusts and are subject to market movements. Over time, investments are also realised to fund funeral payments or refund obligations. The net impact of the above gives rise to a significant reduction in the net asset value of the Group to a position where the Group has reported a net deficit of £151.1 million (2020: restated £177.5 million). Whilst this position appropriately reflects the application of IFRS 15 to the underlying contract with the plan member, based on the current cost of delivery of a funeral service, delivery of pre-need funerals is expected to result in the future recognition of profits under IFRS, which, over time, the Directors consider would more than eliminate the deficit noted above.

This deficit, which only arises on consolidation, has no impact on the Group's future ability to pay dividends to shareholders, which relies on the reserves in the Company and not the Group.

The Trusts

At the balance sheet date, the Trusts had £1,043.1 million (2020: £967.1 million) of financial assets and £19.8 million (2020: £21.6 million) of cash, which was recognised in the consolidated balance sheet. This has resulted in average net Trust asset per plan increasing six per cent to £3,650 (2020: £3,400). The movement in financial assets is primarily attributable to remeasurement gains recognised in the consolidated income statement of £85.0 million (2020: £41.3 million), reflecting changes in asset values and net disposals of financial assets of £12.2 million (2020 net disposals of financial assets: £18.7 million).

Aggregated contract liabilities totalled £1,337.5 million (2020: £1,317.5 million) with the primary movements being sales of new plans of £86.3 million (2020: £82.0 million), increases due to significant financing of £51.6 million (2020: £53.1 million) and releases due to death or cancellation totalling £117.9 million (2020: £122.2 million).

Outlook

The successful delivery of our strategy will deliver long-term growth and value.

Divisional performance

Introduction

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.

For statutory purposes the Group has two reporting segments, funeral services and crematoria, as under IFRS 15 only a single performance obligation exists when a pre-arranged funeral plan is sold, being the performance of a funeral. The Group also reports central overheads, which comprise unallocated central expenses.

For the purpose of alternative performance measures the Group has three reporting segments, funeral services, crematoria and pre-arranged funeral plans as the chief operating decision maker reviews segmental performance before applying the effect of IFRS 15.

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 crematoria and cemeteries.

Pre-arranged funeral plans represent the sale of funerals in advance to clients wishing to make their own funeral arrangements and the marketing and administration costs associated with making such sales.

Funeral services

Overview

As at 31 December 2021, we operated from a network of 776 (2020: 795) funeral locations throughout the UK, generally operating under established local trading names. The change to the portfolio reflects five branch openings and 24 closures in the year. Most closures represent funeral locations where leases have naturally come to an end and have not been renewed and also include seven freehold closures.

Performance

We conducted 79,200 funerals (2020: 80,300) during the period under review. Underlying operating profit was £48.2 million (2020: restated £53.1 million) a reduction of nine per cent, this can be explained by the financial summary table below.

(1) Restatement relates to the correction of the application of IFRS 16 in 2020. See note 1 for further details.

(2) Represents revenue impact.

Items totalling £35.2 million (2020: restated £34.4 million) excluded from underlying operating profit resulted in statutory operating profit of £13.0 million (2020: restated £18.7 million). These items are discussed on pages 49 and 50 but relate to non-underlying items and the impact of consolidating the Trusts and IFRS 15.

Progress and Developments

Market share

Approximately one per cent of all funerals were conducted in Northern Ireland. Excluding Northern Ireland, these funerals represented approximately 11.8 per cent (2020: 12.0 per cent) of total estimated deaths in Britain. Whilst funerals divided by estimated deaths is a reasonable measure of Dignity's market share, the Group does not have a complete national presence and consequently, this calculation can only ever be an estimate.

On a comparable basis, excluding any funerals from locations not contributing to the whole of 2020 and 2021, market share was 11.8 per cent, compared to 11.9 per cent in 2020. Both 2021 and 2020 are a significant improvement on the dramatic market share declines witnessed in 2016 and 2017, however, the Group's new strategy is expected to grow market share significantly.

Market share is calculated based on a fixed assumption of one week between the registration of the death and the date of the funeral. Therefore, due to COVID-19 and longer delays between the date of registering the death and the date of the funeral being performed, calculations of market share in 2020 and 2021 may not be comparable.

Funeral mix and Average revenue

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

The new pricing strategy was introduced in early September and as expected it has caused a decline in our underlying average revenue. It is too early to judge the precise effects of this however, as demonstrated in the second table, the underlying Attended average in quarter four 2021 is £788 lower than 2019 and £356 lower than 2020, which was impacted by COVID-19. Sales of ancillary items such as flowers and memorials have also improved compared to 2020 at £154.

Investment

Investment in the Group's locations and fleet have continued. In 2021, £10.5 million (2020: £5.0 million) was invested in maintenance capital expenditure. Whilst 2021 expenditure was considerably higher than 2020 the Group anticipates higher spend in 2022.

Outlook

The Group is focusing on its restructure which will allow it to put the power back in the hands of the colleagues who are at the heart of their local communities, with this will come growth.

Crematoria

Overview

The Group remains the largest single independent operator of crematoria in Britain, operating 46 (2020: 46) crematoria as at 31 December 2021.

Performance

The Group performed 74,800 cremations (2020: 74,500) in the period, representing 11.3 per cent (2020: 11.2 percent) of total estimated deaths in Britain.

Underlying operating profit was £47.0 million (2020: restated £44.2 million), an increase of six per cent. This can be explained by the financial summary table below:

Financial summary 2021

(1) Restatement relates to the correction of the application of IFRS 16 in 2020. See note 1 for further details.

(2) Represents revenue impact.

The primary reason for the increase in underlying operating profit is average revenues. Crematoria grounds have been fully open for all of 2021 compared to being closed in quarter two of 2020, and consequently total memorial and cemetery revenue was £19.2 million (2020: £16.7 million), approximately 15 per cent higher despite cremation volume being in line with 2020. The average cremation revenue is in line with the prior year at £887 (2020: £885).

Non-underlying costs of £0.5 million (2020: £0.2 million) are excluded from underlying operating profit resulting in statutory operating profit of £46.5 million (2020: restated £44.0 million).

Progress and Developments

The Group has invested £5.4 million (2020: £2.7 million) maintaining and improving its locations in the period.

The Group now has planning permission for six new crematoria. The total capital commitment for these six projects is expected to be approximately £55 million, with £11.5 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.

In addition, the Group also has one location where it is appealing the planning decisions and another one that is currently in the planning process. Furthermore, the Group withdrew its interest in one location following an unsuccessful planning appeal.

Outlook

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

Pre-arranged funeral plans

Underlying Performance

The Group continues to have a strong market presence in pre-arranged funeral plans and insurance policies charged to it for the provision of a funeral. The plans represent potential future incremental business for the funeral division, providing high-levels of certainty of cash flows as existing plans mature.

The Trading Group claims a marketing allowance from the trust that covers the costs incurred in the selling of Funeral Plans. As a result, the pre-arrangement division does not contribute any profit at the time of sale therefore underlying operating profit was £nil in both periods.

Approximately 50,000 (2020: 60,000) new plan sales were made and the number of active pre-arranged plans (including insurance backed arrangements) increased to 581,000 (2020: 558,000). All plan sales are stated net of cancellations of 33,000 (2020:32,000). The majority of commissions are clawed back from distribution partners on cancellation in the first two years (the majority of expected cancellations take place in this period).

Of the sales in the period 26,000 plans were trust based funeral plans (2020: 30,000). In addition, 24,000 (2020: 30,000) plans were linked to life assurance plans with third parties. 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.

Historically, as with all the Group's divisions, pre-arranged funeral plans underlying profits broadly reflect the cash generated by that activity. This position has started to shift as more long-term instalment plans are written, where marketing costs are incurred when a plan is sold, but, marketing recoveries are claimed from the trust in line with instalment payments. This shift has changed the profile of the early years cashflow position.

Progress and Developments

Dignity remains focused on selling high-quality business, in ways that support the strong reputation of the Group. We ended our relationship with those third-party telephony partners who sold plans on our behalf and are now focussing on prioritising the sale of funeral plans through our branches.

The financial position of the Trusts holding members' monies is crucial, given the Group ultimately guarantees the promises made to members. At the end of 2021, the Trusts had average assets per plan of £3,650 (2020: £3,400) in respect of 323,000 trust based funeral plans. Average assets per plan are greater than the amount currently received by the Trading Group for performing a funeral.

The latest actuarial valuations of the Trusts (at 24 September 2021) showed them to have a surplus of £147.3 million (25 September 2020: surplus £4 million), based on assumptions by the Trust's actuary. This valuation is based on the amounts the Trusts are expected to pay when a funeral is performed rather than the actual cost of performance (being a lower amount) to the Group.

During the first half year the new investment strategy announced last year was largely executed as the previous investment allocations were unwound and the Trusts' assets placed in a combination of high-grade bonds (open-ended investment funds) and low cost index funds (equities). This will reduce the ongoing fund management cost and more rationally align the investments with the liabilities with the intention of seeking in the long run to outperform the cost of carrying out the funerals the trusts support.

The Trusts have assets, including cash, under the management of the Trustees of £1,062.9 million (2020: £988.7 million) with investments split as follows:

The current allocation is subject to annual review by the Trustees with support from their investment advisers. See page 34 for additional discussion of Trust balances.

Outlook

The Group remains optimistic on its ability to continue to be a market leader in pre-arranged funerals and has successfully submitted its FCA application in December 2021 and is planning for regulation to be effective by the middle of 2022.

The Group intends to continue to sell as many plans as is commercially possible and economically sensible primarily through its branches. The Group expects plan sales in H1 2022 to be lower than previous years whilst it transitions from plans being sold by third party providers to selling the majority of plans through its branches.

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 £39.4 million (2020: restated £37.0 million). This reflects continued investment in digital activities and central capabilities. The table below summarises the key movements:

(1) Restatement relates to the correction of the application of IFRS 16 in 2020. See note 1 for further details.

The increase in digital activities primarily relates to promotional spend. Salaries have reduced year on year partly due to £0.7 million savings in temporary staff costs that were high in 2020 due to the increase in cover required in the call centre during the pandemic. Other costs include legal and professional fees of £2.3 million (2020: £1.5 million), recruitment fees £0.8 million (2020: £0.3 million) and insurance costs of £0.5 million (2020: £0.2 million).

Non-underlying items of £2.3 million (2020: £9.8 million) are excluded from underlying costs resulting in total central costs of £41.7 million (2020: £46.8 million).

In addition to the above costs, maintenance capital expenditure of £1.7 million (2020: £1.4 million) has been incurred on central projects predominantly relating to IT that will help the business as a whole operate more efficiently.

Outlook

As previously stated, Central overheads are expected to reduce as part of the strategic review. In January 2022 the Group made the decision to make some colleagues redundant as well as suspending some of its marketing and digital activities.

Dean Moore

Interim Chief Financial Officer

22 March 2022

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.

(1) Restatement relates to the correction of the application of IFRS 16 in 2020. See note 1 for further details.

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 155,000 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 2021

Reputation and recommendation

99.0% (2020: 98.9%)

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

98.0% (2020: 97.9%)

98.0 per cent of respondents would recommend us.

Quality of service and care

99.9% (2020: 99.9%)

99.9 per cent thought our staff were respectful.

99.7% (2020: 99.6%)

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

99.2% (2020: 99.1%)

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

High standards of facilities and fleet

99.8% (2020: 99.7%)

99.8 per cent thought our premises were clean and tidy.

99.6% (2020: 99.2%)

99.6 per cent thought our vehicles were clean and comfortable.

In the detail

99.2% (2020: 98.9%)

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

99.1% (2020: 99.2%)

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

98.3% (2020: 98.0%)

98.3per cent said that the final invoice matched the estimate provided.

Consolidated income statement

for the 53 week period ended 31 December 2021

The alternative performance measures included within the Preliminary Announcement present information on a comparable basis with that presented in prior periods.

Consolidated statement of comprehensive income

for the 53 week period ended 31 December 2021

Consolidated balance sheet

as at 31 December 2021

Prior year comparatives have been restated due to a prior year adjustment in relation to insurance plans. See page 25 for further details.

The alternative performance measures included within the Group's consolidated financial statements present information on a comparable basis.

Consolidated statement of changes in equity

for the 53 week period ended 31 December 2021

Comparatives for the 52 weeks ended 25 December 2020 have been restated due to a prior year adjustment in relation to insurance plans. See note 1 for further details.

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

Consolidated statement of cash flows

for the 53 week period ended 31 December 2021

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

Comparatives for the 52 weeks ended 25 December 2020 have been restated due to a prior year adjustment in relation to the application of IFRS 16. See note 1 for further details.

1 Prior year restatements

Insurance plans

The Group is the named beneficiary on a number of life assurance products sold by third party insurance companies on which the Group pays commission. The Group is entitled to recover commission paid if plans are cancelled within two years of being sold. However, if plans are cancelled outside this two year period, commissions paid are not refundable. The majority of plans with these features ceased to be written in October 2019 and the remainder in February 2020.

Following a review of the Group's accounting policy for insurance plans in relation to the prepaid balance held on the consolidated balance sheet within 'deferred insurance commissions' it has been amended to include a provision for expected future cancellations. A detailed analysis has been performed on the cancellation rates for insurance products and a prior year restatement has been required to reflect the expected level of future cancellations.

It was further noted that a liability was not held for the active plans where a known commission is payable in future years. The calculation for the liability includes an estimate of the level of cancellations before the commission is payable and is discounted using a risk free rate of return. Furthermore, an assessment has been performed to determine the level of future expected funerals and this element of the liability has been held as a corresponding asset.

Prior year comparatives have been restated to reflect the above changes. There is no impact on statutory earnings, underlying earnings or earnings per share for the 52 week period ended 25 December 2020. A reconciliation from the reported prior period comparatives has been provided in note 17 together with the third balance sheet required to be disclosed in support of the prior year adjustments.

IFRS 16

Following the finalisation of adopting IFRS 16 for the first time and as presented in the consolidated financial statements as at and for the 52 week period ended 25 December 2020 a number of restatements have been made to the consolidated financial information as follows:

· The operating profit impact of IFRS 16 in December 2020 was reported within the funerals services segment within 'other adjustments' totalling £4.6 million, however this has now been split between the funeral services (£3.1 million), crematoria (£1.4 million) and central overheads (£0.1 million) segments to better reflect where the leasing arrangements are held;

· The December 2020 restated split reported in the 2021 Interim Report was £1.9 million to funeral services, £2.6 million to crematoria and £0.1 million to central overheads. Following further analysis of the leasing arrangements these have been restated within this Annual Report as above. Operating profit for December 2020 has therefore been restated from £17.5 million to £18.7 million in the funerals segment and from £45.2 million to £44.0 million in the Crematoria segment. All remaining analysis of the restatement is based on this revised split; and

· The impact of IFRS 16 has now been moved into underlying performance measures to reflect the application of IFRS 16. On adoption in 2020 the modified retrospective approach was applied which meant 2019 comparatives were not restated. As a result, the Group choose to exclude it from its underlying performance measures reported in 2020 in order to retain comparability.

The following restatements have been made within the segmental analysis as a result of the above:

· Funeral services - Underlying operating profit before depreciation and amortisation has been increased by £10.9 million to £73.0 million, underlying depreciation and amortisation has increased by £7.8 million to £19.9 million giving an overall increase in underlying operating profit of £3.1 million to £53.1 million. Accordingly, 'other adjustments' has decreased by £1.9 million to £13.9 million. Statutory operating profit has increased by £1.2 million to £18.7 million;

· Crematoria - Underlying operating profit before depreciation and amortisation has been increased by £2.5 million to £51.2 million, underlying depreciation and amortisation has increased by £1.1 million to £7.0 million giving an overall increase in underlying operating profit of £1.4 million to £44.2 million. Accordingly, 'other adjustments' has decreased by £2.6 million to £nil. Statutory operating profit has decreased by £1.2 million to £44.0 million; and

· Central overheads - Underlying operating loss before depreciation and amortisation has been reduced by £0.4 million to £34.9 million, underlying depreciation and amortisation has increased by £0.3 million to £2.1 million giving an overall decrease in underlying operating loss of £0.1 million to £37.0 million. Accordingly, 'other adjustments' has decreased by £0.1 million to £nil. There is no impact to statutory operating profit.

Accordingly, the following restatements have also been made within the segmental analysis:

· IFRS 16 finance costs of £4.7 million have been transferred out of other adjustments into underlying profit before tax. The total underlying finance costs has been restated to £29.8 million; 

· Accordingly, the total impact of the above on underlying profit before tax is a decrease of £0.1 million to £30.6 million;

· There is no impact on the underlying taxation charge;

· Underlying earnings for the 52 week period ended 25 December 2020 have been restated by £0.1 million to £23.2 million. Therefore, underlying earnings per share has decreased by 0.2p to 46.4p; and

· There is no impact to statutory loss after taxation or statutory earnings per share.

Consolidated statement of cashflows

The consolidated statement of cash flows has also been restated as at and for the 52 week period ended 25 December 2020 as follows:

· The 'principal and interest elements of lease payments' was previously classified within cashflows from financing activities. The interest element of IFRS 16 amounting to £4.7 million has been reclassified into finance costs paid under cash flow from operating activities. Total finance costs paid now totals £29.2 million, leading to a net cash generated from operating activities of £26.8 million. Principal elements of lease payments has been restated to £7.8 million leading to a net cash used in financing activities of £17.5 million.

2 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.

For statutory purposes the Group has two reporting segments, funeral services and crematoria, as under IFRS 15 only a single performance obligation exists when a pre-arranged funeral plan is sold, being the performance of a funeral. The Group also reports central overheads, which comprise unallocated central expenses.

Revenue

Funeral services relate to two primary sources of revenue:

· Funerals arranged and funded by the client at the time of need, in addition to ancillary items, such as memorials and floral tributes; and

· Funerals arranged and funded by a pre-arranged Trust funeral plan, for which amounts recognised as revenue arise from the de-recognition of deferred revenue on completion of the related performance obligation.

Crematoria services relate to cremation services and the sale of memorials and burial plots at the Dignity operated crematoria and cemeteries.

Underlying revenue and operating profit

For the purpose of alternative performance measures the Group has three reporting segments, funeral services, crematoria and pre-arranged funeral plans as the chief operating decision maker reviews segmental performance before applying the effect of IFRS 15.

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 crematoria and cemeteries.

Pre-arranged funeral plans represent the sale of funerals in advance to clients wishing to make their own funeral arrangements and the marketing and administration costs associated with making such sales.

Substantially all Trading Group revenue is derived from, and substantially all of the Trading 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.