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Edited Transcript of IVC.AX earnings conference call or presentation 25-Feb-20 10:30pm GMT

Full Year 2019 InvoCare Ltd Earnings Call

North Sydney, New South Wales Mar 23, 2020 (Thomson StreetEvents) -- Edited Transcript of InvoCare Ltd earnings conference call or presentation Tuesday, February 25, 2020 at 10:30:00pm 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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* 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

* Sam Haddad

Bell Potter Securities Limited, Research Division - Industrials Analyst

* Tim Plumbe

UBS Investment Bank, Research Division - 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 2019 Full year Results Analyst Briefing. (Operator Instructions)

I would now like to hand the conference over to Mr. Martin Earp, CEO. Please go ahead.

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

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Thank you, and good morning, and welcome to the presentation of InvoCare's 2019 full year results. Today, I will summarize the key highlights for the 2019 trading year and the performance of our key growth strategy, Protect & Grow. As usual, Josée Lemoine, our CFO, will talk you through the financials; before Damien MacRae, our COO, provides detail on the operating business. Finally, I will summarize the focus for 2020 and provide an outlook for the coming year.

Again, the changing accounting standards of AASB 15 and AASB 16 continue to impact the InvoCare business when looking at the reported performance. As we did last year, we back out the impact of these accounting standards in the underlying results.

Please turn to the first page. 2019 highlights. At the half year, we indicated that it has been a promising start to 2019 after what had been a challenging year in 2018. It is pleasing to report that the promise at the half year has been fulfilled in the full year results. 2019 delivered strong year-on-year growth with operational EBITDA, up 21.4%; operating earnings after tax, up 19.6%; and earnings per share, up 14.4%. This performance has been driven by the benefits of the Protect & Grow strategy beginning to flow through the business in combination with the uplift associated with the regional acquisitions, the continued focus on managing costs and the number of deaths in the market reverting back towards the long-term trend. Reported profit is up 54.6%, which reflects the strong performance of the funds under management associated with our prepaid funeral business, which grew at circa 10% for the year.

The pillars of growth in our business are all positive, and Damien will touch on these later in the presentation. Notwithstanding the strong performance, the company continues to face the long-standing challenge of declining market share in the traditional funeral business, driven by the aging physical condition of our locations, changing customer preferences and the need to invest in developing our local leaders. It is pleasing to report that the Protect & Grow strategy, which was designed to address this market share loss, is working albeit that during the implementation phase, there is a drag on performance associated with locations being off-line, the ramp-up of the business post-renovation and the impost that the rollout of our new ERP system has had on the business in 2019.

Further detail on the financial performance of the business is shown in the charts on this slide, which provides a historic view of the key financial metrics. As mentioned in my opening comments, the accounting standard changes continue to affect InvoCare, and we have specifically called out the underlying results in the sales and EBITDA chart. The underlying results are highlighted in gray and are comparable with the years up to and including 2017. These charts clearly show how the business was impacted by the reduction in the number of deaths across all of our key markets in 2018. The other key point to highlight is the 10.8% increase in the final dividend, which reflects our understanding of the importance that our investors, both institutional and retail, place on this distribution.

One of the key drivers of our business is the year-on-year growth in the number of deaths, which has been increasing for over 20 years and is forecast to continue at 2% or greater in Australia for the next 30 years. The trend is similar for New Zealand at an increase of 1.4% per annum and Singapore at 1.8%. However, within this very strong demographic tailwind, there were year-to-year fluctuations in the number of deaths. And we have always referenced these year-to-year variations as being within plus or minus 5% of the previous year. These annual fluctuations do, however, have a proportionally greater impact on the financial performance of the business than the simple percentage movement would suggest. This is due to the high percentage of fixed costs associated with the business.

In summary, the proportion of sales revenue associated with the last few cases have a significantly higher margin than the overall average margin. This leverages the positive impact of the benefits in a year of above-average growth, but conversely, magnifies the negative in a year when deaths declined on the previous year. It is worth highlighting that our estimate of the decline in the number of deaths in Australia in 2018 was 3.1% on the previous year. However, having secured the data of the actual number of deaths from the Australian Bureau of Statistics for 2018, the decline in the number of deaths across Australia in 2018 was actually 4.4%. Our internal analysis of this data indicates that deaths within the markets in which we operate were down 4.8%.

I mention this to highlight how difficult the trading conditions were for InvoCare in 2018. However, as previously stated, back-to-back years of decline are very rare, and we estimate that the number of deaths in the market in which we operate as a group was up 2.9% in 2019 and up 3.3% for Australia. It is our expectation that this revision towards the long-term trend should continue in 2020, albeit we remain cautious about providing forecast given that the fluctuations in the number of deaths for any given year are driven by the critical trade -- winter trading period.

I'll now give a brief update on Protect & Grow. Many of you who have been following the InvoCare story will be familiar with the Protect & Grow strategy. But given its importance to InvoCare's future growth, it is worth recapping. In summary, this is a program of investment into our core assets with the aim of setting up InvoCare for long-term success by delivering market share growth and operational efficiencies from our traditional funeral business. It will also provide the platform for more growth through the delivery of improved customer-relevant services into the future.

The strategy had 3 distinct components: Firstly, Network and Brand Optimisation encompassed both protect investment, which was refreshing locations to make them more contemporary; and grow investment, which was driven by establishing new locations and the enhancement of traditional facilities. Secondly, the people-and-culture stream of work focused on encouraging greater collaboration within the business, improving the skills of our local leaders and investing in customer service training. And finally, the operational efficiency was to be driven by a combination of rolling out a new ERP system and the upgrading of our shared service centers.

The outcomes delivered in 2019. The NBO renovation program was always intended to be rolled out in stages, with 2019 to be a year when we took stock of the original work conducted in 2017 and '18 and planned for the rollout of the balance of the program. During 2019, InvoCare did complete a further 21 renovations, which takes the total number of locations renovated to 106, which is greater than 50% of our locations, which is in keeping with the guidance provided to market last year. It's pleasing to note that the Protect & Grow strategy is working, and we are seeing both increasing case volume, which drives market share and increasing case average at renovated locations when compared with the performance of unrenovated locations.

With regard to people and culture, we are seeing the maintenance of a world-class Net Promoter Score in the business at plus 78. And in addition, we have rolled out our bespoke local leader training program and continue to put a focus on sharpening our customer service skills through our master class training.

Perhaps the biggest challenge, and by default, therefore, the greatest achievement, has been the rolling out of the new ERP system to 99% of the funeral locations with only Singapore and recent acquisitions being ring-fenced. As with all implementations of new ERP systems, this rollout has not been without its challenges as both staff and suppliers were asked to adopt new working practices. It is testament to the dedication and resilience of our staff and the ongoing support of our long-standing business partners that the new system processed over 30,000 funerals last year.

In addition, we completed work on 3 shared services centers last year. These state-of-the-art facilities provide not only higher levels of care for our client families but allow for more efficient working practices and a safer working environment, which should lead to a reduction in injuries.

I put the map into the slide deck to illustrate not only the scope of the work being undertaken but also to illustrate the scale of the task required to renovate our locations across 3 countries. To date, we have renovated 106 locations, which includes 9 enhancements, which allow for the provision of greater services; 24 are new locations, which allow us to reach new local markets; and 73 are the refreshment of existing facilities, which provides a contemporary environment without changing the service proposition.

Today, we have invested $106 million in renovations and received $9 million in asset disposals. We anticipate asset sales will ramp up this year as more of the renovated facilities come online, which in turn, allows us to dispose of surplus locations.

Entering into the third year of rollout of NBO renovations, we can now report on the 106 locations that have been renovated since Q4 2017 and completed up to the end of 2019. The headline results are: volume at renovated locations is up 4.9% when compared with the performance of unrenovated IVC locations. Using the same comparison, EBITDA is up 8.5%, which reflects the improved case average that we are experiencing at the renovated locations. These results are shown on a year-by-year basis in the charts. The performance of the unrenovated sites in the IVC network has been applied to the base year of 2016 to the cohort of 106 locations and is shown in the gray line. This clearly demonstrates the benefit of the NBO renovations.

It should be noted that the drag associated with the closure of locations, either temporarily or permanently, is also shown in these charts. The charts also show how these locations are performing against a scenario where market share remained constant. Again, it is clear to see that the performance of the renovations has addressed the market share losses that we continue to experience at our unrenovated locations.

The final point to flag up is that the full benefit of NBO is not fully reflected in this analysis, and it continues to include the drag associated with the construction period and the ramp-up post renovations. As previously stated, we have learned a lot of lessons during the rollout of Phase 1 of NBO, and the results to date give the company confidence to push ahead with additional renovations in 2020.

I'll 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 performance presentation this morning will focus on the following 4 topics: firstly, the overall results and performance highlights against prior periods; secondly, the impact on our operating versus underlying results following adoption of new accounting standards; thirdly, an overview of our operational expenses; and finally, a closer look at the cash flow, capital management and net assets position. You will find further details on capital expenditure, country segments and a summary of accounting changes in the appendices.

So let me take you through the overall performance of the business. Please turn to Slide 13. Three key performance callouts underpin the strong performance for 2019: 21.4% operating EBITDA growth, 19.6% operating earnings after tax growth leading to an increase in operating EPS of 14.4%. The table on the left shows a summary of the income statement for the group. Damien will speak further in the next section on the underlying results. I will highlight areas significantly impacted by the changes in accounting standards.

Overall, at an operating level, the strong results benefited from the growth strategies initiated in 2017 and 2018, with operating sales growing 3.5% on the prior comparative period. This is the product of a few factors: the Australian and Singapore markets starting to revert to trend, volume growth through the completed NBO renovations and the acquisitions and expansions into regional markets in 2018, together with a solid performance from our memorial parks. This was slightly offset by the decrease of contracts realization, otherwise known as the AASB 15 unwind. I will cover this accounting change later on.

Let's look at the strong growth in underlying results across all financial metrics, with sales revenue growth of 4.8% across the group with improved volume and case averages across most regions, with -- you can refer to the appendices for the segmentation information. Australia's sales growth of 2.9% was achieved through solid memorial park sales growth of 4.6%, following the build of large memorial complexes, together with the recent 2018 and 2019 funeral acquisition. The latter contributed additional sales of $9 million in 2019. The comparable renovated funeral locations improved, while the unrenovated continued to decline. New Zealand's sales growth of 12.9% was driven by the recent acquisitions, whilst the comparable business performance has continued to decline, leading to the impairment of goodwill, which I will expand on shortly. Singapore's sales growth of 26.5% followed the reopening of the location post renovations in 2018. And other revenue was augmented by $2.3 million from one-off sales option fees on properties as part of the network optimization program under the Protect & Grow strategy.

You'll note that operating margins increased, reflecting the adoption of AASB 16, which is the lease standard, which reclasses the occupancy and facility costs, hence, improve the performance. Profit lifted by 54.6% through the contribution from the investment management of our prepaid or funds under management, which benefited from a strong equity performance, along with solid returns on domestic property investments. This was slightly offset by the impairment of goodwill relating to our New Zealand business.

Finally, with operating earnings after tax on last year up by 19.6% and a prudent approach to capital management, the Board has determined a final dividend of $0.235 per share, bringing the total dividend to $0.41, that's 10.8% up on 2018. The payout ratio at 79% is in line with traditional norms.

Let me take you through the impact of the adoption of the new accounting standards. Would you please turn to Slide 14. Before I walk you through the detailed financials, let me remind you of the implication of the adoption of the new accounting standards on our results, namely AASB 15, which is the revenue from contracts with customers, specifically the unwind of the pre-1 January 2018, CemCrem or memorial park contracts. And also the new standards, which started in 1st of January, 2019, AASB 16, which is our leases standard. This waterfall chart shows clearly how these accounting standards are impacting the operating profitability, the dark blue bars at each end of the chart, and underlying profitability, which is the purple bars on the inside. For the EBITDA, the underlying versus operating growth is 14.2% and 21.4%, 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 transfer of title of ownership with more of these contracts being recognized in 2018 than in 2019, with a net unfavorable impact of $3.5 million on PCP. That being the difference between the $15.9 million in 2018 and the $12.4 million this year, as shown in the waterfall chart.

It is more than offset by the adoption of AASB 16, which is impacting favorably operating EBITDA by $14.3 million, with no restatement of competitors. This reflects 215 plus operating leases now accounted for on the balance sheet, meaning that occupancy and facility cost is now expensed below EBITDA via an increase in depreciation and finance costs.

Notwithstanding the changes in accounting standards, the underlying EBITDA grew 14.2% year-on-year, which reflects the market reverting to trend together with the growth strategy in delivering on expectations and prudent cost management. The year-on-year decrease in corporate costs is related to short- and long-term incentives provision release.

Let's turn to Slide 15 to get a sense of containment on operational expenses. Operational expenses were contained during another transformational year. With a growth of 2.8% on the previous corresponding period, costs were closely managed through improved gross margin and lower general expenses, which was partially offset by annual expenses from 2018 acquisitions and the 24 new greenfield locations. Cost of goods sold percentage to underlying sales of 25.7% improved by 1 percentage point through continued procurement focus. Employee and facilities cost increase was mostly impacted by the annualized impact of the 2018 acquisitions and greenfield locations, which are the new shop fronts. And technology cost increase in 2019 reflect the cloud licensing costs, which needs to be expensed post-implementation of the new ERP system.

Details on other costs can be found in the appendices. But briefly, depreciation and amortization were contained following a review of useful life on our cremators, of fixtures and fittings and motor vehicles. Finance costs have been in line with prior periods following the capital raise in March 2019 and subsequent net debt reduction, which I will cover shortly. And tax expenses benefited from utilization of capital losses.

Lastly, I'll wrap up the financial performance section on Slide 16 by taking you through our cash flow and capital management position. Cash conversion of 82% in this period has improved by 10 percentage points from our half year position, although we are still slightly behind our 2018 conversion rate. Our performance 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. We've made good progress since June and full focus continues group-wide. You will note the lower borrowings as a result of $86 million from the share placement proceeds earlier this year, which was partly utilized for debt repayment. As for our position as at the end of December 2019, the business is within its banking covenants.

This leads me to the impact on the group's net assets, which increased by $106 million. Main contributors are: a net increase in prepaid contracts and funds under management and the prepaid contract liabilities, which is a net position of $40.5 million increase due to the strong returns from equities and property revaluation; followed by a net increase in property and plant and equipment of $23 million, which is mainly due to the refurbishments pursuant to the NBO program and to the acquisitions in the period of $6.8 million. The application of AASB 16 leases introduced an increase in net liabilities of $18.9 million being the recognition of $144 million of right-of-use assets, offset by $163 million of lease liabilities whilst also showing a decrease in intangible assets of $16 million as a result of goodwill arising from the 3 acquisitions in the period and brand names intangibles which is offset after taking a considered approach by the recognition of an impairment loss of $24.4 million on the New Zealand CGU or cash-generating unit. The impairment reflects the underperformance of the New Zealand comparable operations during the 6 months ended 31st of December 2019, the competitive landscape and the relative size of the New Zealand market, together with updating of our long-term modeling for the expected performance of those operations. The 2 businesses acquired in 2018 have been integrated into the existing New Zealand operations, however, the performance has not sufficiently compensated for the impact of a reduction in case volume and increased cost of the New Zealand operations as a whole.

And finally, as just mentioned, the decrease in borrowings as part of the capital raise was used to reduce borrowings, while the temporary increase of $7 million in current trade receivables during the transition to the new ERP and noncurrent trade receivable increase of $19 million, following the adoption of accounting changes, AASB 15.

I will now hand over to Damien, who will provide an operational update.

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Damien MacRae, InvoCare Limited - COO [4]

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Thank you, Josée, and good morning all. I'll take the next few moments focusing on 4 of our key areas of operational performance, being our funeral business, memorial parks, our prepaid business and finally, our new pet cremations business. Firstly, our funeral business, this business encompasses our Australian, New Zealand and Singapore funeral operations. Some key outcomes for 2019 include at a high level, our funeral business has delivered solid growth returns during 2019, with EBITDA delivering 11.1% growth and EBIT, 15.4%.

Our funeral business has maintained an outstanding Net Promoter Score of 79. Our client family experience remains at the core of our value proposition, and our field teams continue to provide outstanding service to their families.

Throughout 2019, we saw case volume grow by 3.8%. This growth was driven by the 2018 and '19 acquisitions as well as strong contributions from NBO-completed locations. It should be noted a significant opportunity remains to address market share from our non-NBO sites, which continues to be a drag on our core business. These non-NBO locations have been brand agnostic, however, a larger number of these facilities are located in New South Wales, a state which has seen a larger market share impact during 2019.

At a brand level, we saw above-market growth of both Value Cremations and Simplicity Funerals, whilst White Lady Funerals delivered a very strong first 3 quarters of 2019 before a slower Q4. Case averages saw year-on-year growth of 2.1%, with a focus on providing more product offerings and of a different quality. Like our volume growth, we've experienced superior year-on-year case average growth from our NBO locations, driven by superior facilities and the opportunity to meet more of our client families' funeral needs. All of our brands experienced year-on-year case volume growth -- case average growth, I should say.

We saw a disciplined approach to cost control across all our funeral locations with a clear focus on resource management delivering desired outcomes around FTE growth. An ongoing focus on the health and safety of our field teams has also seen a reduction in lost time injuries and greater efficiencies across all parts of the funeral business.

The large number of acquisitions undertaken in 2018 have outperformed our business models with solid volume growth and IVC procurement benefits being realized. Early indications from our 2019 acquisitions look to be supporting our business cases.

Our Singapore business post-facilities renovation has rebounded strongly with volume increases of an excess of 40% and EBIT in excess of 50%. A highly segmented approach to our Singapore client family needs has also paid strong dividends with significant growth in our case averages.

As mentioned by Josée, we've experienced challenging trading performance in our New Zealand business. This is being driven by a highly fragmented and decentralized market. Actions have been undertaken to address cost pressures on the New Zealand business as well as providing greater local authority to respond in a more fluid fashion within our key markets.

I'll now move on to the memorial parks. Our memorial park business encompasses 17 parks located across New South Wales, Queensland and also New Zealand. The business saw strong growth at both the sales and EBITDA level during 2019 at 5% -- at 4.5% and 10%, respectively.

This performance was driven by: firstly, the realization of a significant product and capital build focus over previous years; secondly, a solid market share position from both IVC and non-IVC partners utilizing our park facilities and cremators; and thirdly, a disciplined approach to cost management throughout 2019. As mentioned, our product program delivered major programs of work during 2019, most notably in our New South Wales parks with an additional 2,200 high-value memorial products being completed. Encouragingly, the pre-sales of these products have been strong and also strong interest remains. A significant investment in our Queensland Allambe Park has been undertaken, which has seen water plains remediated, providing an additional 20 years of park life plus additional products to an undersupplied market being the Queensland Gold Coast. We forecast we'll begin to realize these sales during the 2020 year. Although the funeral -- although below the funeral NPS score, memorial parks remained high at 69, with a strong focus around our product quality. All of our memorial park teams are incentivized as per our funeral staff on our client family feedback on the customer service that is provided.

2019 also saw our first regional acquisition of a memorial park, this being the acquisition of Broulee Memorial Gardens as part of our Batemans Bay acquisition within New South Wales. This acquisition will provide us with a greater understanding of the regional memorial park market and provide a platform for future growth opportunities.

We've also announced for 2020 the strengthening of the executive team for the memorial parks division with the appointment of Steve Nobbs as Executive General Manager, who'll be reporting directly to myself. This will ensure the strong results being experienced in 2019 can be built on with a focus on new growth opportunities for 2020 and beyond.

Moving on to our prepaid funerals. Our prepaid business saw strong portfolio growth of in excess of 10% during the 2019 year. We continue to remain comfortable with our assets versus liabilities position with end-of-year coverage of circa $94 million. Throughout 2019, circa 16% of sales in the funerals business were derived from previously purchased pre-need funerals. This was a slight increase on previous periods. We do not envisage this amount to vary significantly over the short term. It also should be called out, we have continued to work with our portfolio partners to strengthen our governance of the pre-need fund with a new independent Guardian investment committee being established during the 2019 period.

Finally, I'd like to move on to our pet cremations business. As mentioned in the previous updates, we saw our first full year of trading of our start-up pet cremations business, branded Patch & Purr, during 2019. These saw significant investment with the opening of our first greenfield location in Wollongong and our first shop front in Middle Cove in New South Wales. Encouragingly, we saw a strong increase in the vicinity of 100% of the cremations undertaken by our 2018 acquisition located in South Windsor in North West Sydney. This increase has been driven by leveraging firstly the solid brand of the acquired business, and secondly, the marketing network within IVC.

Throughout 2020, we will continue to assess further growth opportunities, which will include both greenfield as well as acquisitions. We forecast the pet cremation business to show solid EBITDA improvement during the 2020 period. I'll now pass you back to Martin, who will discuss our forward-looking view.

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

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Thank you, Damien. Thank you, Josée. Looking ahead to 2020 and beyond. Given the positive performance of Protect & Grow in -- the first priority for 2020 is to push ahead with seeking to complete the protect component of the strategy. This will include the refresh of circa 59 locations, finalize the rollout of ERP to the cemeteries and crematorium division and focus on optimizing the system. We'll continue to train our staff and our local leaders with the Aspire and master class programs, and we will invest in a further 3 shared services centers.

In addition, as the protect work comes to a close at the end of the year, there is a need to transition the skills and capability for the project team back into the business so that this protect work can continue on a business-as-usual basis. This is to ensure that the locations are maintained to a standard that allows our team to make a positive first impression every single day. We will also continue to put capital into new and growth locations, 15 in total, that will allow us to grow market share into the future. We've also identified circa 15 locations that will have been refreshed, but could be further enhanced post 2020. And this provides a long-term pipeline of growth opportunity for the company.

InvoCare will continue to focus on acquisitions and in addition, we will continue to invest in greenfield locations within the regional markets that we have recently entered. The aim of these greenfield development is to leverage both the recently acquired assets operationally but also to leverage the power of our national brands.

We will also continue to invest time and capital into further developing our pet cremation business, as Damien just alluded to, with the aim of establishing a national presence in the market. Finally, we will fund research to ensure that we are able to identify innovative solutions, including digital, to provide a more relevant customer service offering to our client families into the future.

And finally, the outlook for 2020. As I've always said, it's difficult to provide forecast on a full financial year performance with any degree of certainty until after the critical winter trading period. This is due to the fact that the winter trading period is the driver of year-on-year fluctuations in the number of deaths.

However, we do think it's important to provide some guidance towards the assumptions that have underpinned our budget for 2020. So in summary, we see that the number of deaths should continue towards the revision, back towards the long-term trend. We anticipate that case average growth will be circa 2% this year, which reflects the fact that we still have a large number of unrenovated sites within the portfolio. And we will continue to apply close cost control over our business costs throughout the business.

We do understand that it's difficult for investors to calculate the impact of the renovations on core business. And as such, we estimate that the drag on EBITDA due to renovations in 2020 will be approximately $4 million.

We also recognize that forecasting the changing impact of AASB 15 on our business is also difficult to forecast. We estimate the impact in 2020 will be $12 million (sic) [$14 million]. We will provide a trading update on key performance metrics for Q1 at the AGM in May.

So in conclusion, 2019 was a strong year for InvoCare, driven by our 2 main growth strategies of Protect & Grow and regional acquisitions. On the back of this performance, we will continue to invest in these strategies to deliver growth.

Thank you all for listening, and I'll now open up for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Tim Plumbe from UBS.

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

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Just 3 questions from me, if that's all right. The first one around the second half '19 trading conditions. I mean, if I look, first half underlying sales growth of almost 10%, but full year, just under 5%. And then on the cost side of things, first half was 9.4% second half, only 2.8%, suggests, back of the envelope, that revenue growth in the second half was essentially flat, and you guys pulled a lot of cost out of the business. Can you maybe talk about the top line? And then also on that cost side of things, are those permanent costs out? Or are we going to have to put some of those back in, in calendar year '20?

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

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I'll let Josée talk about the costs, Tim, but I think what you're really seeing there is when we did the acquisitions, the previous year. And so therefore, we were getting the full year-on-year benefit of those acquisitions in 2019 in H1. But by H2, we were seeing less of that benefit flow through on a year-on-year comparison.

With regard to the costs, we're not pulling out costs because we think we'll need to stick them back in. It really is about driving efficiencies through better procurement, looking at how we staff our business, investing in the shared services back of house and also seeing some benefits begin to flow through from previous activities and the ERP system.

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Tim Plumbe, UBS Investment Bank, Research Division - Research Analyst [4]

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Got it. So that sounds like permanent cost out. And just follow -- so the second half revenue flat, is that kind of right on my back-of-the-envelope calculation?

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

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I am going to have to defer that question and get back to you with an accurate response, Tim, if that's okay?

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

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Got it. The second question is around the NBO and how we think about it from here. Can you remind us how should we be thinking about divestments for that part of the business? Have you incorporated that into your 15% return on capital employed? And then how are you guys thinking based off your modeling in terms of years before we get to that 15%, please?

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

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Okay. So let me just clarify. When we talk about the 15%, that was a project IRR of 15% over a 10-year period with no terminal value in it. We are beginning to see our investment move into positive ROIC in terms of the original 90 or so that we had in the first 2 cohorts. We're beginning to see positive benefits flow throughout the business, both in terms of case average, but also in terms of case volume. And really, we're very much very much in line in terms of the EBITDA uplift from renovated sites against what we had forecast in our business models. As with all of these things, though, there's some areas where we've done better and there are some areas where we probably could have done better. We've learned those lessons, and they really then will flow through into Phase 2 of Protect & Grow.

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

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Got it. And then just last question around the death rate. Given the larger decline that you guys saw in calendar year '18, on your revised estimate, can you give us an idea in terms of what sort of uplift in the death rate you would need to bring us back in line with that long-term trend?

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

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We probably estimate that the uplift is sort of going to be around between 1.5% to 2% this year, slightly above the long-term trend. But as I say, we hesitate to provide forecasts because we really cannot say what will happen during the winter period.

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Operator [10]

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Your next question comes from Russell Gill from JPMorgan.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [11]

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Handful of questions. Just want to get more clarity around the market share. You've stated there that you think you gained 20 basis points of market share through the period. Does that -- firstly, does it include acquisitions? And does it look at the entire group, including stuff that's off-line? Because later on, you do highlight that you saw growth or uplift in -- I guess, in volumes of 4.9% across the NBO sites. I was wondering if you could give more clarity around that market share number. And then also whether you do look at market share in those NBO sites and whether that 4.9% is indicative? The death rate might be higher around those sites or like -- just any, I guess, feels we can get around that market share or clarity in that market share.

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [12]

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Yes. It's an all-inclusive market share figure. So it does include acquisitions and it does include the drag associated with having sites off-line for renovation. I think what is very clear to see is in the unrenovated sites, we are continuing to lose market share, which we have been for the best part of, I don't know, 20 years or so. And really, the Protect & Grow program was -- the fundamental reason for doing it was to address that market share decline and turn that decline into an increase. And it's pleasing to see that where we have invested in the new sites, we are seeing market share growth. And it's a little bit difficult for us to be very specific about an individual site because we don't get data about deaths in 10 minutes around one of our locations. It's a little bit more aggregated than that. So we have to sort of look at it more at a sort of regional or even state level, and that's what we do.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [13]

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I guess, another way of asking the question, when you're -- on the NBO sites that you're seeing this uplift, does it factor in some closures of other areas that are nearby and, therefore, I guess, there's some cannibalization benefits if I'm just looking at NBO sites on a stand-alone basis?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [14]

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We do look at the business and we say, have we cannibalized any sites? I think we've identified one up in the Gold Coast, which we cannibalized a White Lady branch. But by and large, no, we haven't seen cannibalization. We do look at that very carefully.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [15]

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Great. Second question, just on the NBO and coming back to where it goes from here, can you give us a feeling for the gross and net CapEx profile for FY '20? And then going forward, you highlighted there were 15 sites that were refreshed that could actually take an enhancement. It feels like the NBO project becomes, I guess, a longer-dated, sustaining-type CapEx. Just to feel that how we should be thinking about the maintenance CapEx for your business longer term as you move through this model. So yes, I just -- the growth in net CapEx in FY '20. And then, I guess, a comment around the underlying sustaining CapEx in the business going forward.

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [16]

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Sure. Josée, do you want to handle the CapEx question, and then I'll handle the second half of that question.

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Josée Lemoine, InvoCare Limited - CFO [17]

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All right. So Russell, if you look forward for the 74 locations that Martin was quoting before for 2020, we're looking at -- I'm going to give you a number that's more Protect & Grow as a whole, which has got some other, I guess, some other efficiencies that we've got, shared services, including that, it will be about circa -- approximately $50 million. And BAU, you can look at it $20 million to $25 million. So we're looking at $75 million circa the spend for 2020.

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [18]

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And with regard to looking forward, we look at Protect & Grow, and we had said that's a full year program of works. What we are saying is we will have completed the protect part of the program by the end of the year. I think it's actually very good news that we've identified a whole series of additional growth sites that we can continue to invest in on the basis of the work that we've done today. So I actually think it gives us a strong pipeline of growth initiatives long -- well beyond 2020.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [19]

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Right. And Josée, when you said that $70 million to $75 million, was that a gross number? What's the anticipated asset sales?

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Josée Lemoine, InvoCare Limited - CFO [20]

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Yes. So that's a gross number. So the anticipated sales are about -- close to -- in excess of $15 million.

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

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Yes.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [22]

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Great. Next question, just on prepaid sales, they seem to have declined every half for the last, I guess, 6 halves. And then in the second half '19, they fell off a long way, almost down 50%. Can you just talk through the prepaid sales market? And how we should think about that business? I guess, the one-offs that potentially came through in the second half, how we should be thinking about the business going forward?

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Damien MacRae, InvoCare Limited - COO [23]

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Yes. Russell, it's Damien here. The prepaid sales have been declining since the peak in 2016 due to the regulation change then. We've put in place some changes to that team to get a more efficient team in place. We forecast that, that will normalize into 2020, and it remains a focus for us as we go forward. But certainly has been declining since the regulation change in 2016. We've put some changes in place to try to capture more of that market efficiently, and we forecast that, that will normalize into 2020 and beyond.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [24]

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And when you -- on your forecasting, Damien, do you assume that you'll actually, I guess, grow the business on a net basis? Because it look like it's sort of, I guess, in ex asset movements, sort of in outflow at the moment.

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Damien MacRae, InvoCare Limited - COO [25]

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That's certainly the intention. Yes, that's the forecast.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [26]

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Okay. Just another question. The underlying numbers -- and firstly, thank you very much for all the detail you provided on the accounts and the accounting changes. Just the area that looked a bit strange to me was underlying, ex accounting changes, the D&A has actually gone backwards year-on-year. Given the big uplift in CapEx, could you just possibly talk about what drove the decline in the D&A? Obviously, there will be a benefit because there was a big impairment charge in New Zealand. But I just thought the D&A on an underlying basis would have gone up a little bit, given the big uplift in CapEx the last couple of years.

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Josée Lemoine, InvoCare Limited - CFO [27]

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Yes. Actually, the impairment in New Zealand actually does not have an impact because it's in goodwill. The goodwill is not amortized. So the major contributor, as I mentioned before, was we took the opportunity to review our useful life on cremators, fixtures and fittings and motor vehicles. So...

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

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And Josée, just to chip in a little bit here. As part of the Network and Brand Optimisation, we've done a full review of our asset register. We've done a condition index of our assets, and we are creating life cycle costing plans moving forward. So that's all been part of the NBO process to put in place those issues. And out of that, we've been able to provide a more accurate assessment of D&A moving forward.

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Josée Lemoine, InvoCare Limited - CFO [29]

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Yes, we did because, I mean, a lot of our useful life was set. I mean, quite many years ago, it had not been revised. So if you look for our cremators, the technology around our cremators have significantly changed over the years, but we were depreciating them on a shorter period than the actual recommended useful life per our manufacturers. So that's just an example of what -- and with the NBO work, the reinvestment and the new call of buildings, we've been able to actually optimize that useful life, too. So just to help you, Russell, is that we had a correction in 2019 in our depreciation.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [30]

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Okay. Understood, which is, therefore, more of a run rate rather than a onetime impact. It's now more run rate going forward.

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Josée Lemoine, InvoCare Limited - CFO [31]

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Yes.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [32]

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And then a final question, I guess, more broad comments, the ACCC announced yesterday that their priorities for 2020 in funeral services appeared top of the list. Can you just possibly -- obviously, the industry has faced a lot of criticism the last 12 months from certain reports, like the Choice reports and the like, can you just talk through, I guess, how you're positioned? I know that you've indicated you're only putting pricing -- average pricing, you expect to go up by 2%. Can you talk through the possible risk to this or possible benefits in terms of addressing some of the more rogue operators in the industry?

And I guess, what your thoughts will be in that -- over the next 12 months?

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

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Yes. No, good question. We, as a publicly listed entity, for many years, have always been held to a higher degree of standards, and we like to push that through the business. And I think it's fair to say that InvoCare has probably led the way in increasing the quality of service that is provided to our client families. We welcome the ACCC having a look at the sector, we're very willing to work alongside the ACCC. And we're very happy to welcome any changes that will improve the level of services to our client families. So we're very happy to work alongside the ACCC on this issue.

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Operator [34]

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Your next question comes from Mitch Sonogan from Macquarie.

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Mitchell Sonogan, Macquarie Research - Analyst [35]

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Just following on from the NBO and talking about a $4 million headwind in '20, can you maybe just talk about the profile of that? Is there -- like just thinking about the trajectory in the second half and then into '21, please.

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [36]

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Yes. No, sure. Essentially, the profile of the impost or the drag associated with NBO comes from the closure of sites. And really, what we have to do is get the balance right between closing our big flagship locations because the impost of closing a -- essentially a flagship for 6 to 9 months, it's considerably more than the impost around the closure of a refresh for a week or 2.

So really, that helps us balance out. And as I alluded to, we're doing a lot more refresh work, but we are also investing significantly in some of those larger sites. So probably the balance between those 2 is 75% towards the drag that is coming from the flagships and 25% from the refreshes.

In terms of the split over the year, again, we try and avoid winter wherever we can. That's not always possible. But I think it probably -- there's not much difference between H1 and H2, in terms of the analysis that I've seen.

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Mitchell Sonogan, Macquarie Research - Analyst [37]

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Okay. And just thinking about it from a holistic perspective, like, once it's actually completed, the current stage of NBO, what percentage of the total cases in Australia are going to be captured by that? Just wondering about what percentage you capture. And then maybe what is left, if you do go ahead with a later stage after this one?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [38]

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Yes. No, we think that of the work, by the time we finish at the end of the year, we'll have captured, I don't know, greater than 80%. I think the number's sort of 85%, 86%. There's still some further work to be done, but not material. And we actually alluded to that last year was that there are probably some of those larger sites that would probably need to be done in H1 next year.

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Mitchell Sonogan, Macquarie Research - Analyst [39]

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Okay. So in terms of thinking about that in the H1 impact in '21, is that going to be much of a headwind? Or do you think the work that you're doing now and the ramp-up of the previous NBO work will be enough to offset that?

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

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I'm going to imagine that position is positive. But once we finalize what the work schedule is in '21, obviously, we'll advise the market.

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Mitchell Sonogan, Macquarie Research - Analyst [41]

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Okay. And Martin, just looking at the other memorial parks in Singapore, both delivered pretty strong results, high results. Can you just talk about what we should expect in FY '20?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [42]

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In terms of Singapore, did you say?

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Mitchell Sonogan, Macquarie Research - Analyst [43]

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Yes, Singapore. And if you could touch on memorial parks as well, that would be great.

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [44]

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Okay. I'll defer to Damien on that one, if that's okay.

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Damien MacRae, InvoCare Limited - COO [45]

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We would expect -- obviously, Singapore got a benefit out of opening for a full year -- full trading year in 2019. We would expect Singapore to normalize its growth trajectory into 2020 and beyond, with a real focus on parlor utilization within the complex in Lavender.

For memorial parks, we've been heavily focused on the building of product. The utilization and the uptake of that product has been strong. However, we still see a significant opportunity within our parks for solid growth throughout 2020 on that product as well as the ongoing sales of cremations, et cetera. So I wouldn't envisage the Singapore numbers to be strong in 2020, obviously, because we'll have a full year trade. But our focus will be on the memorial parks to continue that sort of trajectory.

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Operator [46]

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Your next question comes from Sam Haddad from Bell Potter Securities.

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Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [47]

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Just my first question is on the average revenue per funeral of 2.1%. Can you sort of put some color as to what that growth rate was for the renovated sites? Was that within your target of 3% to 4%? And just -- and also the unrenovated sites, what's the sort of growth rate for that? Yes.

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [48]

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There's a few things that go into play, as you well know, about case average. Part of that is to do with the -- recent acquisitions tend to be in the regional areas, which tend to have a lower case average than the metro areas. But in terms of answering your question, we have seen a case average at the renovated sites in line with our expectations, as you say, 3% to 4%. Yes, we have seen that, and we are seeing lower case averages at the unrenovated sites.

But the mix also depends on how busy we were in Victoria versus how busy we were in Queensland. So there's many different things that play into that. But at an overarching level, the renovated sites are delivering better case average because people are buying more services from us. That's the key thing. We're able to offer greater services, greater AV solutions. We're able to offer areas where they can actually have the celebration, essentially the wake. And so what we're seeing is people are buying more from us because we have better facilities, and we're better able to host the whole event as opposed to just part of the event.

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Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [49]

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And what's the runway for that in terms of service growth per case? Or will you have to sort of revert back to pricing -- more reliant on price increases in the medium term?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [50]

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No, we see that where growth in case average is going to come from us is in the provision of greater services. We are putting a lot of time and effort into making sure that our staff are fully trained, enable them to provide better levels of service. So we see the case average growth into the future. Yes, sure, there will be some headline growth in line with CPI. But the real upside for us is providing better service to customers.

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Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [51]

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Right. And just on -- in relation to that, just the competitive backdrop in general, what are you seeing in the market versus 12 months ago where the market contracted?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [52]

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We're still seeing a very competitive market. Lots of players in the market, as there always have been. I think probably what you see, though, in a market where -- in Australia, certainly in the markets in which we operated, where the number of deaths was down 4.8%, people will probably be a little bit more competitive in terms of headline price. But overall, we're seeing a revision back to what we would call normal trading conditions, which is very competitive market in which we operate in.

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Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [53]

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And just to clarify, the $4 million EBITDA drag for this coming year, is that a net drag? Because I assume it would have been a drag, which you charted in Slide 11. So is that a $4 million net drag? Or is that just a -- just want to see the incremental difference.

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [54]

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What we're trying to say is -- for the analysts is, you are able to plug in what a BAU position would be for the business based on the guidance that we've given. And then having got that, then you should just take $4 million off EBITDA associated with the drag of NBO renovations. We've tried to make it easy.

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Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [55]

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And just finally, on the accounting change for AASB 15. So obviously, that was a boost of $12.4 million for this year. And that's going to reverse next year of $14 million what's -- can you just sort of clarify if there's any impact on the bottom line, on the impact on this -- for this accounting change?

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Josée Lemoine, InvoCare Limited - CFO [56]

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Well, from an EBITDA perspective, obviously, the year-on-year -- if the contracts are paid within the current terms, you would have a close to circa $2 million extra next year, year-on-year impact.

So it's not -- I think what I've explained before is that our contracts that we sell on memorial parks are phased across -- that the installment payments are 3 to 5 years. And at the time of transition, we had a mix of different contracts. So the actual recognition is not straight-lined or so -- the very first year, we had a strong year in 2018. 2019, we went down year-on-year, and then next year, we'll go up slightly.

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [57]

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I think we've only got time for one more question, I'm being told. So maybe we can take that. And I apologize in advance for those of you we've not been able to answer your questions, but we've run over on time a little bit.

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Operator [58]

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Your final question is from Mathieu Chevrier from Citi.

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Mathieu Chevrier, Citigroup Inc, Research Division - Senior Associate [59]

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I'll be quick. Just on the volume growth that you expect for FY '20, you were saying about 1.5% to 2%. Is that what you're expecting for the Australian market in terms of volume of deaths in 2020?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [60]

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Yes, with regard to deaths, we think that the long-term trend sits at somewhere between 1.5% to 2%. We think it will be slightly above that as we catch up with the long-term trend. However, that's our own internal estimate. And -- but we just see a revision back to the trend.

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Mathieu Chevrier, Citigroup Inc, Research Division - Senior Associate [61]

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Got it. And in terms of D&A guidance, would you have any number you would be able to provide?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [62]

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I didn't hear that. Was that D&A?

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Mathieu Chevrier, Citigroup Inc, Research Division - Senior Associate [63]

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D&A. Yes.

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Josée Lemoine, InvoCare Limited - CFO [64]

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Yes, from a -- and I'll correct one of my comments that I said before when Russell was asking about the capital for next year. I was using the word growth more for the growth project, Protect & Grow. But the $80 million to $85 million is more of a net number, net of disposals. So you have to look and the growth number would be -- the growth number is $85 million. It's $70 million net number, just to clarify.

From a D&A perspective, we did have a slight benefit by the readjustment this year. So you'd have to probably take a middle point between last year's D&A and this year's D&A.

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Mathieu Chevrier, Citigroup Inc, Research Division - Senior Associate [65]

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All right. Okay. And just finally on NBO. From my calculation, you've spent about $130 million so far, and you plan on spending $50 million this year. So that will get you to $180 million. Are you expecting to spend another $20 million in FY '21?

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Martin Alistair John Earp, InvoCare Limited - CEO, MD & Executive Director [66]

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I -- we haven't projected, but your numbers sound about right to me with regard to where we're getting to. That deferral of some of the bigger sites will -- that's $3 million, $4 million, $5 million. So if we defer 2 or 3 of those into '21, that probably makes the numbers in line with what you're saying. So yes.

Okay, thank you. Thanks, everybody, for listening.