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

Thank you for standing by, and welcome to the Propel Funeral Partners Limited First Half FY '23 Results Briefing. [Operator Instructions] I'd now like to hand the conference over to Mr. Albin Kurti, Managing Director. Please go ahead.

Thanks, Darcy. Good morning, everyone, and thanks for joining Propel's FY '23 Half Year Results Briefing. First and foremost, I'd like to acknowledge bereaved client families who farewelled love ones during the first half of FY '23. And I would also like to recognize the hard work of our dedicated staff in Australia and New Zealand. Their professionalism, flexibility and commitment to providing essential and caring funeral and related services to the communities they serve is greatly appreciated. Turning to today's presentation. With me are my colleagues, Lilli Gladstone and Fraser Henderson, and together, we'll take you through the presentation lodged with the ASX this morning. In terms of the agenda, I'll summarize the key highlights of the first half of FY '23, 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, Propel achieved continued growth in key financial and operating metrics during the first half of FY '23 on the back of materially higher funeral volumes and stronger average revenue per funeral growth compared to the lockdown-impacted PCP. Secondly, Propel remained active on the M&A front, netting approximately $44 million on 5 acquisitions so far in FY '23. And thirdly, with a strong funding position, Propel remains well positioned to continue consolidating what is a highly fragmented and essential service industry with favorable demographic tailwinds. Please turn to Slide 6, the key highlights. First half revenue increased 23.3% to $83.8 million on the back of a 14.3% increase in funeral volumes, including contributions from acquisitions, with comparable funeral volumes up 5.2% despite cycling a strong PCP. Average revenue per funeral increased 7.5% and 8.3% on a comparable basis, reflecting a higher mix of full-service funerals compared to the lockdown-impacted PCP and pricing. Propel continued to grow earnings. Operating EBITDA increased 25.6% to $23.1 million, and operating NPAT increased 34.9% to $11 million. Cash flow conversion remained strong at circa 99%. On a capital management perspective, the Board has declared an interim dividend of $0.071 per share fully franked, up 18.3% and reflecting a payout ratio of 75%. And Propel ended the first half with a gearing ratio of 19%, and has available funding capacity of $97 million, which will support Propel's acquisition-led growth strategy. In terms of growth, during the first half, the company completed 3 new acquisitions in Queensland, Victoria and New Zealand, and subsequent to 31 December, completed a further acquisition in New Zealand and signed a binding sale agreement to acquire a long-established multisite funeral services provider in South Australia. And since its IPO in November 2017, Propel has committed over $190 million on acquisitions. Fraser will provide an acquisition update shortly. In terms of the outlook, Propel has made a positive start to the second half of FY '23 and expects to benefit from favorable demographics in Australia and New Zealand, strong funding position and 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 provide an overview of the business. Turning to Slide 8. This slide illustrates how Propel's network has evolved over the past 9.5 years. We started with 1 funeral home in Queensland, and today, we operate from 152 locations across Australia and New Zealand, including 35 cremation facilities and 9 cemeteries. Of those 152 locations, the company owns 83 of the properties, which are held at cost on the balance sheet at approximately $142 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, Davis Funerals has operated in and around Auckland since 1875. The dotted lines show the brands relating to acquisitions completed or announced so far in FY '23. These brands are an important part of the goodwill of each business. The chart on Slide 10 illustrates Propel's historic growth in funeral volumes and revenue. As you can see on the left, the company performed over 9,000 funerals in the first half, up 14.3% on the PCP, reflecting contributions from acquisitions and material growth in comparable funeral volumes, despite cycling strong growth in the PCP. The chart on the right shows that Propel generated revenue of $83.8 million, up 23.3%. The charts on Slide 11 illustrate Propel's historic growth in operating earnings. As you can see on the left, the company generated operating EBITDA of $23.1 million in the first half, up 25.6%. The chart on the right shows that Propel generated operating NPAT of $11 million, up 34.9%. The chart on Slide 12 shows Propel's average revenue per funeral since FY '14, which has grown at a compound annual growth rate of 2.9%. In the first half of FY '23, average revenue per funeral was stronger, up 7.5%, and up 8.3% on a comparable basis, reflecting a higher mix of full-service funerals compared to the lockdown-impacted PCP and pricing. Turning to Slide 13. Cash conversion continues to be a key focus. As you can see from this chart, Propel's cash conversion has remained consistently high, averaging approximately 99% since FY '15. In the first half of FY '23, cash conversion remained stable at 99%, 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 31 December 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 and who retained their shareholding as at 31 December 2022, Propel has generated a total shareholder return of approximately 72% on a pretax basis, including dividends. This equates to total shareholder value accretion since the IPO of approximately $246 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 first half financial results.

Thanks, Albin, and good morning, everyone. Today, I will cover 5 key areas. Firstly, I'll provide an overview of Propel's first half results for an analysis of the income statement. Secondly, I'll touch on key growth drivers of revenue, operating earnings and margins. Thirdly, I'll provide an analysis of the cash flows. I'll then touch on the balance sheet and wrap up with capital management. Please turn to Slide 16. Propel generated revenue of $83.8 million in the first half, an increase of 23.3% on the PCP. The increase was driven by strong organic growth, with full period contributions of 6 acquisitions completed in FY '22, and the past period contributions of 3 acquisitions completed during the reporting period. Propel reported a gross margin of 70%, which was below the PCP, but in line with pre-COVID gross margins and reflects a higher mix of full-service funerals compared to the lockdown-impacted PCP and recent acquisitions. The company generated operating EBITDA of $23.1 million in the first half, 95.6% higher than the PCP. This growth demonstrates positive operating leverage, resulting in margin expansion of circa 50 basis points. In terms of other items of note on the income statement, acquisition costs totaled $0.8 million and were in line with the PCP, and net interest expense was 11% higher than the PCP, primarily relating to higher interest rates, partially offset by lower net debt for part of the period. Propel generated operating NPAT of $11 million in the first half, 34.9% higher than the PCP. The weighted average number of shares on issue during the reporting period was 10% higher than the PCP, resulting in operating earnings per share growing approximately 23%. The waterfall on Slide 17 sets out the sources of revenue growth on the PCP. The chart shows the full period contributions of acquisitions made in the PCP, the contributions of acquisitions completed during the year and organic growth the business has held for the comparable period. As you can see from the comments on the bottom left of the slide, in the first half, funeral volumes increased 14.3%, including contributions from acquisitions. Average revenue per funeral increased 7.5%, impacted by pricing, funeral mix and recent acquisitions. Business design during the comparable period experienced a 5.2% increase in funeral volumes, like cycling material growth of 7.8% in the PCP. Comparable average revenue per funeral was strong, up 8.3%. This, combined with the volume growth, contributed to organic revenue growth of circa 15% over the PCP. As you can see on the bottom right of this slide, the operating EBITDA margin increased to 27.6%, 50 basis points above the PCP. Margin was positively influenced by operating leverage from a material increase in comparable funeral volumes and average revenue per funeral, partially offset by funeral mix and recent acquisitions. Moving to Slide 18. Operating cash flow increased 17.2% on the PCP, driven by contributions from acquisitions and strong trading. Cash flow conversion remained strong at 99.2%. In respect of investing activities during the first half, Propel deployed $10.7 million in cash in connection with acquisitions, and $1.4 million relating to earn-out payments, incurred capital expenditure of $6.8 million. Maintenance CapEx amounted to 3.9% of revenue, in line with the PCP. The financing activities during the period largely reflects the proceeds from senior debt to fund acquisitions and dividends paid. Moving to Slide 19. There are 3 main points to mention on the balance sheet. As at period end, Propel had net debt of approximately $61 million, circa $20 million higher than the start of the period. Two, the 82 freehold properties owned by Propel on 31 December 2022 were held at cost, less depreciation of approximately $142 million. And three, Propel's prepaid contract funds totaled $53.3 million, which are largely invested with third-party friendly societies who primarily invest the funds in cash and fixed interest products. 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. Difference between those 2 amounts is recognized in the income statement. Contract earned at need when the service is delivered. At that time, revenue is recognized and the liability is extinguished. Consistent with the PCP, prepaid contracts that turned at need in Australia accounted for less than 10% of the group's Australian funeral volumes during the reporting period. Turning to Slide 20. In respect of capital management, Propel's $200 million senior debt facility, which matures in October 2024, was drawn to $67.1 million as at 31 December 2022. After allowing for funds required for the interim dividend declared today of $0.071 per share, and binding commitments on acquisitions totaling $33.5 million, Propel has available funding capacity of $97 million. And as at 31 December 2022, Propel remains comfortably in compliance with its debt covenants, reporting a net leverage ratio of 1.2x, well below its limit of 3.5x. 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 22, 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, the ABS forecasted death volumes will increase by 3.1% per annum from 2021 to 2032, and 1.9% per annum from 2032 to 2050. Whereas in New Zealand, Stats NZ forecasted death volumes will increase by 1.6% per annum from 2022 to 2033, and 1.7% per annum from 2033 to 2050. Few industries have the benefits of this 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 23 shows how Propel's estimated market share in Australia, based on the number of deaths recently projected by the Australian government. And the actual number of funerals performed by Propel in Australia in 2022, has grown from circa 1.2% in 2015 to circa 7.6% in 2022. However, it is worth noting that notwithstanding that significant increase, it is estimated that circa 70% of the market is still owned by entities other than Propel and the largest operator. Turning to Slide 24. 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 $192 million on acquisitions. During the first half of financial year 2023, Propel deployed approximately $11 million on business acquisitions and properties in New Zealand, Queensland and Victoria. Subsequent to 31 December 2022, Propel deployed and/or committed approximately $33 million, executing a conditional sale agreement to acquire Alfred James & Sons, a multisite funeral services provider, which has operated in and around Adelaide for over 100 years, and completing the acquisition of Seddon Park Funeral Home, which operates in and around Hamilton, which is New Zealand's fourth most popular city. 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 achieved material growth in key financial and operating metrics in the first half of FY '23. 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, together with nonexecutive directors owning approximately 19% 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 and a favorable sector thematic and is well funded. In terms of the outlook, 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. Encouragingly, Propel's positive trading momentum in the first half of FY '23 has continued into the start of the second half. In the month of January 2023, revenue was materially higher than the PCP, reflecting higher average revenue per funeral and continued growth in total and comparable funeral volumes, despite the funeral industry cycling a strong PCP. In terms of the company's financial results for the remainder of FY '23, we expect to benefit from favorable demographics in Australia and New Zealand, the company's 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. And during 2023, Propel will cycle strong comparable funeral volume growth in the PCP. Higher inflation is expected to impact funeral-related pricing and costs, and ongoing impacts of COVID-19, particularly on life expectancy and death volumes, remain uncertain. In conclusion, and as I summarized at the outset, the 3 key takeaways from today's presentation are: one, Propel achieved continued growth in key financial and operating metrics during the first half of FY '23, on the back of materially higher funeral volumes and stronger average revenue per funeral growth compared to the lockdown-impacted PCP; two, Propel remained active on the M&A front, committing approximately $44 million on 5 acquisitions so far in FY '23; and three, with a strong funding position, Propel remains well positioned 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.

Congratulations on another good result. Just wanted to ask you 2 quick questions. I mean, firstly, on the comparable average revenue. So that looks strong, especially on a comparable basis. How has the average revenue per funeral trend being into the second quarter? And what are the key drivers here in terms of timing of price increases and then the full services mix as well?

Chami, thanks for your question. So you're right, it was a strong organic average revenue per funeral growth in the half at 8.3% on what was a lockdown-impacted prior corresponding periods. So I think that's the first point to make. In terms of the -- what we've seen in January, certainly, average revenue per funeral from a comparable point of view has comped positively. And January last year was actually a pretty solid month for us. So we're quite encouraged by that, but it's only 1 month. In terms of the factors that can impact it, clearly, it's impacted by what I mentioned earlier, which is the lockdown that occurred the previous -- in the PCP, the profile of recent acquisitions and price increases, and we are in a higher inflationary environment. And some of our businesses have increased prices at the start of January to reflect some increased costs that have come through.

That's great. And maybe perhaps just in terms of volumes, as you said, it's the most uncertain aspect, I suppose. But some of the U.S. peers are talking about expectations for another volume decline in 2023, fully acknowledge that Australia didn't have that excess deaths, as did the U.S., but do you see any leading indicators to the Australian market? And how are you sort of thinking about slightly maybe 12 to 18 months on the debt volume trend?

Yes. That's a really interesting question, Chami. I mean it's -- I suppose it's probably the key question really, and there is uncertainty around volumes. I suppose there's 2 schools of thought. The data, when we look at it, suggests that we haven't yet experienced anything like the spikes in death volumes that have occurred in other countries. And you referenced the U.S. as one example. And when we look at -- when we compare death volumes in calendar year 2022 versus the full year prior with COVID, i.e., calendar year 2019, in the U.S., even though there was a 19% spike in the first year of the pandemic, deaths in 2022 were still 9% higher than in 2019. It's a similar story in the U.K., whereas in Australia, we actually experienced a decline of 5% in death volumes in the first year of the pandemic. And death in 2022, based on the provisional data from the ABS, were only about 7% higher than 2019 levels. That -- so it's entirely possible that death volumes remain stronger for longer. That's one end of the spectrum. The other end of the spectrum is over the next 12 to 18 months, we will cycle stronger growth in the PCPs, and there may be moderation in organic volumes. If that was to occur, we obviously have the cushioning impact of the contributions from the acquisitions that we've announced so far in FY '23 and other potential future acquisitions that we may complete.

Your next question comes from James Bales from Morgan Stanley.

Congrats on the result. I just had a couple of questions. You called out on the average price the impact of mix post-COVID as well as your own price increases. Could you perhaps give us a split of what accounted for each or what the relative impacts were in getting to the 8.3% like-for-like price increase?

James, Lilli here. So just in round numbers, just roughly just over half of that related to pricing and just under half related to mix.

Okay. Great. And then I also wanted to understand your thoughts in terms of the volume impact that you expect in the second half from the acquisitions that you have completed year-to-date, and also what you expect in terms of incremental EBITDA contribution from that M&A activity?

I don't think we've been specific about that contribution expectation in the second half, James. But I think you can make some assumptions around the volumes that we have disclosed in our various ASX announcements. I think our most recent acquisition announcement early last week indicated that those acquisitions had generated roughly $12 million in revenue in the most recent financial years. I think that gives you some guide for revenue contribution. Clearly, one of those acquisitions, we expect to complete during the fourth quarter. So you need to probably make some assumptions around timing. But hopefully, that gives you a steer. I know I'm not answering your volume question specifically, but hopefully, I'm giving you some color around possible revenue contribution, and you can make your own assumptions around earnings margins.

[Operator Instructions] Your next question comes from Piers Flanagan from Barrenjoey.

Just a couple from me, and maybe just firstly on the M&A landscape. Just interested out there at the moment with higher volumes across the industry, just how conversations are going, sort of on your expectations around sort of potential multiples struck at current earnings versus looking at sort of a more normalized earnings base.

Fraser here. I think we've sort of consistent -- I mean, obviously, we've been in the industry now for 16 or 17 years, and those multiples have not changed. And then from our perspective, we sort of look at what we think is maintainable earnings. And therefore, to sort of determine that, we look at historicals as well as current. And so I think if in the same vein, if we try to price businesses on what they were achieving during COVID, it would have been a pretty short conversation with the vendor. And similarly, if they were trying to sort of price their maintainable number on the current ratio, even with higher average revenue per funeral and higher volume, it would be a pretty short conversation from our perspective. So I think both sides are, most times, rational and reasonable and sort of try to look through those short-term impacts.

Sure. And then maybe just really on the operating leverage that was shown in the first half. Can you maybe just talk about sort of how you're thinking about that leverage in volumes sort of do revert or do slow down of sort of a high number at the moment. Just I'm thinking about sort of the labor availability between casual and permanent?

So Piers, obviously, that operating leverage was positive in the first half. I think 1.2x, meaning the operating EBITDA growth was higher than the revenue growth. And your point is right there around the fixed cost nature of the business. So if you're getting the revenue growth from a volume and a pricing perspective on a fixed cost base, that's obviously where you get the operating leverage. From an employment sort of cost perspective, we were pretty pleased with our results there. The comparable deployment cost per funeral was flat on the PCP, but that is reflective of those, obviously, higher comp volumes. In terms of our split of full-time staff versus casual, so there's roughly 30% of our staffing base are casual, so that's where we can flex up when we need to in a higher-volume environment, and obviously flex down if we need to in a lower-volume environment. So that gives you some color on how we flex the largest OpEx line in our P&L.

There are currently no further questions at this time. I'll now hand the call back to Mr. Kurti for any closing remarks.

Thanks, Darcy, and thank you all for joining today's call. Lilli, Fraser and I look forward to catching up with some of you over the coming days and to providing further updates on the company's progress as and when appropriate. Thanks, everyone.

That does conclude our conference for today. Thank you for participating. You may now disconnect.