Biocrem - Investment Memo (Angel Group)

Biocrem is a pure-play direct cremation provider that leverages its focus on unattended cremations to provide Cremation-as-a-Service (”CaaS”).

Key value drivers:

⛈ Problem

☔️ Solution

Traditional market: The UK’s existing 301 crematoria are configured to serve the traditional ‘attended’ cremation, but these same sites also serve the recent and fast growing direct ‘unattended’ cremation market. This lack of specialisation (”square peg in a round hole”) results in an infrastructure that is costly to build and operate, ultimately resulting in higher prices for its clients, i.e. funeral directors.

Polluting industry: Cremations are an energy-intensive process that releases 200 - 245 kg of carbon, which for the UK is equivalent to ~ 115k tonne each year. Burial is becoming more expensive and harder to access due to lack of space in urban environments. It disrupts the fragile ecosystems in the soil and can pollute groundwater with embalming chemicals and decomposition.

Biocrem is launching the UK’s first purpose-built crematorium focused solely on unattended cremations. Advantages:

Biocrem offers a new cremation solution for the UK that is affordable, eco-friendly and accessible to all. Its facilities carry out unattended cremations and focus on maximising efficiency of the core process.

The team’s established track record positions them well for expansion in the B2B market. By leveraging their proven sales ability and industry expertise, the team has pivoted to capitalise on B2B opportunities.

Why pivot from B2C to B2B?

🏳️ Funeral director side of the funeral market is highly fragmented and economics of the D2C model are unclear given high digital distribution costs

🤝 Today there is no pure-play direct cremation-focused facility in the UK despite the recent increase in the share of direct cremations

🦕 The economics (unit economics, ROCE, ROI) of the Biocrem business are category leading

🔃 Focus on B2B growth and then open a new B2B2C markets by offering plan providers, hospices, retire homes and doulas the platform to white label direct cremation services to their customer base.

Funeral directors sell traditional ‘attended’ cremations as well as direct ‘unattended’ cremations. Direct cremations are a low-cost alternative that have gained traction with the UK public in the past decade.

Biocrem offers funeral director a purpose-built direct cremation-focused facility with collection and delivery services.

🔺Lack of choice of service provider: Funeral directors are limited in their choice of crematorium by facilities that are within a ~ 50 mi. radius with often only one facility to chose from, rarely two and almost never three.

📉 Pressure on margins: The UK funeral market is under pressure due to the increasing popularity of direct cremations, which are a low-cost alternative to traditional cremations. This trend is resulting in cannibalisation of high margin traditional cremations, which is putting pressure on the margins of funeral directors and crematoria operator. Funeral directors are seeking cost-effective solutions.

♻️ Environmental Concerns: There is growing awareness and concern about the environmental impact of traditional burial and cremation practices. Funeral directors and crematoria are under pressure to offer eco-friendly alternatives, such as green burials, natural coffins, or carbon-neutral cremation options.

Unsophisticated mom & pop operations: 70% of UK’s funeral directors are operating a single shop front. These operators are generally family-owned, are passed from generation to generation and are not sophisticated in their day-to-day operations

Biocrem is a location-agnostic service provider; because it focuses solely on unattended cremations, it allows funeral directors to select Biocrem as a service provider even if the distance is large.

Biocrem offers a competitive price point made possible by its focus on direct cremations. Biocrem’s unique model of low capital requirement coupled with low operating costs are making it uniquely suited to help funeral directors. It operates a new type of hybrid cremator which can use gas, biogas or electricity, minimising fuel usage by operating almost continuously.

BioCrem becomes the first and only brand in the UK to provide CO2 and NOx emissions-minimized cremations. It achieves this by operating by operating almost continuously which maximises energy recovery.

Biocrem provides a phone app that provides intuitive booking, scheduling, billing and customer-support services facilitating logistics for the funeral directors which leaves them more time to support their customers.

Streamlined cremations

Biocrem charges a fixed fee per cremation, as per the standard crematoria model. Unlike the traditional crematoria model however, Biocrem offers collection and delivery services to maximise its opportunity to enlarge its addressable market beyond the usual catchment area.

In order to provide this collection and delivery service, the Biocrem business plan includes a fleet plus associated ancillary equipment of ‘private ambulances’ equipped for transportation of deceased.

Because Biocrem focuses solely on unattended cremations, it is able to build a facility at a fraction of the cost of a traditional crematorium. This is possible because Biocrem can do away with chapels, reception areas, maintained grounds, gardens of remembrance, and parking spaces. Moreover, Biocrem is able to build its facilities in industrial park, converting a light industrial use into a crematorium facility.

Biocrem has negotiated a vendor financing agreement with Facultatieve (FT), Europe’s leading manufacturer of crematoria equipment. The cremator FT will install in the first facility will be a hybrid cremator that can use gas, biogas and electricity as energy sources.

Source: Facultatieve Analysis, 2022

Traditionally, cremations have primarily used natural gas or propane as fuel sources (99% of UK crematoria). When these fossil fuels are burned, they release CO2 into the atmosphere. For every gas cremation, approximately 200-245 kg of CO2 is released (the equivalent of driving your car for 470 miles), which is around 115,150 tonnes of carbon released each year solely from cremation in the UK.

Biocrem has estimated in conjunction with OEM manufacturer that operating its machinery on continuous shifts (something made possible solely due to the direct-cremation nature of Biocrem’s model) would reduce energy consumption and therefore CO2 emissions by a factor of 10.

Use of funds for this seed round is to establish Biocrem’s first facility and fund operations leading to commercial launch. Thereafter facility #1 will become self-sustaining and profitable. Financing of the second facility (North England) is likely to be done using bank debt as by that time Biocrem will be a cash generating business with a large PP&E installed based (attractive to banks and impact lenders).

The historical evolution of crematoria fees over the past 10 years shows that fees have increased well in excess of CPI, in nominal terms at a CAGR of 6% between 2008 and 2018, equivalent to an inflation-adjusted increase of 48% across the Period.

bottom-up approach

The TAM represents the total potential market demand for Biocrem's services, considering all cremations in the UK.

There were 523,303 cremations in the UK in 2021 across 310 crematoria. Assuming this trend continues, and using the historical CAGR in the cremation rate of 0.33% per year, the cremation rate is projected to reach 82.3% of all deaths by 2037. Considering the projected 777,000 deaths in 2037, the estimated number of cremations would be approximately:

Projected cremations in 2037 = 777,000 * 0.823 = 639,771

Therefore, the TAM for Biocrem would be the potential market demand for cremations in the UK, which is estimated to reach around 639,771 cremations in 2037. TAM: £223m

(UK Funeral market value: £2.5bn)

The SAM represents the portion of the TAM that BioCrem can realistically target and serve.

In this case, the SAM can be defined as the number of cremations that Biocrem can potentially handle in its purpose-built crematoria.

Based on the assumption that Biocrem will charge £250/350 per cremation UK funeral data in 2021:

Assuming a similar proportion of direct cremations in the future, the SAM can be estimated as follows:

SAM = Direct cremations in 2021 * £350 per cremation: 88,600 * £350 = £31m

SAM: approximately £31m

The SOM represents the portion of the SAM that Biocrem can realistically capture based on its business strategy and competition.

In summary, the TAM for BioCrem is estimated to reach approximately 639,771 cremations in 2037. The SAM, representing the potential revenue from direct cremations that Biocrem can target and serve, is estimated at around £31m.

Using the capacity of each site: At full capacity and operating with maintenance shut-down requirements, Biocrem can process 3,000 cremations per site per year, based on that and the 2 sites planned for the first 4 years, Biocrem can process maximum of 6,000 cremations. SOM: £2.1m

The UK direct cremation market is fragmented with the top 5 providers estimated to perform 21,500 direct cremations in 2022. Pure Cremation is the largest player. Most competitors have between 1-5 crematoria sites, clustered around London and Southern England. This limits their geographic reach.

The analysis shows these additional players are relatively small, likely generating under £10 million in combined revenue. They rely mainly on 3rd party crematoria. Farewill is likely the largest based on its broader funeral services.

The UK funeral market experiences significant demand for cremations. Over the past 10 years, crematoria fees have steadily increased at a compound annual growth rate of 6%, resulting in a 48% inflation-adjusted increase. Funeral directors operate in a market where cremation fees generate healthy operating margins, with EBITDA margins projected to be no less than 44% at maturity. Moreover, the majority of investment appraisals forecast operating profit margins exceeding 50%.

The market is concentrated on the crematoria side but fragmented for funeral directors. Direct cremations are growing rapidly off a small base and present an opportunity for new eco-friendly cremation facilities.

Geographic expansion plan: Several facilities spread across the country to cover England and Wales