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

Thank you for standing by, and welcome to the Propel Funeral Partners Limited FY '22 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Albin Kurti, Managing Director. Please go ahead.

Thanks, Ari. Good morning, everyone, and thanks for joining Propel's FY '22 Full Year Results Briefing. I hope that wherever you're listening to this, you and your family are safe and well. First and foremost, I'd like to thank our dedicated staff in Australia and New Zealand for their hard work, professionalism, flexibility and commitment to providing essential and caring funeral and related services to the communities they serve throughout FY '22. We also acknowledge bereaved client families, many of whom farewelled loved ones in particularly challenging circumstances during the first half of FY '22 when extended lockdowns, travel restrictions and strict funeral attendee limits applied in parts of Australia and New Zealand. Turning to today's presentation. With me are my colleagues, Lilli Gladstone and Fraser Henderson. And together, we'll take you through the presentation launched with the ASX this morning. In terms of the agenda, I'll summarize the key highlights of FY '22, COVID-19 impacts, and I'll then provide a brief overview of the business. Lilli will cover the financial results in more detail. Fraser will touch on industry trends and acquisitions. And finally, I'll make some concluding remarks before taking questions. The 3 key takeaways from today's presentation are: firstly, FY '22 was another record year for Propel. The company achieved continued growth in key financial and operating metrics, despite COVID-19 impacts on the back of materially-higher funeral volumes and stronger average revenue per funeral growth in the second half of the year compared to the lockdown impacted first half. Secondly, it was a busy year in terms of corporate and M&A activity with Propel completing the management internalization and 6 new acquisitions, expanding and extending the company's debt facilities and successfully raising equity from existing and new shareholders. And thirdly, Propel has started FY '23 with positive trading momentum. With healthy operating margins, conservative gearing and a strong funding position, Propel remains well placed to navigate the higher inflationary and interest rate environment and to continue consolidating what is a highly fragmented and essential service industry with favorable demographic tailwinds. Please turn to Slide 6 for the key highlights. Revenue increased 20.6% to $145.2 million on the back of an 18.8% increase in funeral volumes, including contributions from acquisitions, the comparable funeral volumes up 8.9% and average revenue per funeral, proving resilient, up 2% despite extended lockdowns in the first half, which I'll discuss further shortly. Propel continued to grow earnings and maintained a healthy operating margin. Pro forma operating EBITDA increased 25.2% to $39 million, and pro forma operating NPAT increased 45% to $16.9 million. Pro forma adjustments comprise one-off items relating to the management internalization and government subsidies, which Lilli will cover in more detail. Cash flow conversion remained strong at circa 100%, which is pleasing. From a capital management perspective, the Board has declared a final dividend of $0.0625 per share fully franked, resulting in total dividends of $0.1225 per share fully franked in connection with FY '22, reflecting a payout ratio of 81%. Propel ended the year with a gearing ratio of circa 14%, having successfully completed a $64 million equity raising during the year. The company also expanded its senior debt facilities during FY '22 by $50 million to $200 million. And importantly, the debt maturity date has been extended and the key covenant limit was increased. And the company has available funding capacity of $136 million, which will support Propel's acquisition-led growth strategy. In terms of growth, Propel grew its network by 8 locations in FY '22, completing 6 new acquisitions in South Australia, Victoria, Western Australia and New Zealand. Since its IPO in November 2017, the company has committed approximately $156 million on acquisitions. Propel recently announced 2 new acquisitions, both of which are expected to complete in Q2 of FY '23. Fraser will provide an acquisition update shortly. In terms of the outlook, Propel has made a positive start to FY '23 and expects to benefit from favorable demographics in Australia and New Zealand, a strong funding position, acquisitions completed and announced 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 touch on COVID-19 impacts. Turning to Slide 7. As can be seen from the chart on the left, in FY '22, COVID-19 impact on average revenue per funeral were less severe during the initial wave of the pandemic in Q4 FY '20. Since the start of the pandemic, average revenue per funeral impacts from lockdowns and strict funeral attendee limits have been temporary with average revenue per funeral generally rebounding quickly as restrictions have eased. It not only reinforces the value that society places on physical attendance at a funeral service as an important part of the grieving process, it also highlights the defensive nature, diversification and the social infrastructure characteristics of Propel's network of funeral homes, cremation facilities and cemeteries. Taking a closer look at COVID-19 impact on average revenue per funeral during FY '22 was really a story of 2 halves. As can be seen from the middle chart on this slide, during the first half of FY '22, average revenue per funeral was impacted by extended lockdowns and strict funeral attendee limits in parts of Australia and New Zealand. For example, funeral attendance in Greater Auckland was initially prohibited and subsequently limited to 10 attendees for approximately 3 months during the first half of FY '22 with similar restrictions applying in parts of Australia, which contributed to a higher mix of lower-value funerals and comparable average revenue per funeral being in line with the PCP. However, throughout the second half of FY '22, there were no extended lockdowns or strict funeral attendee limits in Australia and New Zealand, which contributed to a higher mix of full-service funerals and stronger growth in comparable average revenue per funeral of 4.3% on the PCP. In terms of funeral volumes in August last year, we flagged that we expected the below-trend death volumes experienced during FY '21 to result in a deferral of death volumes into future periods. As you can see from the chart to the right, in the first half of FY '22, Propel's comparable funeral volume growth of 7.8%, which accelerated to 10.1% in the second half, resulting in full year growth of 8.9%, reflecting an increase in death volumes across most markets in which the company operates. I'll now provide a brief overview of the business. Slide 9 illustrates how Propel's network has evolved over the past 9 years. We started with 1 funeral home in Queensland, and today, we operate from 144 locations across Australia and New Zealand, including 32 cremation facilities and 9 cemeteries. Of those 144 locations, the company owns 79 of the properties. Slide 10 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, Davis Funerals has operated in and around Auckland since 1875. The orange dotted lines show the brands relating to acquisitions completed and announced during and since FY '22. These brands are an important part of the goodwill of each business. Charts on Slide 11 illustrate Propel's historic growth in funeral volumes and revenue. As you can see on the left, the company performed over 16,500 funerals in FY '22, up 18.8% on the prior year. The chart on the right shows that Propel generated revenue of $145.2 million, up 20.6%. The charts on Slide 12 illustrate Propel's historic growth in operating earnings. As you can see on the left, the company generated pro forma operating EBITDA of $39 million in FY '22, up 25.2% on the prior year and a more than 12-fold increase in FY '15. The chart on the right shows that Propel generated pro forma operating NPAT of $16.9 million, up 45%. Lilli will cover the bridge between statutory and pro forma operating earnings shortly. The chart on Slide 13 shows Propel's average revenue per funeral since FY '14, which has grown at a compound annual growth rate of 2.6%. In FY '22, average revenue per funeral was resilient, up 2% on the prior year and up 4.9% on the pre-COVID-19 period in FY '20. As I discussed earlier, it's important to note that Propel achieved comparable average revenue per funeral growth of 4.3% in the second half of FY '22, following the lockdown impacted first half. Turning to Slide 14. Cash conversion continues to be a key focus. As you can see from this chart, Propel's cash conversion remained consistently high, averaging approximately 99% since FY '15. In FY '22, cash conversion remained strong at approximately 100%, which is pleasing, particularly given the growth in Propel's operating cash flow. Before I hand over to Lilli, I want to briefly touch on the company's performance since its IPO. Propel listed on the ASX 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 2022, Propel's share price has materially outperformed the ASX 300 Index and its only listed domestic peer. For investors who participated in Propel's IPO and subsequent share issues, who retained their shareholding as at 30 June 2022, Propel has generated a total shareholder return of approximately 86% on a pretax basis, including dividends. This equates to total shareholder value accretion since the IPO of approximately $280 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 financial results.

Thanks, Albin, and good morning, everyone. Propel delivered a material increase in total and comparable funeral volumes during the year. This, combined with strong average revenue per funeral in the second half, contributed to the company achieving growth in key financial metrics despite COVID-19 impacts. Today, I'll cover 5 key areas. Firstly, I'll provide an overview of Propel's full year results for an analysis of the pro forma income statement. Secondly, I'll comment on the pro forma adjustments and related earnings bridge. Thirdly, I'll touch on key growth drivers of revenue, operating earnings and margins. I'll then provide an analysis of the cash flows and balance sheet and wrap up by touching on capital management. Let's turn to Slide 17. Propel generated revenue of $145.2 million in FY '22, an increase of 20.6% on the prior year. The increase was driven by the full year impact of 3 acquisitions completed in FY '21 and a part year impact of 6 acquisitions completed during the year. Furthermore, the performance was impacted by a material increase in funeral volumes and strong growth in average revenue per funeral in the second half. Propel reported a gross margin of 70.6%, which was 140 basis points lower than FY '21. The gross margin was primarily influenced by 3 factors: recent acquisitions, none of which have cremation facilities; sales mix represented by higher growth in revenue from funeral operations compared to the higher margin revenue from cemetery, crematoria and memorial gardens, and funeral mix. However, it should be noted that the FY '22 gross margin was in line with FY '19, i.e. pre-COVID. The company generated pro forma operating EBITDA of $39 million in FY '22, an increase of 25.2% on the prior year. The increase was due to contributions from 9 acquisitions completed in FY '21 and FY '22 and operating leverage driven by higher funeral volumes, and good cost control, despite the higher inflationary environment. In terms of other items of note on the income statement, depreciation increased circa 7% due to acquisitions, interest expense and the effective interest rate on drawn debt both in line with FY '21 and acquisition costs totaled $1.1 million. Propel generated pro forma operating NPAT of $16.9 million in FY '22, up 45% on the prior year, which translated to operating earnings per share growth of circa 31%, impacted by an 18% increase in shares on issue primarily relating to the capital raising. The pro forma adjusted effective tax rate was 29.7%. The bridge on Slide 18 sets out the statutory operating EBITDA and the impact of the 2 pro forma adjustments. The bridge and pro forma numbers assume the management internalization occurred on the 1st of July 2020, and therefore, additional employment-related costs are included for the full 12 months in both years and backs out the impact of government subsidies in both years. This results in pro forma operating EBITDA increasing by $7.8 million or 25.2% to $39 million. On a statutory basis, operating EBITDA was $39.6 million in FY '22, an increase of 9.3% on the prior year. Further information relating to the statutory income statement is set out in the appendix. The waterfall on Slide 19 sets out the sources of revenue growth on the prior year. The chart shows the full year impact of 3 acquisitions made in FY '21, the part year impact of 6 acquisitions completed during the year and organic growth for the relevant businesses. As you can see from the comments on the bottom left of the slide, funeral volumes increased 18.8% and average revenue per funeral increased 2% or 4.9% on the pre-COVID period. In terms of organic, in the center of this slide, comparable businesses experienced an 8.9% increase in funeral volumes and a 2.2% increase in average revenue per funeral. Both percentages accelerating in the second half of FY '22, as Albin mentioned earlier. These 2 factors contributed to organic revenue increasing 10.7% on FY '21. As you can see on the bottom right of this slide, the pro forma operating EBITDA margin was 26.8%, 100 basis points above the prior year. The margin was positively influenced by operating leverage from a material increase in comparable funeral volumes and good cost control with comparable OpEx per funeral circa 2% below FY '21, despite the higher inflationary environment. These were partially offset by sales mix and the margins of recent acquisitions. Turning to Slide 20, the statutory ungeared pretax operating cash flows were 13.3% higher in FY '22 with contributions from acquisitions and strong trading being partially offset by higher employment costs paid in connection with the management internalization and lower government subsidies received compared to FY '21. Cash flow conversion remained strong at circa 100%. In respect of investing activities during the year, Propel deployed approximately $18 million in cash in connection with acquisitions and $0.5 million relating to earnout payments. And incurred net capital expenditure of $10.2 million, including growth projects. Maintenance CapEx amounted to 4.4% of revenue. The financing activities largely reflect the net proceeds from the capital raising of $62.3 million and a subsequent reduction of senior debt as well as dividends paid during the year. Moving to Slide 21. There are 3 main points on the balance sheet. One, as at year-end, Propel had net debt of approximately $40 million. Two, the freehold properties owned by Propel are held at cost at approximately $132 million; and three, Propel's prepaid contract funds totaled approximately $53 million, which are largely invested with third-party friendly societies, who primarily invest the funds in cash and fixed interest. In accordance with accounting standards, the asset increases by the investment return generated during the reporting period and the liability increases by the financing charge. The difference between those 2 amounts is recognized in the income statement. The contract turns at need when the service is delivered. At that time, revenue is recognized and the corresponding liability is extinguished. During the year, and consistent with FY '21, prepaid contracts that turned at need in Australia accounted for less than 10% of the group's Australian funeral volumes. It should be noted that there are no prepaid funeral contracts in the New Zealand business. Turning to Slide 22. In respect of capital management, during the year, Propel expanded its senior debt facilities to $200 million, which mature in October 2024. Propel raised net proceeds of $62.3 million in connection with the placement and follow-on share purchase plan. After allowing for funds required for the final dividend declared today of $0.0625 per share on binding commitments on acquisitions announced, but not yet completed, Propel has available funding capacity of approximately $136 million. And Propel remains comfortably in compliance with its debt covenants, reporting a net leverage ratio of 0.8x. 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 graph on Slide 24, which shows 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. That volume is the most significant driver of revenue in the death care industry. In Australia, the ABS forecasted death volumes will increase by 2.9% per annum from 2020 to 2031 and 2% per annum from 2031 to 2050, whereas in New Zealand, Stats NZ forecast that death volumes will increase by 2.2% per annum from 2021 to 2032 and 1.8% per annum from 2032 to 2050. Few industries have the benefits of the certainty of that sort of tailwind. However, death volume growth is not necessarily linear and can fluctuate from time to time. Social distancing measures, travel restrictions and increased focus on personal hygiene and effective flu vaccinations since the start of the pandemic seemingly resulted in a deferral of death volumes into future periods, which is supported by the strong comparable fuel volume growth in FY '22 as Albin mentioned earlier. Funeral industry is highly fragmented in both Australia and New Zealand, with Propel the second largest in both countries. Slide 25 shows how Propel's estimated market share in Australia, based on reported number of funerals performed and provisional ABS data on Australian death in calendar year 2021 has grown in the last 5 calendar years from circa 1.2% in 2015 to circa 7% in 2021. However, it is worth noting that notwithstanding that significant increase, [ actually ] 71% of the market is still owned by entities other than Propel and the largest operator. Turning to Slide 26. Propel remains focused on executing its core investment strategy of acquiring assets and social infrastructure, which operates in the death care industry. During the financial year 2022, Propel committed approximately $21 million on acquisitions and properties in Adelaide with Berry Funeral Directors and Glenelg Funerals, State of Grace and Eagars in New Zealand, McKee in Perth and Crawfords in Geelong. Since 1 July 2022, Propel has committed approximately $8 million and agreed to partner with the owners of Community Funerals and Cremation for Pets in and around Cairns and Mason Park Funerals in Wangaratta. Propel has deployed over $155 million in acquisitions since its IPO in November of 2017. The team remained active in both exploring those organic and inorganic growth opportunities. The acquisition pipeline is strong with approximately $136 million of available funding capacity. Propel is well positioned to continue consolidating what is a highly fragmented industry. I'll now hand back to Albin.

Thanks, Fraser, and thank you, Lilli. As you can see from our presentation today, Propel achieved material growth in key financial and operating metrics in FY '22. 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 its founder-led management team owning approximately 15% of 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, a stable and aligned management team, 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. Although death volume growth is certain, unavoidable and predictable over the longer term, it's not linear, and it fluctuates over time. In other words, death is certain, but its timing is not. In FY '22, Propel achieved material growth in funeral volumes and experienced stronger growth in average revenue per funeral in the second half, following the lockdown impacted first half. Encouragingly, the company's positive trading momentum has continued into the start of the new financial year. In the first 6 weeks of FY '23, total and comparable funeral volumes were materially higher than the PCP. In the month of July 2022, average revenue per funeral was circa 6% higher than FY '22. And the company's operating EBITDA margin reflected strong seasonal trading conditions. In terms of the company's financial results, we expect to benefit from favorable demographics in Australia and New Zealand, a strong funding position and acquisitions completed and announced to date and other potential future acquisitions. However, it should be noted that death volumes fluctuate over short time horizons. Higher inflation is expected to impact funeral-related pricing and costs, and ongoing impacts from COVID-19, particularly on death volumes, remain uncertain. In conclusion, and as I summarized at the outset, I think the 3 key takeaways from our presentation today are, one, FY '22 was another record year for Propel. The company achieved continued growth in key financial and operating metrics despite COVID-19 impact on the back of materially higher funeral volumes and stronger average revenue per funeral growth in the second half of the year compared to the lockdown impacted first half. Two, it was a busy year in terms of corporate and M&A activity, with Propel completing the management internalization and 6 new acquisitions, expanding and extending the company's debt facilities and successfully raising equity from existing and new shareholders. And three, Propel has started FY '23 with positive trading momentum. With healthy operating margins, conservative gearing and a strong funding position, Propel remains well placed to navigate the higher inflationary and interest rate environment and to continue consolidating what is a highly fragmented and essential service industry with favorable demographic tailwinds. With that, I'll hand back to the moderator to invite questions.

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

And firstly, congratulations on a good result today. A couple of questions from me, if I may. So firstly, just on your organic volume growth. This has come in strongly, and I suppose in line with that market growth as well. With high volumes at present, I mean, any sense of you sort of gaining market share in organic volumes, specifically in those states where you have higher presence?

Look, I think -- Chami, thanks for your question. I think there are certain -- certainly pockets across our network where we feel as though we've gained some market share, but nothing I'm going to call out.

And then secondly, the average revenue per funeral for July looks strong. Are you able to talk to how much of this is the funeral mix versus then pricing?