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Edited Transcript of IVC.AX earnings conference call or presentation 14-Aug-19 11:30pm GMT

Half Year 2019 InvoCare Ltd Earnings Call

North Sydney, New South Wales Nov 21, 2019 (Thomson StreetEvents) -- Edited Transcript of InvoCare Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Damien MacRae

InvoCare Limited - COO

* Josée Lemoine

InvoCare Limited - CFO

* Martin Alistair John Earp

InvoCare Limited - CEO, MD & Executive Director

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Conference Call Participants

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* James Bales

Morgan Stanley, Research Division - Equity Analyst

* Mathieu Chevrier

Citigroup Inc, Research Division - Senior Associate

* Mitchell Sonogan

Macquarie Research - Analyst

* Russell J. Gill

JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand

* Tim Plumbe

UBS Investment Bank, Research Division - Director and Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the InvoCare Limited 2019 Half Year Results Analyst Briefing Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Martin Earp, Chief Executive Officer and Managing Director. Please go ahead.

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [2]

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Thank you. Good morning, and welcome to the presentation of InvoCare's 2019 half year results.

Today, I will summarize the key highlights for the first 6 months of the year and the high-level financial results before handing over to Josée Lemoine, our CFO, to walk us through the detailed financials. Damien MacRae, our Chief Operating Officer, will then provide a more detailed review of the operational performance of the business. Finally, I will update you on the progress of our growth strategies.

Before I start, I will draw attention to the fact that the change in accounting standards of AASB 15 and AASB 16 have impacted InvoCare more than many companies due to the large prepaid component of our business. This makes a simple comparison with previous years difficult. And as such, we have provided a set of underlying results that backs out the impact of these accounting standards. Josée will provide greater clarity on this issue later in the presentation. But I should make clear that both Damien and I will focus on the underlying operational performance of the business.

First half highlights. It has been a promising first half to the year after what was a challenging 2018. The markets in which InvoCare operates have begun to revert back to the long-term trend with growth in the number of deaths increasing 1.2% on the same period last year after a greater than 3% decline in our Australian markets in 2018. In addition, our growth strategy of Protect & Grow Plan and regional acquisitions contributed positively to deliver growth for the business.

The combination of these factors combined to deliver an underlying 9.8% increase in sales, a 13.3% increase in EBITDA and an increase in operating earnings after tax of 8.6%.

Reported profit grew by 97%, a result that was driven by year-on-year improvement of the prepaid funerals fund under management, which delivered an 8.1% increase in total FUM across the first 6 months of the year. This result was driven by the increase in domestic equities since the start of the year as well as strong property performance driven by declining interest rates.

Despite the fact that it had been a promising first half to the year, the directors are cognizant that within our industry, the winter months of Q3 are critical to the overall performance for the full year. In light of this, the Board has decided to maintain its interim dividend at $0.175, the same as last year. I should also mention that as part of our future growth strategy, InvoCare has expanded its operations into the pet cremation sector, and I will discuss this later in the presentation.

Next slide, please. As I just mentioned, the underlying financial performance shown in the first 2 columns provide a strong year-on-year performance, especially when we take into account that the real impact with a lower number of deaths last year occurred in Q3.

This positive performance is reflected across all 3 geographic regions, but I will call out Singapore, where even allowing for the fact that our main location was closed for 5 months of the first half of last year, the overall performance of the renovated facility is clearly demonstrating the value of investing in our locations to meet the changing needs of customers. Damien will provide more detail around the performance of all 3 countries in his operational summary.

Turning to the pillars of growth. It is pleasing to see a scorecard which has positive arrows across all the main contributors to overall financial performance. The market is beginning to revert to the long-term trend, which is a positive driver of long-term value creation. The forecasted increase in the number of deaths by the ABS, which was reforecast in 2018, is showing a long-term trend for growth of 2.4% per annum.

Market share on a rolling 12-month basis is also showing an increase, which is driven by the 2018 acquisitions but also the positive contribution that the Protect & Grow strategy is having on case volume. Given the positive impact that Protect & Grow is having on our business, we have continued with investing into our properties and have renovated 96 locations, which represents approximately 40% of the planned work.

Funeral case average is also increasing, again driven in part by the Protect & Grow strategy. We are able to provide increasing levels of service to meet the changing needs of customers. We are beginning to see increasing case averages.

Our operating margin has improved as we have focused on ensuring that we proactively manage our costs across the board with a particular focus on matching our personnel resourcing to the level of demand being experienced in the market.

Finally and most importantly, the Protect & Grow strategy, where we focus on improving our facilities, our service levels, our business systems and our culture, have all combined to lift our customer service levels as measured by Net Promoter Score.

Success in the funeral business is driven by referrals and repeat business. And we judge ourselves by the metric of whether people would strongly recommend us to their families and friends. Whilst the improvement is promising, we will continue to invest in our business to improve this key metric.

I will now turn to Josée to talk us through the detailed financial results.

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Josée Lemoine, InvoCare Limited - CFO [3]

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Thank you, Martin, and good morning, everybody. The financial results presentation this morning will focus on the following 4 topics: First, the impact on our operating versus the underlying results following the adoption of the new accounting standards; second, the overall results and performance against prior period; third, we'll take a closer look at the factors impacting operating earnings and net profit after tax; and finally, we'll look at cash flow. You'll find further details on capital management, capital expenditure, key movements in funds under management and a summary of the accounting changes in the appendices.

Firstly, let me take you through the impact of the adoption of the new accounting standards. Please turn to Slide 6. Before I walk you through the detailed financials, let me explain the implication of the recent adoption of the new accounting standards on our results. And that's basically the AASB 15, which is the revenue from contracts with customers and in this case it's specifically the unwind of the pre 1 January 2018 CemCrem contracts; and secondly, the leases standard, AASB 16.

This waterfall shows clearly how these accounting standards are impacting the operating profitability, if you look at the dark blue bars at each end of the chart. The underlying profitability is shown as the dark gray bars on the inside. I know it's a bit of a busy chart, but it's just we were trying to illustrate the impact from our results.

So for the EBITDA, the underlying versus operating growth is 13.3% and 16.9%, respectively. I'd like to remind you that the unwind of the CemCrem contracts is directly linked with the timing of final installment payments and/or the transfer of title of ownership. We had more of these contracts being recognized in H1 2018 than in 2019 with a net unfavorable impact of $3.7 million on PCP. And that's being the difference between the $7.5 million on the left-hand side of the chart in the orange bar and the $3.8 million this half as shown on the waterfall chart above.

It is offset by the adoption of AASB 16, which is the leases standard, impacting favorably operating EBITDA by $6.7 million with no restatement of comparatives. This reflects 215 operating leases now accounted for on the balance sheet, meaning that occupancy and facility costs are now expensed below EBITDA via an increase in depreciation and finance costs.

Notwithstanding the changes in accounting standards, the underlying year-on-year growth of 13.3% reflects the market reverting to trend together with the growth strategies delivering on expectations and prudent cost management. The year-on-year increase in corporate costs, as some of you might have noticed from the chart, is related to short and long-term incentive provision release in the PCP.

It is even more important to understand the impact of the accounting standard changes on the earnings after tax on the next slide, #7.

The impact of the accounting standards on the earnings after tax performance, unlike the EBITDA, does cloud the strong underlying results if not understood. This waterfall shows clearly the impact on profitability. For the earnings after-tax, the strong underlying growth of 8.6% is in contrast to a decline of 5.2% for the operating, with the waterfall showing clearly how the accounting standards are impacting the operating profitability. Again, I'll refer you to the dark blue bars at each end of the chart. The underlying profitability is shown as the gray bars.

The unwind of the CemCrem contracts delivered a net unfavorable impact of $2.1 million on PCP, being the difference between the $4 million in the half in 2018 and the $1.9 million recognized this half, as shown in the chart. And this reflects the related finance and tax costs attached with the CemCrem contracts, compounded by the adoption of the lease standard impacting unfavorably on operating earnings by $0.8 million, again, with no restatement of comparatives.

Occupancy and facility costs are now expensed below EBITDA through depreciation, finance costs and related tax affecting.

Details of the net impact of adoption of the new lease standard can be found in the appendix and also in Note 12 of the interim financial report. For the underlying business, depreciation and finance costs are in line with the investment in Protect & Grow.

So let's look more closely at the overall results and performance against prior period on Slide 8. This table shows a summary of the income statement for the group. Damien will speak further in the next section on the underlying results while I will focus on operating results. I will highlight, where required, areas significantly impacted by the change in the accounting standards.

Overall, at an operating level, the strong results benefited from the growth strategies initiated in 2017 and 2018 with operating sales growing 7% on the PCP. This is the product of a few factors: Firstly, the Australian and Singapore markets reverting to trend; net volume growth with the scheduled NBO renovations; and the acquisitions and expansion into regional markets in 2018. These benefits were slightly offset by the decrease of the contracts realization, as mentioned earlier, in regard to the accounting changes required by the revenue standard.

Let's look at the sales performance across the group by geography to get a sense of how these factors played out. In Australia, funeral sales were up 6.9% and the average revenue per funeral case increased 2.2%. Both were impacted by the 8 acquisitions made during 2018, mostly in the second half, and the mix of reopening and temporary closures of locations for refurbishment.

Cemetery and crematoria strong sales during the half following the completion of 2 large crypt complexes did not fully mitigate the decrease on PCP of $5.4 million and realization of deferred memorial sales, resulting in $2.4 million decrease in CemCrem operating sales. Again, Damien will expand on the underlying performance.

New Zealand increased volume and market share in a competitive market following the acquisitions in the Auckland and Dunedin markets, while Singapore was favorably impacted by the reopening of its parlors since May last year.

The operating margin's increased, reflecting the adoption of AASB 16, which is the leases standard and which is reclassifying the occupancy and facilities costs, and slightly offset by the greenfield location ramping up. The contribution from the investment management of our prepaid or funds under management has lifted profit by 97%, benefiting from a strong equity performance along with solid returns on domestic property investments.

Finally, with operating earnings down slightly on last year to $22.3 million and a prudent approach to capital management, the Board has determined a half year dividend at $0.175. The payout ratio at 88% is slightly above traditional norms.

Would you please turn to Slide 9? As you can see in this table, after considering the increase following the adoption of the new accounting standards, increases in both depreciation and amortization and finance and net interest costs reflect the ongoing investments in the growth strategies. Further down the table, you will note that the tax effective rate increased as tax on operating earnings in 2018 included capital losses recovered from the U.S.A. sale and reduced the 2018 tax expense and related effective tax rate.

Turning now to a closer look at the factors impacting net profit after tax on Slide 10. Our net profit after tax increased from $20.8 million in 2018 to $41.1 million this half. This change is largely the result of the impact of the mark-to-market accounting treatment of our prepaid contracts, reflecting the higher returns on prepaid contracts due to strong equities performance and property and investment returns. The need to mark these investments to market leads to considerable volatility in InvoCare's reported profit from year-to-year and is not reflective of the operating performance of the business.

The tax under nonoperating items benefited from $1.5 million arising from the capital loss on disposal of an investment in an online memorial associate.

Finally, moving on to cash flow on Slide 11. Cash flow and cash conversion in this period has reduced to 72% as it was adversely impacted by the cyclical nature of development and investment in our memorial parks compounded by the temporary increase in debtors during the transition to the new ERP system. The purchase of property, plant and equipment of $30.1 million is in line with the Protect & Grow Plan.

The decrease on PCP reflects the lower technology spend as delivery of telephony upgrades and first phase of the ERP rollout was completed last year.

You will note the lower borrowings as a result of the $86 million from the share placement proceeds earlier this year, which was partly utilized for debt repayment.

I will now hand you to Damien, who will provide an operational update on our underlying business.

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Damien MacRae, InvoCare Limited - COO [4]

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Thank you, Josée, and good morning. I'll take the next few moments providing some detail around the operational performance of the InvoCare business with particular focus on, firstly, our customer journey; and secondly, our operational performance by business unit.

So if we can turn to Slide 13. As a referral-driven business, our customer focus and service delivery is at the center of our value proposition irrespective of brand. Pleasingly, our transformational strategy, Protect & Grow, is having a positive impact on the customer experience.

The combination of the 3 pillars of Protect & Grow, being our people and culture, our physical assets and our systems, is allowing us to continue to develop and enhance the experience we provide our client families. And the customer experience remains at the core of our strategy with all team members being recognized and rewarded based on the feedback we receive from our client families.

Particularly pleasing is the continued growth trend in our Net Promoter Score over the last 18 months across all of our business units. To put this in -- to put this NPS performance into perspective, it is widely considered anything above 20 is favorable. Bain & Co. in the U.S. suggests that an NPS score above 50 is excellent and above 80, irrespective of industry, is considered world-class. Our current score of 80 provides us with confidence that the large number of interactions we have with our families, we are providing a world-class experience.

Whilst we do not expect the trend to continue to grow at the same rate as the past 18 months, InvoCare remains committed to recognizing and reporting on the customer experience going forward and this will remain at our core.

Let's turn to Slide 14. Our half 1 2019 underlying performance highlights all business units within the group are, firstly, growing; and secondly, providing a contribution to the overall InvoCare performance. Pleasingly, this is both at a customer level and a financial performance level.

Some key points to call out. Firstly, as mentioned by Martin, after a challenging 2018, it is encouraging to see all business units delivering double-digit underlying EBITDA growth. Secondly, a combination of normalizing markets, our Protect & Grow transformation and regional acquisitions have seen solid volume growth, which in turn has led to market share growth. And thirdly, as mentioned on the previous slide, our teams continue to deliver outstanding service to our client families, leading to top-tier NPS scores and their likelihood to recommend our service to their families and to their friends.

Moving on to Slide 15. Our funeral performance slide provides a detailed breakdown of drivers of our volume growth for half 1. This growth over half 1 has seen market share grow in the markets we participate in by 110 basis points over the rolling 12-month period. Some key takeouts on this graph include our strategy embarked in 2018 of regional acquisitions is paying dividends with 7.5% of total volume coming from these acquisitions.

Also and very importantly, the sites we have completed NBO upgrades on prior to the beginning of 2019 have shown solid organic growth over the first half as a portfolio. This compares with unrenovated sites contracting over the similar period. This provides us with another encouraging proof point of the positive impact our NBO strategy is having on the portfolio and clear growth opportunities as a greater number of our sites are transformed through NBO.

I'll now provide some more details on our business lines, turning to Slide 16. Within our Australian funerals business, we have seen promising underlying EBITDA growth of 13.2%, driven by strong customer experience, disciplined expense management, case average growth and a return to a more normalized market. This has driven market share growth in the Australian funeral market by 20 basis points for the rolling 12 months.

This market share growth has been driven by our national brands and the acquisition strategy. White Lady Funerals, Simplicity Funerals and Value Cremations have all grown market share during this period. Traditional brands through acquisitions have also grown during this period. However, it should be noted, InvoCare's state-based brand have contracted. New brand initiatives as well as a significant NBO investment are in place to be rolled out during the remainder of FY '19 and FY '20 to focus on this opportunity.

Case averages delivered solid growth driven by disciplined distribution and the sale of a broader product base.

Turning to Slide 17. Our Australian memorial parks business units or our cemetery and crematoria business has seen solid growth across both its memorialization and at-need business drivers. This growth is seeing sales increase by 6.2% and underlying EBITDA by 11.6%.

Investments in park developments over recent years, particularly crypt complexes in New South Wales and development of large private estates, have been well received and continue to sell in line or above our expectations.

We are particularly encouraged to see the ongoing growth of our multiculture unit and the new park development, which is experiencing strong recognition and acceptance by this customer segment. A solid pipeline of product opportunity remains.

Our cremation and burial cases have increased by 3.4% during half 1 with an even spread across both our New South Wales and Queensland business units. Pleasingly, we have seen growth come from both InvoCare customer base and the non-InvoCare customer base, providing confidence in the quality of our parks and service being provided by the dedicated teams.

Turning to New Zealand. Our New Zealand business has recognized the significant benefit of 2 of our acquisitions during 2018 in the Auckland and in the Dunedin markets. This has ensured strong market share growth in a declining market and solid underlying EBITDA performance of 10.7% growth. Market share in New Zealand has grown by 610 basis points over the rolling 12 months.

The New Zealand market continues to be a highly competitive one from a pricing perspective, largely driven by its fragmented brand nature with no national brands currently present. This combined with new acquisitions has driven a negative impact on case averages. It is important to call out the outstanding result on the customer experience being delivered by our New Zealand team. At 87 NPS score, this leads all business units within the InvoCare group.

Now to Singapore. Our first full half of trading since the major NBO undertaken in our Singapore business has seen a return to core growth and the take-up of our new offerings from various market segments in the Singapore market. This has combined to deliver market share growth of 110 basis points, case average growth and an underlying EBITDA growth of 117.5%.

Segment targeted products and services in the Singapore business has seen strong consumer acceptance and is driving solid case average growth.

Finally, like our other business units, it is important to call out the customer experience being delivered by the Singapore team. Although not currently measured on NPS, our separate measure of likelihood to recommend highlights our provision of excellent customer service. We intend on introducing the NPS measure in 2020 to the Singapore market.

So in summary, at an operational level, we are seeing promising trends across all business units. At its core, this performance is being driven by an outstanding team who continue to deliver strong customer experience and leverage our Protect & Grow transformation.

I'll now pass you back to Martin.

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [5]

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Thank you, Damien. I thought it was sensible that I quickly recap the rationale for investing a net $200 million into the Protect & Grow strategy. The baby boomer generation is driving a significant change in customer needs and expectations from the funeral industry.

The changing dynamic of the market created an opportunity for InvoCare to leverage its existing position and deliver an attractive return for investors. Customers are increasingly seeking to celebrate a life rather than mourn a death, have greater transparency on both information and pricing, be more involved in the funeral arrangements and combine the memorial service and the celebration of life in the same modern location with ample parking.

In summary, the majority of customers want a funeral that better meets their individual needs and delivers value for money rather than simply seeking a cheaper solution. Meeting these needs requires a significant upgrade in properties and increased service levels. This in turn requires a significant amount of capital, a large footprint of land in the major metropolitan centers and a willingness to derive a return over the longer term.

InvoCare saw an opportunity to create long-term value for shareholders by investing capital to meet customer needs.

We have completed work at 96 locations, which is 41% of the program, and are on track to complete 50% by the end of the year. The slide represents where the work has been completed across our network and also identifies the type of work conducted, either enhance, refresh or new growth locations.

The distinction that we make between an enhanced location and a refreshed location is that an enhanced location often requires structural work and planning approval in order to build the physical facilities that are required to allow us to provide additional services, whereas the refresh is focused on modernizing the existing facilities and does not require planning permission or structural change.

In February, we reported the performance of the first cohort of 48 renovated locations, which at that time had more than 6 months' worth of operating data. We reported that they were exceeding our expectations with regard to the EBITDA uplift against the BAU position. We did, however, caveat this update by referencing the fact that with less than 12 months of operational data, it was still early days to draw firm conclusions.

With an additional 6 months of operating data, we can report that the performance of these renovated locations continue to exceed our expectations. And this trend is also supported with the newly renovated sites that have less than 1 year's worth of operating data.

We also reported in February that we had learned a lot of lessons during the rollout of Phase 1, and it was our aim to not only incorporate these lessons into newly renovated locations but also to circle back and apply the lessons to the sites that we had already renovated.

I can report that this work has commenced and remains ongoing. But as shown in the graph on the slide, the number of locations that are in line or exceeding expectations have increased from 61% to 65%. Overall, we are very pleased with the results, and we will be pushing ahead with further renovations in Q4. In addition, we have commenced planning work for the renovations to be conducted in 2020.

Turning to operational efficiency. This was a key part of the Protect & Grow strategy, and it was to invest in back-of-house business systems and physical infrastructure to allow us to operate both more efficiently and safely into the future. It is therefore pleasing to report that at the half year, we have rolled out our new ERP system to 50% of our locations, and the balance will be completed by the end of the year.

In addition, I can report that we have opened our first purpose-built dedicated shared service operational center in Malaga in Western Australia. This state-of-the-art facility has the ability to meet the needs of 6,000 funerals and will allow us to provide a higher level of service to our families whilst operating more efficiently and safely. A further 2 operational centers are due to be opened before the end of the year.

At InvoCare, we never lose sight of the fact that our success is driven by our people delivering the highest level of customer service day in and day out. We understand that this level of commitment and dedication does not happen by accident. And we have put a lot of effort into our culture to ensure that our operational team is supported in their efforts to exceed customers' expectations.

In the first half of the year, we have continued to focus on improving our customer service training and rewarding and recognizing our employees for delivering excellent customer service. In addition, we are determined to ensure that we retain our most valuable resource, our people, and ensure that we keep everybody safe in the workplace. It is encouraging to see progress on both of these issues.

In addition to the continued focus on these areas, we will, in the second half of the year, be conducting a full employee satisfaction survey and launching a training program designed specifically for InvoCare to upskill our local leaders.

Regional expansion. We had a very successful first year with regard to developing a presence in the 5 regional areas that we had identified will provide above-average growth rates in the key population demographic of greater than 65 years of age. The acquisitions that were made in 2018 will deliver in excess of 4,000 cases and $27 million in revenue during 2019. We are pleased to report that all of these businesses have been successfully transferred into InvoCare's operation, and we will continue to work with the local teams to see how we can better support these businesses into the future.

A benefit that was not fully quantified at the time of the acquisition has been the level of insights and fresh thinking that the people within these businesses have brought to InvoCare. We will continue to tap into this new source of expertise as we seek to improve our understanding of the regional markets.

As with all development teams, the number of completed deals in any half will ebb and flow. And whilst we did not complete any acquisitions in H1, we maintained a strong and active deal pipeline. In July, we announced the acquisition of Heritage Funerals in Toowoomba, which will complement our existing presence in this regional market. And we're delighted to welcome Judith McGrath and her team into the InvoCare family.

As previously stated, we are committed to discipline around the price paid for acquisitions, and we will continue to maintain this discipline moving forward. It should, however, be recognized that assisting us in being able to be disciplined is the high level of brand recognition for Simplicity and White Lady Funerals. This recognition provides us with the alternative of entering these regional markets using our national brands when the price of an acquisition reaches a level that we are no longer comfortable with.

Pets. When we were finalizing the Protect & Grow strategy in 2016, the humanization of pets was noted as an area of potential interest. Since that time, we've put effort into researching a sector of pet cremations within Australia and identified it as an attractive adjacent market, which leverages our deep knowledge of the cremation business.

Subsequent to this research, we were able to identify one of the most successful operators in the U.S. where the market segment is relatively mature. We were able to partner with this company and utilize their deep knowledge of the industry as well as their business model, systems and processes to launch a new pet cremation business called Patch & Purr into the Australian market. The focus of this business is to provide a significantly higher level of service to both the pet owners and the veterinary clinics. And we are currently operating in New South Wales to prove up the concept, but the very early results are promising.

So in conclusion, the key takeouts that I would like to leave you with are: It has been a promising start to the year with positive contributions beginning to flow from the key investment programs. The Protect & Grow strategy is exceeding expected EBITDA uplift, and regional acquisitions have contributed to strong growth in the first half of the year. The increase in case average demonstrates that people are willing to pay for higher quality products and services if they believe that they are getting value for money. The increase in Net Promoter Score driven by the Protect & Grow strategy is a good indicator of long-term success. And finally, the equity that we raised in February 2019 has allowed InvoCare to strengthen the balance sheet whilst continuing to fund future growth opportunities.

With regard to future guidance, as we saw last year the fluctuations that can occur in the winter trading period of Q3 make it incredibly difficult to provide an accurate full year guidance. And as such, we will not be providing full year guidance today. I am, however, able to confirm that trading for July was solid with funeral case volume growth broadly in line with expectations.

Thank you all for listening, and I will now open up the call to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from Tim Plumbe, UBS Investment Bank.

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Tim Plumbe, UBS Investment Bank, Research Division - Director and Research Analyst [2]

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Just a couple of questions from me, if that's all right. Martin, I was just wondering, if we backed out the acquisitions, backed out the P&G portfolio and just looked at the underlying portfolio and operating conditions within that portfolio, can you give us a bit of a sense in terms of the growth that was achieved out of that? I mean first half of '18 was quite soft from memory. So did you see a decent improvement? I can't really see it in terms of the volume numbers.

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [3]

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I think the chart that you need to look at was within Damien's section on page whatever of the presentation, which clearly shows that the NBO increase led to...

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Josée Lemoine, InvoCare Limited - CFO [4]

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Page 15.

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [5]

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Sorry, it's Page 15 of the slide deck. And it showed that the NBO completed had increased case numbers by 509, whereas the uncompleted NBO locations, which is about 50% of the portfolio, was down 241 cases. So you can -- what that clearly demonstrates is we continue to see difficult trading conditions in what I would call old-school product. But where we have renovated our facilities, customers are voting with their feet and choosing to use our facilities that have been renovated.

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Tim Plumbe, UBS Investment Bank, Research Division - Director and Research Analyst [6]

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Got it. So I mean last year was pretty soft comp -- or sorry, you're going off pretty soft comps from last year. Do you have a sense in terms of what happens to the overall death rate? I mean is that you guys losing market share within...

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [7]

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Tim, last year for the first half of the year, we didn't see the decline in the number of deaths really occur until Q3. So when we look at H1 and H1, you really are sort of probably getting a sensible comparison of the impact.

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Tim Plumbe, UBS Investment Bank, Research Division - Director and Research Analyst [8]

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Got it. Okay. Okay. Cool. And just for the second one, in terms of the Protect & Grow spend, I think in 2017, you guys had spent an odd $37 million. Just wondering, I mean that's the oldest cohort. Are you able to put some numbers around the kind of ROI that you guys are getting on that $37 million as at 2019?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [9]

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We haven't got that information to hand at the moment, Tim.

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Tim Plumbe, UBS Investment Bank, Research Division - Director and Research Analyst [10]

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Okay. And just last one, July volumes, in line with expectations. Are you able to give us a sense in terms of what that is relative to PCP?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [11]

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It's definitely up. I'm just looking at Damien. He was saying that it's probably up, what...

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Damien MacRae, InvoCare Limited - COO [12]

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3% to 4%, Tim, I would say, probably up in July.

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Tim Plumbe, UBS Investment Bank, Research Division - Director and Research Analyst [13]

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Okay. Great. And that's excluding acquisitions?

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Damien MacRae, InvoCare Limited - COO [14]

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Yes.

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Operator [15]

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Your next question comes from James Bales, Morgan Stanley.

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James Bales, Morgan Stanley, Research Division - Equity Analyst [16]

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I wanted to understand a bit more about the refurb program and the metric that 1/3 of refurbs are behind budget. So how much do they have to be behind budget before they're no longer in line? Like is that 5%? And how many of the ones that are in line and above are actually above on that metric?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [17]

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Okay. Good question. Look, first things first, we define in line as sort of plus or minus 10% either way. What we're seeing is actually the improvement in -- across the board, but we go back and we either do some additional work or we look at the marketing that we're doing in those areas. But what we've been seeing is an improvement across the board in terms of the performance of that cohort of 48. So it's moved from 61% to 65% are in line or overperforming.

What I will say, however, is actually, the performance is probably a little better than that because if we have a slow start to a facility, let's say, back in 2017, we've done some remedial work maybe back end of 2018, beginning of this year, and we're now seeing it performing. However, it takes time to catch up on maybe the first 6 or 9 months of underperformance. So we actually saw that improvement from 61% to 65% as very positive because actually, we've got to run down the slow start.

So overall, we're getting very comfortable that across the board, the program's ahead of our expectations and will continue to improve as we circle back and drive the results out of those underperforming assets.

But we always said that in the first cohort, we were going to be learning lessons. We've been very clear about what those lessons were. We've documented them very clearly in the February results. And we continue to apply those lessons, not only to the original cohort but also to the new work that we're conducting.

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James Bales, Morgan Stanley, Research Division - Equity Analyst [18]

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So Martin, are you able to say how many are above that 10% in terms of outperformance?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [19]

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Sure. I'm just looking at the team. I think it's probably 2/3 of the number. But let me get the exact number. So what we were saying, in 2018, 24% would have been above. And that's increased to 40% above. So 40% of the 65%.

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James Bales, Morgan Stanley, Research Division - Equity Analyst [20]

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Yes. Okay. And then just to...

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [21]

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So again -- and that's why we sit here and we think we're on the right path because actually, with 40% overperforming, that's -- and they tend to be the biggest sites that are overperforming, that's really driving the economic case for Protect & Grow.

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James Bales, Morgan Stanley, Research Division - Equity Analyst [22]

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Yes. Okay. And then I just had a question on cash flow as well. That conversion of 72%, what do you see as unwinding in the second half? And what are your expectations to cash conversion for the full year?

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Josée Lemoine, InvoCare Limited - CFO [23]

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James, we haven't quite settled those. We're working closely -- obviously, in the first half, we rolled out about, well, 50% of our locations on a new system. And so that's quite -- it has thrown a bit the team into focusing on learning new skills and new systems and probably spending a bit less time on collections. So we're addressing that at the moment with the team. So we would expect that component to redress itself.

On the CemCrem investment, we still have a few large developments. And those are lumpy investments over -- like you can have some -- 2 years in a row of large investments, and then you might go for another 18 months to 2 years with minimal investments because it just -- it makes sense to develop a bulk area versus just some small areas incrementally. So we expect that to come back up. We also see a -- half-on-half usually a better cash conversion in the second half. But I haven't set a target yet. So we'll have to stay tuned.

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Operator [24]

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(Operator Instructions) Your next question comes from Mitchell Sonogan, Macquarie Group.

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Mitchell Sonogan, Macquarie Research - Analyst [25]

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Just a quick one. Just again on the Protect & Grow NBO program. Can you maybe talk about the phasing and maybe about what you expect for sort of case or cases lost maybe second half and then even FY '20? Just looking at Page 15 again on the volumes, you sort of said about 241 pre-NBO and maybe 115 lost from NBO in progress but the lost cases in first half '18 from Australian NBO was about 450. So that's a big difference. Just wondering about how much disruption has been caused from that program and the staging, please.

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [26]

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Yes, good question, Mitchell. I'm happy to answer that. Obviously, in 2018, we were doing a significant amount of work and more so than in 2019. But that was always the plan. I think we always referred to the capital deployment profile as a camel and that we will be deploying the capital in essentially 2 humps, not quite true, but certainly 2 major pushes: 2018 Phase 1; and then next year, we'll push again, pushing through quite a significant spend through the business.

What we probably got better at, which is mitigating the impact, well, there's 2 things really. One is we're getting better at mitigating the impact whilst the site is temporarily closed for renovations and beginning to utilize the network better to make sure that, that impact is less. So that will assist us.

The second thing, of course, is as we get more sites online and renovated, the overall net impact of NBO will obviously be less because when we were doing it in 2018, we had no new sites contributing additional cases. We were closing locations for renovation and losing case volume, but we didn't have any new sites to counteract that loss. Obviously, throughout this year, we've got many more sites that have been renovated and are performing strongly, and that mitigates the loss in terms of the net loss due to NBO.

With regard to the second half of the year, we are planning on doing some additional work in Q4. And obviously, that will have an impact. I can't see it being materially different from what we saw in the first half of the year.

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Mitchell Sonogan, Macquarie Research - Analyst [27]

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Okay. Great. And just looking at case averages up 2.2%, that's pretty solid. Can you just maybe talk through how that is impacted by acquisitions? And I guess following on from that, can you maybe just talk about what you're seeing in the lower value end of the market in terms of the cremations and that sort of thing and how that might feed into that case average as well?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [28]

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Look, I'll answer that, and Damien might jump in to assist me if I need any help. But the first thing with regard to acquisitions and the impact on case average is generally that's a little bit of a drag for us because they tend to be in regional areas where the case average is a little lower. Certainly, Damien called that out when he was talking about the Auckland market and the acquisitions of Morrison's, which is much more value-for-money brand than maybe some of our traditional brands, high-end brands in the Auckland market. So we will see acquisitions as being a little bit of a drag overall on case average.

The second part of the question was to do with Value Cremations. We bought in Value Cremations obviously to supplement our Simplicity brand, which provides value into the market. We're not seeing much change in terms of the demand in those areas, a little bit of creep in market share but not a lot. So any impact that we have is probably already being digested by the business in terms of last year's numbers.

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Mitchell Sonogan, Macquarie Research - Analyst [29]

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Great. And just finally from me, talking about the acquisition environment. Can you maybe talk about how you are seeing multiples? It does sound like some have trended up there. But I guess just thinking about the pipeline, is it still pretty solid? And do you expect some more of those to drop over the rest of the year?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [30]

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Yes. Again, we remain disciplined. And the guidance I've given before around the multiples hasn't changed. And so we're not necessarily seeing a lot of deals go through the market. I can think of one in the first half of the year that we were interested in but got priced a little bit outside of our price band. We're still very interested in that market, so from sort of the New South Wales, Northern New South Wales Coast. And we'll be looking to sort of access that market using our national brands.

But in the main, it really is -- it's more about sort of the ebb and flow of people who are looking to exit and retire. And often, we can't drive that. Maybe price has something to do with that, but it's not a major determinant of when people sell. So in reality, we accept that acquisitions and completed acquisitions will ebb and flow, and we'll continue to maintain a dialogue with potential vendors.

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Operator [31]

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Your next question comes from Mathieu Chevrier, Citi.

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Mathieu Chevrier, Citigroup Inc, Research Division - Senior Associate [32]

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First one, looking at second half of '19, consensus for the year at NPAT is roughly $60 million, which implies that you will need to grow NPAT to roughly $38 million in the second half. Now obviously, 2018 was an unusual year. Is there anything that's changed structurally that would allow you to not get back to the level you've seen back in the second half of '17?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [33]

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We haven't seen any structural changes in the business that would prevent that, no.

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Mathieu Chevrier, Citigroup Inc, Research Division - Senior Associate [34]

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Okay. Great. That's much appreciated. And again, looking at capacity relative to the first half of '19, would you need to add much operating cost should the death rate increase by, let's say, 1% year-on-year?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [35]

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No. I mean -- and that probably is the key distinction to make for people who are new to this industry, is that the second half has more volume through it than the first half. And that's a function of winter where we -- we're obviously busier in Q3. We have a pretty high fixed cost. So actually, we don't necessarily see any -- if there is additional cost, and there probably is a little bit, but not material additional cost to actually serve the winter markets.

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Mathieu Chevrier, Citigroup Inc, Research Division - Senior Associate [36]

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Okay. And then just finally, in terms of CapEx, what are your expectations for FY '19 and FY '20?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [37]

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We can't give you any answer to the FY '20 because we're still working through the phasing with regard to Phase 2 of the Protect & Grow strategy. With regard to CapEx for the balance of the year?

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Josée Lemoine, InvoCare Limited - CFO [38]

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For the balance of the year, it will be slightly up on the first half, probably more similar to the last half.

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Mathieu Chevrier, Citigroup Inc, Research Division - Senior Associate [39]

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Right. And then we would expect an increase -- a significant increase, as you say, Martin, in FY '20?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [40]

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We certainly want to be busier next year than this year, correct.

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Operator [41]

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Your next question comes from Russell Gill, JPMorgan.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [42]

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Apologies if this has been asked before. I just jumped on late. Two questions just on the case average growth and pricing that you've seen in the next 6 -- last 6 months, but also what you envisage over the next year or 2, particularly on the back of these Choice magazine investigations that are ongoing but also the fair regulation act in New South Wales and the draft regulation out displaying low-cost options and the like. Can you also make some comments around thoughts on that and ability of pricing going forward?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [43]

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Yes, sure. Look, first thing to say is the segmentation of the market along price has been in the market for the best part of 40 years. Simplicity Funerals, which is one of our national brands, offers value for money. And frankly, that's over 40 years old. And so there's always been an opportunity for people to get different levels of service for different levels of price within the Australian market. We did -- we look at Choice and we've explained to Choice that InvoCare as a group is the only organization that is able to offer entry level through Value Cremations all the way up to the full-level service, the premium service of White Lady. And we've explained to them very clearly that different levels of service offering have different prices, and I think they fully accept that.

With regard to what do we expect to see into the future, again, we expect to see an ability to provide additional services to customers. And that will flow through into our case average growth at probably what we would call sort of more traditional levels of 3% to 4%. But as I sort of explained during the presentation, we actually have to complete the NBO to see the full benefit of that. But where we have completed NBO sites and are able to offer what I would call a modern full service, which is both the memorial service and the celebration of life, we are seeing case average growth that is in line with our expectations.

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Operator [44]

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There are no further questions at this time. I will hand back to Mr. Earp for closing remarks.

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [45]

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Okay. I'd just like to say thank you all for taking the time to dial in and listen to the presentation today. And I look forward to speaking with you over the next week to 10 days to work through in a little bit more detail the presentation. Thank you.