REG - Dignity PLC - Preliminary Results <Origin Href="QuoteRef">DTY.L</Origin> - Part 3
08/03/2017 07:06
- Part 3: For the preceding part double click ID:nRSH7964Yb
Adjustments for:
Taxation 14.0 12.1
Net finance costs 26.5 26.5
Profit on disposal of fixed assets (0.1) -
Depreciation charges 15.9 14.5
Amortisation of intangibles 0.2 0.1
Movement in inventories 0.4 0.1
Movement in trade receivables (0.6) (1.6)
Movement in trade payables 1.3 3.2
External transaction costs 4.1 3.2
Changes in other working capital (excluding acquisitions) (1.4) 7.8
Employee share option charges 3.6 2.4
Cash generated from operations before external transaction costs 121.1 125.2
9 Analysis of the movement in the retirement benefit obligation
30 December 25 December
2016 2015
£m £m
At beginning of period (12.5) (10.5)
Total expense charged to the income statement (2.3) (2.0)
Remeasurement losses and administration expenses charged to other comprehensive income (12.5) (1.4)
Contributions by Group 1.4 1.4
At end of period (25.9) (12.5)
10 Basis of preparation
European law requires that the Group's consolidated financial statements for
the 53 week period ended 30 December 2016 are prepared in accordance with all
applicable International Financial Reporting Standards ('IFRSs'), as adopted
by the European Union. These financial statements have been prepared in
accordance with IFRS, International Financial Reporting Interpretations
Committee ('IFRIC') interpretations (as issued by the International Accounting
Standards Board) and those parts of the Companies Act 2006 applicable to
companies reporting under IFRS.
In the current period, the Group's consolidated financial statements have been
prepared for the 53 week period ended 30 December 2016. For the comparative
period, the Group's consolidated financial statements have been prepared for
the 52 week period ended 25 December 2015.
The financial information set out above does not constitute the Company's
statutory accounts for the years ended 30 December 2016 or 25 December 2015
but is derived from those accounts. Statutory accounts for 2015 have been
delivered to the registrar of companies, and those for 2016 will be delivered
in due course. The auditors have reported on those accounts; their reports
were (i) unqualified, (ii) did not include a reference to any matters to which
the auditors drew attention by way of emphasis without qualifying their report
and (iii) did not contain a statement under Section 498 (2) or (3) of the
Companies Act 2006 in respect of the accounts for 2015 and 2016.
There are no IFRSs or IFRIC interpretations that are effective for the first
time for the financial year that have a material impact on the Group.
The consolidated financial statements are prepared on a going concern basis
and have been prepared under the historical cost convention.
The principal accounting policies adopted in the preparation of these
financial statements have been consistently applied to all periods presented.
11 Securitisation
In accordance with the terms of the Secured Notes issued October 2014, Dignity
(2002) Limited (the holding company of those companies subject to the
securitisation) has today issued reports to the Rating Agencies (Fitch Ratings
and Standard & Poor's), the Security Trustee and the holders of the Secured
Notes issued in connection with the securitisation, confirming compliance with
the covenants established under the securitisation.
Copies of these reports are available at www.dignityfuneralsplc.co.uk.
12 Principal risks and uncertainties
Risk management is embedded throughout the business with all employees aware
of the role they play.
Risk appetite
Our risk appetite remains broadly unchanged in 2016. Risk appetite is the
level of risk the Group is willing to take to achieve its strategic objectives
and is set by the Board. The Board looks at the Group's appetite to risk
across a number of areas including market, financing, operations, strategy and
execution, developments, cybersecurity and technology and brand.
The Group's risk appetite is set in the context of our focus on one sector -
funeral services. As experts in this sector we are able to mitigate the risk
involved in growing the business by acquisition, development and our active
asset management strategy. This focus on our core strengths is balanced by a
more cautious approach to risk in other areas.
Our approach to risk management
The Group has a well established governance structure with internal control
and risk management systems. The risk management process:
· Provides a framework to identify, assess and manage risks, both positive and
negative, to the Group's overall strategy and the contribution of its
individual operations.
· Allows the Board to fulfil its governance responsibilities by making a
balanced and understandable assessment of the operation of the risk management
process and inputs.
Responsibilities and actions
The Board
The Board is responsible for monitoring the Group's risk and their mitigants.
Risk process
Every six months the Audit Committee formally considers the risk register and
approves it for adoption by the Board.
Risk assessment
Executive Directors and senior management are responsible for identifying and
assessing business risks.
Identify
Risks are identified through discussion with senior management and
incorporated in the risk register as appropriate.
Assess
The potential impact and likelihood of occurrence of each risk is considered.
Mitigating activities
Mitigants are identified against each risk where possible.
Review and internal audit
The link between each risk and the Group's policies and procedures is
identified. Where relevant, appropriate work is performed by the Group's
internal audit function to assist in ensuring the related procedures and
policies are appropriately understood and operated where they serve to
mitigate risks.
Risk status summary and new risks
The ongoing review of the Group's principal risks focuses on how these risks
may evolve. Since the publication of last year's Annual Report, we consider
the following key principal risks to have an increased risk exposure.
Increasing and emerging risk trends
The focus of both the government and the media on the cost of funerals has
increased which may affect the ability to increase average revenues per
funeral or cremation. In addition, there appears to be increased competition
in both the funeral and pre-arranged funeral plan markets.
Regulation
The increased focus on the whole sector may increase the likelihood of
regulation of funerals in the UK as a whole and not just in Scotland. In
addition, this could lead to regulation of the funeral plan sector with the
Funeral Planning Authorities being re-constituted to be more of a regulatory
body.
Reliance on technology/Data governance
The increasing prevalence of cyber attack across the world, means that along
with all large corporates, our business systems are under increasing level of
attack. Over the last two years we have invested significantly in this area
both in upgrading all aspects of our systems and our internal resources and
also using external consultants to perform regular external and internal
penetration tests and using the results to drive a continuous improvement
programme.
Our principal risks and uncertainties
Outlined here are the principal risks facing the Group. In assessing which
risks should be classified as principal, we assess the probability of the risk
materialising and the financial or strategic impact of the risk.
The principal risks we have identified
We maintain a detailed register of principal risks and uncertainties covering
strategic, operational, financial and compliance risks. We rate them according
to likelihood of occurrence and their potential impact.
In the table below we provide a summary of each risk, a description of the
potential impact and a summary of mitigating actions.
Operational risk management
Risk description and impact Mitigating activities 2016 Commentary Change
Significant reduction in the death rateThere is a risk that the number of deaths in any year significantly reduces. This would The profile of deaths has historically followed a similar profile to that predicted by the ONS, giving the Group the ability to plan its business accordingly. The risk is mitigated by the geographical spread of locations, the ability to control costs and the ability to acquire funerals. The number of deaths in 2016 was higher than expected. No change
have a direct result on the financial performance of both the funeral and crematoria divisions.
Nationwide adverse publicityNationwide adverse publicity for Dignity could result in a significant reduction in the number of This risk is addressed by ensuring appropriate policies and procedures are in place, which are designed to ensure excellent client service and careful selection of reputable partners. There have been no such events in the period. No change
funerals or cremations performed in any financial period. For pre-arranged funeral plans, adverse publicity for the Group or one
of its partners could result in a reduction in the number of plans sold or an increase in the number of plans cancelled. This
would have a direct and significant impact on the financial performance of that division and the Group as a whole.
Ability to increase average revenues per funeral or cremationOperating profit growth is in part attributable to increases in the The Group believes that its focus on excellent client service helps to mitigate this risk. Average revenues increased in line with the Board's expectations. No change
average revenue per funeral or cremation. There can be no guarantee that future average revenues per funeral or cremation will
be maintained or increased.
Significant reduction in market shareIt is possible that other external factors, such as new competitors, could result in a The Group believes that this risk is mitigated for funeral operations by reputation and recommendation being a key driver to the choice of funeral director being used. For crematoria operations this is mitigated by difficulties associated with building new crematoria. Market share was slightly lower than the Board's expectations. However, this offsets 2015, where the closing position was slightly higher than expected. No change
significant reduction in market share within funeral or crematoria operations. This would have a direct result on the financial
performance of those divisions.
Demographic shifts in populationThere can be no assurance that demographic shifts in population will not lead to a reduced In such situations, Dignity would seek to follow the population shift. This is mitigated by the geographical spread of locations coupled with the ability to acquire funeral locations in areas of higher demand. There have been no material changes, with satellites being opened and businesses acquired in appropriate areas. No change
demand for funeral services in areas where Dignity operates.
Operational risk management (continued)
Risk description and impact Mitigating activities 2016 Commentary Change
CompetitionThe UK funeral services market and crematoria market is currently very fragmented.There can be no assurance that There are barriers to entry in the funeral services market due to the importance of established local reputation and in the crematoria market due to the need to obtain planning approval for new crematoria and the cost of developing new crematoria. There are a number of potential affinity partners who could replace existing ones or add to existing relationships. No major changes noted. Denials of planning applications for crematoria demonstrate the barriers to entry. No change
there will not be further consolidation in the industry or that increased competition in the industry, whether in the form of
intensified price competition, service competition, over capacity or otherwise, would not lead to an erosion of the Group's
market share, average revenues or costs and consequently a reduction in its profitability.The retention of affinity partners who
sell the Group's pre-arranged funeral plans is essential to the long-term development of the pre-arranged funeral plan division.
The loss of an affinity partner could lead to a reduction in the amount of profit recognised in that division at the time of
sale. Failure to replenish or increase the bank of pre-arranged funeral plans could affect market share of the funeral division
in the longer-term.
TaxesThere can be no assurance that changes will not be made to UK taxes, such as VAT. VAT is not currently chargeable on the There are currently specific exemptions under European legislation for the UK on the VAT treatment of funerals. Any change would apply to the industry as a whole and not just the Group. No significant changes noted in the period. No change
majority of the Group's services. The introduction of such a tax could therefore significantly increase the cost to clients of
the Group's services.
Regulation of pre-arranged funeral plansPre-arranged funeral plans are not a regulated product, but are subject to a specific Any changes would apply to the industry as a whole and not just the Group. This risk is also mitigated through the high standards of selling and administration of pre-arranged funeral plans operated by the Group. No significant changes noted in the period. No change
financial services exemption. Changes to the basis of any regulation could affect the Group's opportunity to sell pre-arranged
funeral plans in the future or could result in the Group not being able to draw down the current level of marketing allowances,
which would have a direct impact on the profitability of the pre-arranged funeral plan division.
Regulation of the funeral industryLegislative changes by the Scottish Government were enacted in 2016. This provides them with The Group already operates at a very high standard, using facilities appropriate for the dignified care of the deceased. We continue to seek regulation of our markets. No change
the powers to regulate the funeral industry and they are currently recruiting an Inspector of Funerals. Dignity welcomes this
progress. Regulation could result in increased compliance costs for the industry as a whole.
Operational risk management (continued)
Risk description and impact Mitigating activities 2016 Commentary Change
Changes in the funding of the pre-arranged funeral plan businessThe Group has given commitments to pre-arranged funeral plan There is considerable regulation around insurance companies which is designed, amongst other things, to ensure that the insurance companies meet their obligations.The Trusts hold assets with the objective of achieving returns slightly in excess of inflation. The latest actuarial valuation of the pre-arranged funeral plan Trusts demonstrates a small actuarial deficit. However the average assets per plan are still robust. No change
members to provide certain funeral services in the future.Funding for these plans is reliant on either insurance companies
paying the amounts owed or the pre-arranged funeral plan Trusts having sufficient assets.If this is not the case, then the Group
may receive a lower amount per funeral than expected and thus generate lower profits.
Financial risk management
Risk description and impact Mitigating activities 2016 Commentary Change
Financial Covenant under the Secured NotesThe Group's Secured Notes requires EBITDA to total debt service to be above 1.5 times. The nature of the Group's debt means that the denominator is now fixed unless further Secured Notes are issued in the future. This means that the covenant headroom will change proportionately with changes in EBITDA generated by the securitised subgroup. No significant changes noted in the period. No change
If this financial covenant (which is applicable to the securitised subgroup of Dignity) is not achieved, then this may lead to
an Event of Default under the terms of the Secured Notes, which could result in the Security Trustee taking control of the
securitisation group on behalf of the Secured Noteholders.In addition, the Group is required to achieve a more stringent ratio
of 1.85 times for the same test in order to be permitted to transfer excess cash from the securitisation group to Dignity plc.
If this stricter test is not achieved, then the Group's ability to pay dividends would be impacted.
13 Pre-arranged funeral plans
(a) Contingent liabilities and commitments
Dignity Pre-arrangement Limited, Dignity Securities Limited and Advance
Planning Limited are fellow members of the Dignity Group in the United
Kingdom. These companies have sold pre-arranged funeral plans to their clients
in the past. All monies from these sales are held and controlled by three
independent Trusts, being the National Funeral Trust, the Dignity Limited
Trust Fund and the Trust for Age UK Funeral Plans respectively (the 'Principal
Trusts'). Further details of the transactions can be found in the financial
statements of these companies, which are available from 4 King Edwards Court,
King Edwards Square, Sutton Coldfield, West Midlands, B73 6AP.
The Group has given commitments to these clients to perform their funeral. The
agreed amounts payable to either the Group or to third party funeral directors
will be paid out of the funds held in the Trusts. The majority of the
Trustees of each of the pre-arranged funeral plan trusts are unconnected to
the Group, as required by current UK legislation. The investment strategy is
set, implemented and monitored by the Trustees.
It is the view of the Directors that none of the commitments given to these
clients, which are explained further below, are onerous to the Group. However
ultimately, the Group is obligated to perform these funerals in exchange for
the assets of the Trust, whatever they may be.
Similar commitments have arisen following acquisitions of businesses, since
2013, which have sold pre-arranged funeral plans through similar trust based
structures (the 'Recent Trusts'). Only the National Funeral Trust and the
Trust for Age UK Funeral Plans receive funds relating to the sale of new plans
(the 'Active Trusts').
(b) Pre-arranged funeral plan trust assets
As noted above, the Group has given commitments to perform the funerals
covered by the pre-arranged plans, regardless of whether or not the Trusts
have available assets to fund the funeral. The Group, therefore, has a
potential exposure in the form of a reduced fee should the Trusts investment
strategy, over which it has no control, fail to deliver an appropriate return
or result in a fall in underlying asset values, or if the cost of delivery for
a funeral increases at rates in excess of investment returns.
The Trustees have informed the Group that they continue to take independent
advice regarding the Trust's investment strategy. As a result, it is
anticipated that the investment allocation by class will develop further
during 2017 and beyond, gradually resulting in a portfolio in the following
profile:
Example investment types Target (%)
Defensive investments Index linked gilts and corporate bonds 22
Illiquid investments Private investments 16
Core growth investments Equities 22
Growth fixed income and alternative investments Property funds and emerging market debt 40
These developments in the Trust's investment strategy are expected to enhance
investment returns in the longer-term for a broadly similar level of risk as
that currently taken. The strategy will, however, potentially result in
greater volatility year on year in the reported value of the Trust's assets.
The Trustees have advised that the market value of the assets of the
pre-arranged funeral plan trusts was £863.9 million at 30 December 2016 (2015:
£736.0 million) in respect of 299,000 (2015: 290,000) active pre-arranged
funeral plans. 68,000 (2015: 49,000) of the remaining active pre-arranged
funeral plans related to those backed by Insurance Plans, as described in note
1 in the Annual Report, with the balance of 37,000 (2015: 35,000) being plans
arising from acquisitions.
The Trustees of the Principal Trusts are required to have the Trusts'
liabilities actuarially valued once a year (once every three years in the case
of the Recent Trusts). This actuarial valuation is of liabilities of the
Trusts to secure funerals through Dignity and other third party funeral
directors and does not, in respect of those funerals delivered by the Group
represent the cost of delivery of the funeral. It is only in the event that
there are insufficient funds within the Trusts to cover the cost of delivery
to Dignity that the commitment would become onerous to Dignity as described in
(a) above.
The Trustees have advised that the latest actuarial valuations of the
Principal Trusts were performed as at 23 September 2016 (2015: 25 September
2015) using assumptions determined by the Trustees. Given the significant
reduction in bond yields, the actuarial valuation of the liabilities in
respect of the pre-arranged funeral plan trusts have increased to £839.7
million as at 23 September 2016 (2015: £692.1 million). The corresponding
market value of the assets of the pre-arranged funeral plan trusts was £831.5
million (2015: £696.9 million) as at the same date. Consequently the actuarial
valuations recorded a total deficit of £8.2 million at 23 September 2016
(2015: surplus of £4.8 million).
Nonetheless, the Trustees have advised that the Trusts hold assets of
approximately £2,900 (2015: £2,500) per active plan at the balance sheet date.
On average the Group received approximately £2,500 (2015: £2,450) in the
period for the performance of each funeral (including amounts to cover
disbursementssuch as crematoria fees, ministers' fees and doctors' fees).
The Trustees have advised that the Recent Trusts have approximately £19
million of assets as at the balance sheet date and no material actuarial
surplus or deficit.
Transactions with the Group
During the period, the Group entered into transactions with the National
Funeral Trust, the Trust for Age UK Funeral Plans and the Dignity Limited
Trust Fund (the 'Principal Trusts') and the Trusts related to businesses
acquired since 2013 ('Recent Trusts') (and collectively, the 'Trusts')
associated with the pre-arranged funeral plan businesses. The nature of the
relationship with the Trusts is set out above and in the accounting policies.
Amounts may only be paid out of the Trusts in accordance with the relevant
Trust Deeds.
Transactions principally comprise:
• The recovery of marketing and administration allowances in relation to
plans sold net of cancellations (which are recognised by the Group as revenue
within the pre-arranged funeral plan division at the time of the sale); and
• Receipts from the Trusts in respect of funerals provided (which are
recognised by the Group as revenue within the funeral division when the
funeral is performed).
Transactions also include:
• Receipts from the Trusts in respect of cancellations by existing members;
• Reimbursement by the Trusts of expenses paid by the Group on behalf of the
respective Trusts; and
• The payment of realised surpluses generated by the Trust funds as and when
the Trustees sanction such payments.
Transactions are summarised below:
Transactions during the period Amounts due to the Group at the period end
2016 2015 2016 2015
£m £m £m £m
Dignity Limited Trust Fund 0.3 0.3 - -
National Funeral Trust 44.4 41.5 6.8 4.7
Trust for Age UK Funeral Plans 36.5 38.5 4.2 4.6
Recent Trusts 2.1 2.0 0.2 0.4
Total 83.3 82.3 11.2 9.7
Amounts due to the Group from the Trusts are included in Trade and other
receivables.
The above transactions were included within revenue under the following
captions:
Transactions during the period
2016 2015
£m £m
Funeral services revenue 42.6 40.0
Pre-arranged funeral plans revenue 27.3 29.0
In addition to the transactions recognised within revenue in the table above,
there were £13.4 million (2015: £13.3 million) of transactions between the
Group and the Trusts which represented amounts paid to the Group to reimburse
them for trust expenses, monies repaid to members on cancellation and monies
paid to third parties for the performance of some funeral services; all of
which have no impact on the income statement.
This information is provided by RNS
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