Propel Funeral Partners Limited (PFP.AX) Earnings Call Transcript & Summary

Thank you. Good morning, everyone, and thanks for joining Propel's FY '25 and my final full year results briefing. With me are fellow co-founders and long-time colleagues, Lilli Rayner and Fraser Henderson, who, as announced in June, will become co-CEOs of Propel from next Monday following my decision to retire after 14 years. I congratulate Lilli and Fraser on their well-deserved promotions and also Arash Noaeen, who after 8 years with the company, will become CFO next week. Lilli, Fraser and Arash know Propel's business strategy and culture inside out, and I'm pleased that I'll be leaving the company in great shape and in great hands with no change in Propel's strategic direction. Moving to the presentation lodged with the ASX this morning. The 3 key takeaways from today's presentation are: firstly, FY '25 was a record year for Propel. The company exceeded guidance and delivered growth in key financial and operating metrics despite industry volume headwinds during the second half, which are expected to be temporary. Secondly, Propel's funeral volumes have been seasonally stronger in recent months, and the company has made a positive start to FY '26. With a strong balance sheet, Propel is well placed to continue consolidating what is a highly fragmented and essential service industry that stands to benefit from the aging population for decades to come. And thirdly, the internal executive leadership transition has been smooth, and it's very much business as usual at Propel. Please turn to Slide 6 for the key highlights. Revenue increased 7.9% to $225.8 million, above the top end of the guidance range on the back of a 4.4% increase in total funeral volumes and a 2.3% increase in comparable average revenue per funeral. Propel continued to grow earnings. Operating EBITDA increased to $56.2 million, again above guidance and operating NPAT increased to $21.6 million. Cash flow conversion remained strong at 102.2%. From a capital management perspective, the Board has declared a final dividend of $0.07 per share fully franked, resulting in total dividends of $0.144 per share fully franked in connection with FY '25, consistent with the prior year. Propel ended the year with a gearing ratio of 27%, a net leverage ratio of 2.1x and has available funding capacity of $143 million, which will support Propel's acquisition-led growth strategy. Lilli will provide further details on the company's financials shortly. In terms of growth, Propel expanded its network by 9 locations in FY '25, deploying $13 million on 3 acquisitions, and the company has now deployed $302 million on acquisitions since its IPO in 2017. Fraser will provide an acquisition update shortly. In terms of our outlook, the company expects to benefit from favorable demographics in Australia and New Zealand, its strong funding position and acquisitions completed to date and other potential future acquisitions in what remains a highly fragmented industry. I'll talk more about the outlook towards the end of the presentation and will now provide an overview of the business. Turning to Slide 8. This slide illustrates how Propel's network has evolved. Propel started with 1 funeral home in Queensland over a decade ago. And today, it operates from 205 locations across Australia and New Zealand, including 41 cremation facilities and 9 cemeteries. Of those 205 locations, the company owns 124 of the properties, which are held at cost on the balance sheet at $247 million. Slide 9 shows Propel's main operating brands in Australia and in New Zealand. Each brand has a distinct identity and is well known in their respective markets. Some have been around for many decades. For example, in Tasmania, Millingtons has been operating in and around Hobart for over 100 years. And in New Zealand, J. Fraser has operated in Southland since the late 1800s. The dotted lines show the brands relating to acquisitions completed during FY '25. These brands are an important part of the goodwill of each business. The charts on Slide 10 illustrate Propel's track record. The company has maintained a strong growth trajectory. I won't go through each chart, but as you can see, Propel's funeral volumes, revenue and operating earnings experienced growth in FY '25. The chart on Slide 11 shows Propel's average revenue per funeral since FY '15, which has grown at a compound annual growth rate of 3.1%. In FY '25, comparable average revenue per funeral was up 2.3%, in line with inflation. Turning to Slide 12. Cash conversion continues to be a key focus. As you can see from this chart, Propel's cash conversion has remained consistently high, averaging 99% for over a decade. In FY '25, cash conversion remained strong at 102%, which is pleasing. Propel is the only listed debt care company on the ASX. And before I hand over to Lilli, I want to briefly touch on the company's performance since its IPO. The company listed in November 2017 with an issue price of $2.70. And as you can see from the chart on this slide, as at 30 June 2025, Propel's share price has materially outperformed the ASX 300 Index. For investors who participated in Propel's IPO and subsequent share issues and who retained their shareholding as at 30 June 2025, Propel has generated a total shareholder return of 73% on a pretax basis, including dividends. This equates to total shareholder value accretion since the IPO of approximately $324 million pretax. On behalf of everyone involved with Propel, I thank shareholders for their ongoing support. I'll now hand over to Lilli, who will provide further detail on the full year financial results.

Thanks, Albin, and good morning, everyone. Propel delivered growth in key financial and operating metrics in FY '25, above the top end of the guidance range despite an estimated 3% contraction in industry death volumes in Australia in the second half. Today, I will cover 5 key areas. Firstly, I'll provide an overview of Propel's full year results via an analysis of the income statement. Secondly, I'll touch on the key drivers of revenue, operating earnings and margin. Thirdly, I'll provide an analysis of the cash flows. I'll then touch on the balance sheet and finally, wrap up with capital management. Please turn to Slide 15. Propel generated revenue of $225.8 million in FY '25, an increase of 7.9% on the prior year. The increase reflected contributions from 13 acquisitions completed in FY '24 and FY '25, a 2.3% increase in comparable average revenue per funeral and a 3% contraction in comparable funeral volumes in the second half, which mirrored estimated industry volumes and resulted in a full year contraction of 1%. Propel reported a gross margin of 69.8%, in line with the prior year, positively impacted by pricing and favorable sales mix, partially offset by the financial profile of recent acquisitions. Pleasingly, the comparable gross margin increased 20 basis points on FY '24. The company generated operating EBITDA of $56.2 million in FY '25, an increase of 1.4% on the prior year, impacted by industry volume headwinds in the second half, the financial profile of recent acquisitions and changes to executive remuneration. In terms of other items of note on the income statement, interest expense on senior debt decreased by circa $1.5 million in FY '25, driven by lower drawn debt as a result of the capital raising completed in early 2024 and a lower average effective interest rate. Propel generated operating NPAT of $21.6 million in FY '25, circa 2.2% higher than FY '24, noting that operating earnings per share was impacted by an increase in the number of shares on issue. In terms of nonoperating items, acquisition costs totaled $1 million, and the adjusted effective tax rate was 29.6%. The waterfall on Slide 16 sets out the sources of revenue growth on the prior year. The chart shows the full year impact of acquisitions made in FY '24, the impact of acquisitions completed during FY '25 and the organic performance of businesses held for the comparable period. As you can see from the comments on the bottom left of the slide, total funeral volumes increased 4.4% and average revenue per funeral increased 1.3%. In terms of organic, on the center of this slide, comparable businesses experienced a 1% contraction in funeral volumes, having cycled consecutive positive growth in FY '22 and FY '23, followed by a contraction in FY '24 and a 2.3% increase in comparable average revenue per funeral in line with inflation. As you can see on the bottom right of this slide, the operating EBITDA margin was 24.9%, primarily impacted by a contraction in comparable funeral volumes in the second half, margins of recent acquisitions and changes to executive remuneration. Moving to the cash flow statement on Slide 17. Operating cash flows increased 4.4%, reflecting contributions from acquisitions and positive movements in working capital. Cash flow conversion was strong at 102%. In respect of investing activities during the year, Propel deployed $12.8 million in cash in connection with acquisitions and $2.1 million relating to earn-out payments, acquired 5 freehold properties not connected to business combinations, 2 of which were previously leased for total consideration of $10.3 million and maintenance CapEx amounted to 4.2% of revenue, broadly in line with depreciation on property, plant and equipment. The financing activities during the year largely reflect the proceeds from senior debt to fund acquisitions, property purchases as well as dividends paid. Moving to Slide 18. There are 3 main points of note on the balance sheet. One, as at year-end, Propel had net debt of approximately $132 million. Two, freehold properties owned by Propel are held at depreciated costs of approximately $247 million; and three, Propel's prepaid contract funds totaled approximately $76 million, which are largely invested with third-party friendly societies who primarily invest the funds in cash and fixed interest. During the year, prepaid contracts that turned at need in Australia accounted for less than 10% of the group's Australian funeral volumes, consistent with FY '24. Turning to Slide 19. In respect of capital management, Propel has available funding capacity of approximately $143 million. The company remained comfortably in compliance with its debt covenants, reporting a net leverage ratio of 2.1x against a covenant limit of 5x. And finally, Propel declared fully franked dividends of $0.144 per share in connection with FY '25, noting that the company expanded its share capital by circa 17% in the prior year. I'll now hand over to Fraser, who will cover industry trends and acquisitions.

Thank you, Lilli, and good morning, everyone. Some of you may be familiar with the graphs on Slide 21, which show that the number of deaths is forecast to both increase and accelerate in the countries in which Propel has operations, namely Australia and New Zealand. Death volumes is the most significant driver of revenue in the death care industry. In Australia, death volumes grew by 1.2% per annum between 1990 and 2024, and the ABS forecasts that they will increase by 2.8% per annum from 2025 to 2035 and 2.4% per annum from 2036 to 2045. Whereas in New Zealand, death volumes grew by 1% per annum between 1990 and 2024 and Stats NZ forecast that they will increase by 1.9% per annum from 2025 to 2035 and 1.8% per annum from 2036 to 2045. Few industries have the benefits of the certainty of this sort of tailwind. However, death volume growth is not necessarily linear and can fluctuate from time to time. The funeral industry is highly fragmented in both Australia and New Zealand, with Propel the second largest in both countries. Slide 22 shows how Propel's estimated market share in Australia has grown in the last 9 calendar years from circa 1% in 2015 to circa 9% in 2024. However, it is worth noting that notwithstanding that significant increase, circa 70% of the market in Australia is still owned by entities other than Propel and the largest operator. This dynamic is not dissimilar to the New Zealand market, where the majority of funeral home operators remain independent. Turning to Slide 23. Propel remains focused on executing its core strategy of acquiring assets and social infrastructure, which operate in the death care industry. Since its IPO in November 2017, Propel has committed approximately $302 million in acquisitions, including $13 million on 3 acquisitions in FY '25. Moving forward, Propel will continue to explore other potential acquisition opportunities, but the timing of any future acquisitions, as you would appreciate, remains uncertain. I'll now hand back to Albin.

Thanks, Fraser, and thank you, Lilli. As you can see from our presentation today, Propel delivered growth in key financial and operating metrics in FY '25. The company operates in what is a stable, highly fragmented and essential service industry with assets and infrastructure that are difficult to replicate and stands to benefit from favorable demographic tailwinds. Propel is well funded to continue its acquisition-led growth strategy and with the management team and nonexecutive directors who together own a substantial stake in the company, this ensures a strong alignment with fellow shareholders. As I flagged earlier, shareholders who participated in Propel's IPO have benefited from significant shareholder value creation through share price accretion and dividends, and we thank them for their continued support. In summary, Propel has a strong track record and a defensive market position in a favorable sector thematic and is well funded. In terms of the outlook, demand for funeral services is not correlated to inflation, interest rates or the economic cycle, and Propel continues to be well positioned to generate sustainable long-term growth and value creation. The company expects to benefit from favorable demographics in Australia and New Zealand, its strong funding position and acquisitions completed to date and other potential future acquisitions. In that regard, Propel has started FY '26 positively. In July 2025, the company reported a record revenue month, which exceeded $21.5 million and reflected seasonally stronger funeral volumes, average revenue per funeral growth of 2.7% over the PCP and contributions from recent acquisitions. And finally, as announced in June, the internal executive leadership transition will take effect from Monday next week with Lilli and Fraser becoming co-CEOs and Arash, CFO. Once again, I congratulate Lilli, Fraser and Arash, and I wish them every success. Having cofounded this company 14 years ago, I'm obviously incredibly proud of what we have collectively achieved at Propel, and I'd like to take this opportunity to personally thank everyone involved in Propel's journey so far, especially our dedicated staff who have made the last 14 years the most fulfilling of my executive career. And of course, I'd also like to thank the Board and our shareholders for their faith and support over many years, both prior to and since Propel's IPO back in 2017. So with that being said, in conclusion, the 3 key takeaways from our presentation today are: one, FY '25 was a record year for Propel. The company exceeded guidance and delivered growth in key financial and operating metrics despite industry volume headwinds during the second half, which are expected to be temporary. Two, Propel's funeral volumes have been seasonally stronger in recent months, and the company has made a positive start to FY '26. With a strong balance sheet, Propel is well placed to continue consolidating what is a highly fragmented and essential service industry that stands to benefit from the aging population for decades to come. And three, the internal executive leadership transition has been smooth, and it's very much business as usual at Propel. With that, I'll hand back to the moderator to invite questions.

[Operator Instructions] Your first question comes from Chami Ratnapala with Bell Potter Securities.

A few questions from me, if that's okay. I think to start off with good to see the revenue and EBITDA coming over the guidance. And within revenue, I'm noticing that cemetery and crematorium and other revenues have grown much faster than funeral operations. Could you talk to what's driving this?

Chami, it's Lilli. So that's really driven in FY '25 by the acquisition that we did around Decra, which operates in that space. So we completed that acquisition in July last year. So we almost had the full period impact of that business. and then the normal price increases that you would expect in the cem, crem business throughout '25. So that was the main driver of the increase of that period -- or sorry, I should say, that sector over revenue from funeral operations.

Perfect. And maybe on the same point, then there is a slightly different seasonality in the gross margin within first half and second half. Could you talk to that as well?

Yes. I think that just relates to the same point, Chami, around acquisitions. It wasn't overly material, but that does relate to acquisitions as well.

Perfect. And then looking to FY '26, good to see July with that absolute revenue figure given. It seems like it's comping much stronger over the PCP. I mean, how do we frame FY '26? I mean, comps do get better over the year? And also on the margin expansion, given that there's limited dilution from acquisitions this time around. Could you talk to both?

Yes. So I think you're absolutely right, Chami, from a margin -- sorry, from a comping perspective, Q1 was definitely the strongest comp last year. So you may remember in Q1, we called out that the Australian funeral volumes were materially higher than the PCP being in '24. And the comps do get easier as we sort of cycle through FY '26, particularly in the second half, given obviously, we've called out that 3% contraction in the second half. In terms of the margin outlook, I guess we've delivered over a very long period of time, and you're well aware of this, of margins just over the mid-25s, Chami. And that's been in periods where we've had organic volume growth and obviously, organic volume contraction. But there are some minor headwinds to that. As you point out, some of the acquisitions that we've done in the last sort of 18 to 24 months are trading at a lower margin and some of those come from New Zealand. And then there's obviously the impacts of the executive [indiscernible] that we announced early in the year as well. So in terms of guiding to the margin for '26, it's around the mid-25s or slightly above if those volumes return to long-term trends.

Your next question comes from Sophia Mulligan with Macquarie.

Congratulations on your last result, Albin, and your first result as Co-CEO Lilli and Fraser. I just have a couple of questions, if that's okay. Firstly, on the acquisition pipeline. I was hoping maybe Fraser could give a little bit of color on the health of the pipeline and the size of the deals potentially in it.

Sophia. Yes, I mean, I think, obviously, FY '25 was a quieter year, but I think off the back of a record year in FY '24, where you'll remember we deployed close to $100 million of capital. And when I say quieter then, I mean, in terms of announced transactions, that doesn't mean that the team were very busy on potential acquisitions. And I think if you recall, there were 2 in the first half and 1 in this half, which were all sizable, didn't consummate for various reasons, but are still very much in the pipeline. The pipeline itself remains healthy, both in terms of existing those 3 sizable transactions that I've talked about, but a number of other ones. So we remain confident in that pipeline and hope to be able to announce some of those over the course of the next 12 months.