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

So good morning everyone. I'm Brian Scullin, the Independent Chairman of -- and Non-Executive Director of Propel Funeral Partners Limited. On behalf of the Board, it's my pleasure to welcome you to Propel's 2020 Annual General Meeting being conducted for the first time through a virtual meeting platform provided by Link, our share registry provider. We hope that by our holding a virtual meeting, we will assist in further reducing the spread of COVID-19 virus and encourage greater participation and engagement among our shareholders because one of the benefits of a virtual meeting is that it allows shareholders to attend and participate no matter where they live. It's a very different experience for all of us, but let me thank you in advance for your patience as we go through the meeting. We will try to ensure that every shareholder who wants to have an opportunity to participate in the meeting, equivalent to the one they would have had if we were holding it in person. If we experience any technical issues today, a short recess or adjournment may be required. Notice of Meeting was duly given and the meeting has been properly convened. We'll turn to the resolutions towards the end of the meeting. With me Online and joining from Sydney and Hobart are your other independent non-exec directors, Naomi Edwards; and Jonathan Trollip as well as Executive Director, Fraser Henderson; and Managing Director, Albin Kurti. Jonathan presents himself for reelection at today's meeting. Also online are Lilli Gladstone, our Head of Finance. Our audit partner from Nexia, Lester Wills, is here to address any questions you may of him; and representatives from Link. After my introduction, Albin will provide some comments on last year's financial results and a trading update, among other matters. The formal matters of the meeting will then be addressed and you'll have the opportunity to raise questions. [Operator Instructions] I encourage shareholders to send their questions through as soon as possible. Please note, we have sought to address questions prior to the meeting during the presentations. As set out in the Notice of Meeting, in terms of the formal matters of the meeting, all resolutions will be decided on a poll. In order to provide everyone with an opportunity to vote and in case anyone cannot stay for the whole meeting, I now formally declare the poll open on all items; and it will remain open until I declare it closed. Only shareholders, proxy holders and shareholder company representatives may vote on today's resolutions, and you can cast your vote using the electronic voting card. Now the table on the screen shows the votes received prior to the cutoff time in relation to the resolutions requiring a shareholder vote at today's meeting. As you'll see, there's been overwhelming support for each of the resolutions, all of which have been unanimously recommended by the Board. And I'll return to those resolutions a little later. All of us have been personally affected by the COVID-19 pandemic, which has impacted the way we work, live and gather to honor and remember loved ones who have passed. FY '20 presented significant challenges to the funeral industry, including Propel's staff in Australia and New Zealand due to COVID-19 and at some of our locations, the threat of bushfires last summer. On behalf of the Board, I'd like firstly to acknowledge and thank all of our staff for continuing to provide care and funeral and related services throughout FY '20 in often very challenging circumstances, particularly since the start of the pandemic. In March 2020, the funeral industry in Australia and New Zealand confronted unprecedented disruption and uncertainty, following the introduction of funeral attendee limits and social distancing directives aimed at curbing the spread of COVID-19. The company acted quickly to implement measures focused on people's safety, essential service continuity and financial resilience. And I commend the management team to -- for their leadership, particularly during the initial lockdown period, a time of significant disruption and uncertainty. We have endeavored to keep you, our shareholders, appropriately informed and -- about COVID-19 impact on the company's trading through various ASX announcements since last -- since late March 2020. Despite the challenges in FY '20, I'm pleased to report that Propel continued its track record of delivering revenue and earnings growth. The company's diversification in providing essential funeral and related services across 7 states and territories of Australia And in New Zealand, including region and metropolitan markets, delivered considerable resilience in earnings and operating cash flows. Albin will discuss that in more detail shortly. The Board elected to reward shareholders by declaring total dividends of $0.10 per share fully franked in connection with FY '20, reflecting a payout ratio of 85% of distributable earnings. Since listing on the ASX in November 2017 with an IPO issue price of $2.70, the company has paid fully franked dividends totaling $27.9 per share or circa $0.40 per share on a grossed-up basis. At today's closing price of $3.04, this equates to total shareholder value accretion of approximately $73 million or circa 27% since the IPO before tax. Propel remains focused on a clearly defined investment strategy to acquire social infrastructure and assets which operate within the death care industry in Australia and New Zealand such as private funeral home operators, funeral-related properties and infrastructure, and cemeteries and crematoria. That strategy is consistent with what was outlined in our prospectus prepared in connection with the IPO approximately 3 years ago. Demand for death care services is expected to grow in Australia and New Zealand because of increasing death volumes due to population growth and aging of the baby boomers. The death care industry is highly fragmented and the company believes there is significant opportunity for further consolidation in Australia and New Zealand, and we're well positioned to capitalize on those acquisition opportunities. We ended FY '20 in a strong funding position with approximately $54 million of cash at bank and no near-term debt maturities. Having expanded our senior debt facilities last December. As at 30 June 2020, the company was comfortably in compliance with its debt covenants. Obviously, there is a balance between prudently taking advantage of record low of interest rates and liquidity in debt markets and not overstretching the balance sheet. As you'd expect, the Board is mindful to strike the right capital structure to ensure the company is appropriately funded so that we can continue to capitalize on growth opportunities when they materialize. As shareholders are aware, the company was founded and is managed by Propel Investments Pty Limited, which I'll refer to as the manager. Today, all of the company's acquisitions have been identified, negotiated, completed and managed by the manager on the company's behalf. The manager continues to execute the company's investment strategy on an exclusive basis and in accordance with the management agreement, the material terms of which were summarized in the prospectus. Our performance fee of $4.1 million was earned by the manager in November last year. I take this opportunity to confirm that no performance fee is payable to the manager for the 12-month period ended 17 November 2020. On behalf of the Board, I'd like to thank the Propel team for their hard work and dedication. I also express my gratitude to the manager and my fellow directors, and I thank you all for their considerable -- for your considerable efforts. Finally, I'd like to thank you, our shareholders, for your ongoing support. I look forward to hopefully being able to meet in person at future AGMs. I now invite Albin to take you through last year's results, which I'm sure will be of interest to you. Following Albin's presentation, we'll then come to the formal part of the business, matters requiring resolution as outlined in the Notice of Meeting. Albin?

Thanks, Brian. Good morning, everyone. Thanks for joining. As I'm sure shareholders would agree, the emergence of COVID-19 has been the defining event of 2020 and has impacted most industries, including the funeral industry. First and foremost, I'd like to acknowledge and express my sympathies to bereaved client families, many of whom have farewelled loved ones in particularly challenging circumstances in recent months. Having to choose who can attend a funeral has been extremely distressing, and in the early stages of the pandemic, in particular, many families were significantly constrained and unable to grieve in a way they ordinarily would, surrounded and supported by friends and relatives. In New Zealand, mourners were prohibited from attending funerals, and in Australia, funeral attendance was very limited and the hugging of loved ones was forbidden, which, as you can imagine, placed added pressure on families and our staff. So I echo Brian's sentiments and thank all of Propel's dedicated staff in Australia and New Zealand for their hard work, professionalism, flexibility and commitment to providing essential and caring services often under very difficult circumstances, especially since the start of the pandemic. In terms of today's presentation, I'll start with a brief recap of FY '20. I'll then provide an overview of Propel's business, touch on industry tailwinds, acquisitions, capital management, COVID-19 impacts and responses before concluding with our outlook. Despite the challenges, FY '20 was another record year for Propel. Revenue exceeded $100 million for the first time, increasing by 16.5% to $110.8 million on the back of a 17.6% increase in funeral volumes, including contributions from acquisitions. Average revenue per funeral was up 1.6% on the prior year and up 2.1% on a comparable basis. Operating EBITDA grew 36.4% to $32.4 million and operating NPAT was up 6.5% to $14.2 million, including the impacts of the new accounting standard for leases, AASB 16, which the company adopted on 1 July 2019. It's important to note, this noncash accounting change has had no economic impact on the company, its cash flows or its operations. And on a consistent accounting basis, excluding AASB 16 impacts, operating EBITDA and operating NPAT both increased materially, growing by circa 20% and 8% on the prior year, respectively. Cash conversion remained strong at 103.4%. From a capital management perspective, in FY '20, Propel expanded its senior debt facilities with Westpac to $150 million, providing additional funding capacity to support the company's growth strategy. During the second half of FY '20, the company prudently increased its liquidity position and at 30 June at had cash at bank of approximately $54 million and a net leverage ratio of 1.7x, well below the covenant limit of 3x. And as Brian mentioned, total dividends for the year were $0.10 per share fully franked, which included a final dividend of $0.06 per share. In terms of growth, Propel ended FY '20 with 130 locations, 10 more than at the end of the prior year and has subsequently added 6 locations to its network, with the recent acquisitions of the Dils Group in New Zealand and Mid West Funerals in Western Australia. The management has continued to execute Propel's acquisition-led growth strategy, deploying approximately $126 million on acquisitions since the company's IPO in November 2017. In terms of the outlook, despite below-trend death volumes and COVID-19 impacts, the financial resilience demonstrated by Propel in the final quarter of FY '20 has continued into the start of FY '21, which I'll discuss towards the end of the presentation. In terms of the business overview, this slide illustrates how Propel's network has evolved over the past 7 years. We started with 1 funeral home in Queensland, and today, operate from 136 locations across Australia and New Zealand, including 31 cremation facilities and 9 cemeteries. Of those 136 locations, the company owns 77 of them, which are currently held at cost on the balance sheet for approximately $122 million. This slide 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, Millingtons has been operating in and around Hobart for over 100 years; and in New Zealand, Davis Funerals has operated in and around Auckland since 1875. Dotted lines show those brands added to Propel's network during and since FY '20. These brands are an important part of the goodwill of each business we acquire. As you can see on the left of this slide, the company performed over 13,000 funerals in FY '20, up 17.6% on the prior year. Chart on the right shows that Propel generated revenue of $110.8 million in FY '20, up 16.5%. In terms of earnings growth, operating EBITDA was $32.4 million in FY '20, a more than tenfold increase since FY '15 and up 36.4% on the prior year. On a consistent accounting basis, operating EBITDA growth was approximately 20%. Operating NPAT was $14.2 million in FY '20, up 6.5%; and on a consistent accounting basis, operating NPAT growth was 8.4%. As you can see from this chart, Propel's average revenue per funeral in FY '14 has grown [ at a compound ] annual growth rate of 2.5%. In FY '20, average revenue per funeral was up 1.6% on the prior year and up 2.1% on a comparable basis. Propel's cash conversion has averaged circa 99% during the last 6 years. In FY '20, cash conversion remained strong at approximately 103%, which is pleasing, particularly given the continued growth in operating cash flow. Cash conversion continues to be a key focus. We'll now touch on industry trends, acquisitions, capital management, COVID-19 impacts and responses. These charts show that the number of deaths in Australia and in New Zealand is forecast to both increase and accelerate, according to the Australian Bureau of Statistics and Stats NZ. I won't go through the specific growth rates, but the 2 observations I'd make are: firstly, few industries have the certainty of this tailwind profile; and secondly, death volume growth is not [ linear ], and it can fluctuate over shorter time horizons from week to week, quarter to quarter and from year to year. The industry is highly fragmented in Australia and in New Zealand, Propel the second largest in [ both ] countries. The last 3 calendar years, Propel's estimated market share in Australia has increased more than fourfold from circa 1.2% in 2015 to circa 6.3% in 2019. Notwithstanding this significant increase, over 70% of the market is still owned by independent operators. Since its IPO 3 years ago, Propel has deployed approximately $126 million on acquisitions, which are geographically spread across Australia and New Zealand. In total, those acquisitions are expected to contribute more than 5,500 funerals, over 3,000 third-party cremations and approximately $50 million in revenue annually. As disclosed to the market in recent weeks, Propel has completed the acquisitions of the Dils Group in New Zealand and Mid West Funerals in Western Australia. Both acquisitions are expected to contribute positively to Propel's financial results during the remainder of FY '21 and beyond. Moving forward, we continue to explore other potential acquisition opportunities, but the timing of any future acquisitions, as you'd appreciate, remains uncertain. As Brian alluded to, the Board regularly discusses capital management and the company's funding needs, particularly in light of its acquisition pipeline and the fact that, in the last 3 financial years, Propel has committed more than $40 million per annum on acquisitions on average. As you can see from this slide, Propel's current funding capacity is approximately $70 million. Moving to COVID-19 impacts and responses. In late March 2020, the Australian and New Zealand funeral industries confronted unprecedented disruption and uncertainty, following the introduction of funeral attendee limits and other social distancing measures. This resulted in what I have described as a ground zero event for the funeral industry in the month of April when funeral attendance was limited to just 10 mourners throughout Australia and was prohibited throughout New Zealand, a very difficult time for client families and our staff. These restrictions affected the company's ability to offer a full range of services to client families and temporarily resulted in a higher mix of lower-value funerals performed across our network. As illustrated in the chart at the [ top ] of this slide, average revenue per funeral declined by approximately 6% in Q4 FY '20 compared to the prior 9-month period. However, as restrictions began to ease, funeral mix improved and average revenue per funeral increased and reverted to pre-COVID-19 levels in Q1 FY '21. Funeral volumes have also been impacted. In the first quarter of FY '21, death volumes were materially below historical long-term trends in key markets in which Propel operates. For example, In Tasmania, total registered deaths declined 12.6% on the prior corresponding period. Flu cases in Australia were 99% below the prior 5-year average, and the company's funeral volumes cycled strong prior corresponding period. Social distance measures, travel restrictions, an increased focus on personal hygiene and effective flu vaccinations in recent months have contributed to a benign 2020 flu season, and we expect will likely result in a deferral of debt volumes into future periods. This slide sets out some of our responses to COVID-19 and how we, our staff and our client families have had to adapt. Our focus has been on people's safety, essential service continuity and financial resilience. I won't go through each point listed on this slide, but the measures implemented range from ensuring access to sufficient PPE suppliers, staff working from home where feasible, reducing and rearranging seating capacity in our chapels, increasing the scheduled time between services, increased online streaming of funerals, ceasing catering services, changing the way funerals are arranged, reducing operating costs, ceasing nonessential capital expenditure, accessing government subsidies were eligible and prudently increasing the company's liquidity level. I want to particularly highlight and thank those staff who agreed to temporary changes in their employment terms during the months of April and May, such as reduced hours and more flexible working arrangements. Those temporary changes helped to ensure the company maintains staffing levels during what was a very uncertain period. So I want to acknowledge and thank our independent directors and the manager, who at the time we were asking some of our staff to temporarily change employment terms, agreed to waive 100% of their fees for the months of April and May. Moving to the outlook. Propel continues to be well positioned to generate sustainable long-term growth and value creation. We operate in a fragmented and essential service industry with assets and social infrastructure that are difficult to replicate, which stands to benefit from favorable demographic tailwinds over the long term. Although death volume growth is certain, unavoidable and predictable over the longer term, that growth is not linear and it fluctuates over time. In other words, death is certain. Its timing is not. Historical experience suggests that the below-trend death volumes in recent months should be temporary given prior period declines have rebounded quickly and the growing and aging population. Encouragingly, the financial resilience demonstrated by Propel in the final quarter of FY '20 has continued into the start of FY '21. In the first quarter of FY '21, operating EBITDA was $10.5 million, up circa 18% on the prior corresponding period. Average revenue per funeral growth on FY '20 was within our target range of 2% to 4%. Total funeral volumes were above the prior corresponding period, and Propel's strong cash flow conversion was maintained. In terms of the company's financial results, we expect to benefit from death volumes reverting to long-term trends given the growing and aging population, the company's strong funding position, acquisitions completed during and since FY '20 and other potential future acquisitions. Thankfully, funeral attendee limits have eased significantly in recent months and are currently unlimited in New Zealand and restricted to at least 100 mourners across most of Australia. Earlier this week, Queensland doubled its funeral attendee limit to 200 mourners; and we expect funeral restrictions in other states and territories to ease further in the coming weeks and months. Although the risk of multiple waves of COVID-19 remains, from a funeral perspective, we expect any impacts will be isolated to hotspot areas as was recently the case in Victoria and is currently the case in South Australia. Our ground zero experience in April and the recovery since demonstrates that the financial impacts of funeral attendee limits have been temporary, and average revenue per funeral has rebounded quickly as restrictions have eased. This not only reinforces the value that society [indiscernible] funeral service as a vital part of the grieving process. It also highlights the defensive nature and the social infrastructure characteristics of Propel's network of funeral homes, cremation facilities and cemeteries. In conclusion, I think the 3 key takeaways from today's presentation are: one, FY '20 was another record year for Propel, with the company generating significant revenue and earnings growth; two, the company's diversification in providing essential funeral and related services across 7 states and territories of Australia and in New Zealand, including regional and metropolitan markets, delivered considerable resilience in operating earnings and cash flows, particularly in recent months; and three, with a strong funding position, no near-term debt maturities, the support of our dedicated staff and the understanding of client families, Propel is well placed to continue its disciplined acquisition-led growth strategy in what remains a highly fragmented industry while continuing to focus on people's safety, essential service continuity and financial resilience. Before I hand back to, Brian. I'd like to quickly thank my fellow Board members for their guidance and support during the year; my colleagues, Lilli Gladstone, Fraser Henderson and the small team at Propel's head office for their flexibility, hard work, dedication; and finally, our shareholders for their ongoing support. With that, I'll hand back to Brian to cover the formal matters of the meeting and happy to take questions during the Q&A session. Thank you.

Thanks, Albin. So ladies and gentlemen, now to the formal part of the business, those matters which require a resolution and which were outlined in the Notice of Meeting. Before moving to the specific resolutions, I note the following. The resolutions for consideration today may only be voted on by shareholders, proxy holders and shareholder company representatives. Shareholders have the opportunity to ask questions on each matter being put to shareholders. There is no requirement for shareholders to vote on the first item of business set out in the Notice of Meeting. Resolutions 2 and 3 are to be considered as an ordinary resolution and as such, to be passed, must be approved by a simple majority of the votes cast. And resolution 4 is considered as a special resolution and as such, to be passed, must be approved by at least 75% of the votes cast. As I said before, the poll on all items has already been opened and as I said earlier, will remain open until I call the poll to a close. So please ensure that you vote now if you haven't already. The company's registry, Link Market Services Limited, is a point to act as scrutineer and returning officer for the purpose of the polls. Any directed proxies that are not voted at the meeting will automatically default to the Chairman, and I'm required to vote those proxies as directed. Subject to any applicable voting restrictions, the Board recommends that shareholders vote in favor of each of the items of business that require a vote. Any open proxies that have been received by the Chairman of the meeting or directors will be voted in favor of each item. As I said earlier, votes received prior to the cutoff time in relation to the resolutions requiring a shareholder vote today are overwhelmingly in favor of each resolution. I'll now introduce the items of business on the formal end of the meeting. So the first item of business is to receive and consider the company's financial report, directors' report and auditor's report for the year ended June 2020. There is no requirement for shareholders to approve these reports. At this time, I would like to invite shareholders to ask questions or make comments regarding these reports. [ We'll proceed with questions received on ] resolutions until the time that we consider those resolutions. Fraser, are there any questions online?

Brian, there's no questions online in respect to that resolution yet. Thank you.

Okay. So if there are no questions, we'll move to the next resolution. The next item of business is resolution 2, the reelection of Mr. Jonathan Trollip as a Director. Jonathan is an Independent [ Non-Executive ] Director of the company and is a member of the Board's Audit and Risk Committee. He retires at this meeting and, being eligible, offers himself for reelection. I'd just ask Jonathan to provide a background about himself. Jonathan?

Thank you, Brian. My background is set out in the Notice of Meeting explanatory memorandum, so I don't propose to bore shareholders by going through everything in a lot of detail. I think most relevantly in the [ last 5 years ], my working life has been as a professional nonexecutive director primarily with investment companies but also with operating companies. And as shareholders will be aware, Propel Funeral Partners is an operating company that has an external management model with the [ management set ] being provided by the Propel Group. I therefore respectfully consider that I'm well qualified with that experience to act as an Independent Non-Executive Director of the company. In the last [ 3 ] years, I've very much enjoyed working with my fellow independent directors, Brian Scullin and Naomi Edwards and also with the Propel team of Albin Kurti, Fraser Henderson and Lilli Gladstone. So if shareholders do choose to reelect me, thank you for doing so, and I undertake to continue to serve the company as best I can. Thank you.

So thanks very much, Jonathan. So Fraser, again, have we received any questions or comments in relation to this motion?

Brian, we have not.

Okay. So I'll now move on to the resolution and formally propose resolution 2, which is as specified in the Notice of Meeting. I confirm that the directors, with Jonathan abstaining, unanimously recommended that shareholders vote in favor of this resolution. So please now select either for, against or abstain for resolution 2. So we now come to resolution 3, which is a nonbinding advisory vote on the adoption of the company's remuneration report. The remuneration report is included in Propel's 2020 annual report and that's available on our website. It sets out Propel's remuneration policy and arrangements for non-exec directors and the manager. So again, Fraser, are there any questions received or comments in relation to resolution 3?

There are not, Brian, no questions.