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

Hello and good day. My name is Jordan, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Propel Funeral Partners Limited FY '23 results briefing. [Operator Instructions] Managing Director, Albin Kurti, you may begin your conference.

Thanks, Jordan. Good morning, everyone, and thanks for joining Propel's FY '23 full year results briefing. First and foremost, I would like to acknowledge grieved client families who farewelled love ones during FY '23. I also acknowledge and recognize the hard work and dedication of our staff across 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 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, FY '23 was another record year for Propel. The company achieved continued growth in key financial and operating metrics on the back of materially higher funeral volumes and stronger average revenue per funeral. Secondly, it has been a busy period of corporate and M&A activity with Propel expanding its debt facilities and announcing 9 acquisitions during and since FY '23, which significantly broadened the company's network in new and existing metropolitan and regional markets across Australia and New Zealand. And thirdly, having committed $121 million on acquisitions in the past 12 months, Propel expects to deliver continued growth in FY '24 and is well placed to navigate natural fluctuations in the death rate, the higher inflationary and interest rate environment and to continue consolidating, what is a highly fragmented and essential service industry that stands to benefit from the aging population for decades to come. Please turn to Slide 6 for the key highlights. Revenue increased 16% to $168.5 million on the back of a 9% increase in funeral volumes, including contributions from acquisitions and organic growth volume, despite cycling a strong prior year. Average revenue per funeral increased 6% and on a comparable basis, was up 7%. Propel continued to grow earnings. Operating EBITDA increased 18% to $46 million and operating NPAT increased 17.9% to $20.9 million. Cash flow conversion remained strong at over 95%, which is pleasing. From a capital management perspective, the Board has declared a final dividend of $0.069 per share fully franked, resulting in total dividends of $0.14 per share fully franked in connection with FY '23, up 14.3% on the prior year and reflecting a payout ratio of 79%. During FY '23, the company expanded its senior debt facilities by $55 million to $255 million, and importantly, the debt maturity date was extended to October 2027 and the key covenant limit was increased. And Propel ended the year with a gearing ratio of 27% and net leverage ratio of 1.7x and has available funding capacity of $87 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 added 15 locations to its network in FY '23, completing 5 new acquisitions in Queensland, Victoria, South Australia and New Zealand. Subsequent to year-end, Propel has completed 3 acquisitions, adding 21 locations to its network and expects to complete a previously announced acquisition in the coming weeks. Propel has now committed $269 million on acquisitions since its IPO in November 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 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 company's outlook and guidance for FY '24 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 10 years. We started with 1 funeral home in Queensland, and today, we operate from 180 locations across Australia and New Zealand, including 37 cremation facilities and 9 cemeteries. Of those 180 locations, the company owns 107 of the properties, which are held at cost on the balance sheet at $212 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 and announced during and since 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 18,000 funerals in FY '23, up 9% on the prior year. The chart on the right shows that Propel generated revenue of $168.5 million, up 16%. 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 $46 million in FY '23, up 18%. The chart on the right shows the Propel generated operating NPAT of $20.9 million, up 17.9%. 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 3%. In FY '23, average revenue per funeral increased 6% and on a comparable basis by 7%. 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 since FY '15. In FY '23, cash conversion remained strong at over 95%, which is pleasing. 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 issued price of $2.70. And as you can see from the chart on this slide, as at 30 June 2023, Propel's share prices 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 30 June 2023, Propel has generated a total shareholder return of approximately 71% on a pretax basis, including dividends. This equates to total shareholder value accretion since the IPO of $241 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. Today, I will cover 5 key areas. Firstly, I'll provide an overview of Propel's FY '23 results for an analysis of the income statement. Secondly, I'll touch on key growth 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 wrap up with capital management. Please turn to Slide 16. Propel generated revenue of $168.5 million in FY '23, an increase of 16% on the prior year. The increase was driven by the full year impact of 6 acquisitions completed in FY '22 and the part year impact of 5 acquisitions completed during FY '23. Furthermore, the performance was impacted by stronger average revenue per general and comparable volume growth. Propel reported a gross margin of 70.1%, which was 50 basis points below FY '22, but in line with pre-COVID gross margins. It reflects a higher mix of full-service funerals compared to the prior year and the financial profile of recent acquisitions. The company generated operating EBITDA of $46 million in FY '23, an increase of 18% on the prior year. The increase was due to contributions from 11 acquisitions completed during FY '22 and FY '23 and positive operating leverage, which led to Propel expanding its operating EBITDA margin 45 basis points to 27.3%, despite the higher inflationary environment. In terms of other items of note on the income statement. Depreciation increased circa 10% due to acquisitions. Net interest expense increased circa of $1.5 million, reflecting higher drawn debt relating to acquisitions and higher interest rates, noting the average effective interest rate on drawn debt in FY '23 was 5.1%. And acquisition costs totaled $1.6 million. Propel generated operating NPAT of $20.9 million in FY '23, up 17.9% on the prior year, resulting in operating earnings per share of $0.177. The adjusted effective tax rate was 29.6%. The waterfall on Slide 17 sets out the sources of revenue growth on the prior year. The chart shows the full year impact of 6 acquisitions made in FY '22, the part year impact of the 5 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, total funeral volumes increased 9% and average revenue per funeral increased 6%. In terms of organic growth in the center of this slide, comparable businesses experienced a circa 1% increase in funeral volumes and a circa 7% increase in average revenue per funeral. These 2 factors contributed to organic revenue increasing by circa 8% on FY '22. As you can see on the bottom right of this slide, the operating EBITDA margin was 27.3%, 45 basis points above the prior year. The margin was positively influenced by growth in comparable funeral volumes, average revenue per funeral and good cost control despite the higher inflationary environment. These factors led to positive operating leverage. Moving to Slide 18. The ungeared pretax operating cash flows were 7.2% higher in FY '23, influenced by contributions from acquisitions and strong trading, partially offset by working capital movements. Cash flow conversion remained strong at circa 95.4%. In respect of investing activities during the year, Propel deployed $43 million in cash in connection with acquisitions and $1.5 million relating to earn-out payments, and incurred net capital expenditure of $12.4 million, including growth projects. Net mix CapEx amounted to 4.1% of revenue. The financing activities largely reflect the proceeds from senior debt to fund acquisitions and dividends paid during the year. Moving to Slide 19. There are 3 main points on the balance sheet. One, as at year-end, Propel had a net debt of approximately $94 million; Two, freehold properties owned by Propel are held at cost at approximately $175 million, noting that an additional $37 million of properties has been acquired subsequent to 30 June; And three, Propel's prepaid contract funds totaled approximately $64.5 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, prepaid contracts that turned out need in Australia accounted for less than 10% of the group's Australian funeral volumes consistent with the prior year. Turning to Slide 20. In respect of capital management, during the year, Propel expanded its senior debt facilities to $255 million, which mature in October 2027. After allowing for binding commitments on acquisitions and the planned sale of 2 surplus properties, Propel has available funding capacity of $87 million. Propel remains comfortably in compliance with its debt covenants, reporting a net leverage ratio of 1.7x against a covenant limit of 4x. And finally, Propel declared fully franked dividends totaling $0.14 per share into FY '23, up from $0.1225 per share 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 graph on Slide 22, 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. Death volumes is the most significant driver of revenue in the death care industry. In Australia, death volumes grew by 0.8% per annum between 1990 and 2019, and the ABS forecast will increase by 2.4% per annum from 2023 to 2030 and 2.5% per annum from 2030 to 2040. Whereas in New Zealand, death volumes grew by 0.8% per annum between 1990 and 2019 and stats in death forecast that they will increase by 1.8% per annum from 2023 to 2030, and 2.1% per annum from 2030 to 2040. Please note that we've excluded 2019 to 2022 from the historic CAGR I've highlighted on this slide due to COVID-19 impact during those years. Few industries have the benefits of the certainty of this sort of tailwind. However, death volume growth did 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 reported number of deaths performed and provisional ABS data on Australia death in calendar year 2022, has grown in the last 8 calendar years from circa 1% in 2015 to circa 8% in 2022. However, it is worth noting that notwithstanding that significant increase, circa 71% of the market in Australia 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 $269 million in acquisitions, including $121 million in the last 12 months, of that $121 million, approximately 60% related to the purchase of real estate. Since 1 July 2023, Olsens in Sydney, Jay Fraser Invercargill and Harbour City Funeral Home in Wellington have joined Propel's network and it is expected that Terry Longley & Son, which operates from Havelock North in New Zealand will do so in the coming weeks. Together, these businesses, which include 2 cremation facilities have allowed us to enter 4 new markets including 2 major cities. 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 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 stance the benefit from favorable long-term 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 in 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. Having committed $121 million on acquisitions in the past 12 months, over 80% of which has been deployed since April. The company has elected to provide FY '24 guidance for revenue in the range of $200 million to $220 million and operating EBITDA in the range of $54 million to $60 million. As you would appreciate, this guidance is based on a number of assumptions and currently available information, including recent trading, inflation expectations and barring any unforeseen events. In terms of acquisitions, the guidance includes full year contributions from 5 acquisitions completed in FY '23 and part year contributions from 4 acquisitions in FY '24. Importantly, any further acquisitions completed in FY '24 should be incremental. In terms of volumes, the guidance assumes the company performs 21,000 to 23,000 funerals in FY '24. Although it's still early in the new financial year, recent trading indicates that Propel is on track, with the company performing a record number of funerals in the month of July, which did not include contributions from an acquisition completed last week, and a previously announced acquisition, which is expected to complete in the coming weeks. Given natural fluctuations that occur in the death rates over short time horizons, and ongoing uncertainty regarding COVID-19 impacts, it is important to note that during the first half of FY '24, the company will cycle a strong PCP organic volume growth but expects to cycle weaker PCP organic volumes during the second half of the financial year. And finally, average revenue per funeral growth is expected to exceed the company's long-term CAGR of 3% in FY '24 with stable market share and funeral mix also assumed. In conclusion, and as I summarized at the outset, I think the 3 key takeaways from our presentation today are: One, FY '23 was another record year for Propel. The company achieved continued growth in key financial and operating metrics on the back of materially higher funeral volumes and stronger average revenue per funeral. Two, it has been a busy period of corporate and M&A activity with Propel expanding its debt facilities and announcing 9 acquisitions during and since FY '23, which significantly broadened the company's network in new and existing metropolitan and regional markets across Australia and New Zealand. And three, having committed $121 million on acquisitions in the past 12 months, Propel expects to deliver continued growth in FY '24 and is well placed to navigate natural fluctuations into the death rate, the higher inflationary interest rate environment and to continue consolidating what is a highly fragmented and essential service industry that stands to benefit from the aging population for decades to come. With that, I'll hand back to the moderator to invite questions.

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

And a good result today Lilli and Fraser. Just to start off with the July performance or July sort of trading that you have given. Looking at the industry numbers up to April, it seems to be that you have outperformed the industry decline in the second half and July was a very strong month in the PCP. Just keen to understand how the volume decline here has been and if you have been able to manage to continue that outperformance in July?

Chami. As I called out in the outlook commentary, we performed a record number of funerals in July. And that did not include any contribution from Harbour City, which we generally settled last Friday, i.e, in August, nor did it include any contribution from Terry Longley, which as Fraser touched on is expected to complete in the coming weeks. So I think to your point, if you look at our second half of FY '23, we actually think our organic volumes held up pretty well. They declined by slightly less than 4%, which considering industry volumes in Australia declined by over 5% between 1 January and 30 April according to the ABS, we actually think they held up pretty well. But Yes. So we feel pretty good about how our trading has been in July, all things considered.

Albin, and secondly, I mean, really good to see that strong guidance or the range of guidance that you have provided today. Could I just -- said there to what the assumptions are for the lower end and the higher end would be?

Yes. So I mean, I think we've provided some -- we've tried to be pretty transparent around the assumptions in terms of guidance. The guidance range that we've provided, Chami. Clearly, and as I called out, the company performed circa 18,000 funerals in FY '23 and the FY '24 guidance assumes 21,000 to 23,000 funerals, including acquisition contribution. So from the midpoint of that total funeral volume, the upper and lower and bookends are within sort of 5% of the midpoint. In terms of organic volumes, we're not expecting a material movement up or down in comparable funeral volumes in FY '24. And that said, natural fluctuations occur in the death rate over a short time period. And as I pointed out during the presentation, it is important to note that during the first half of FY '24, the company will cycle strong PCP organic volume growth of positive 5%, but expects to cycle weaker PCP organic volumes during the second half of the financial year, which experienced a decline of 4%. So swings in organic volumes during the course of the year are to be expected. But as I said, we're not expecting a material movement up or down across the full year, but obviously, time will tell.

That's great. Albin maybe lastly, I mean, the 3% average revenue per funeral between the FY '24 guidance looks pretty good. How are you thinking about the operating leverage in the business between the current labor cost environment and also some of the price increases taken in July?

Chami. Lilli here. So from an operating leverage perspective, obviously, in '23, we had the benefit of those comparable funeral volumes being positive and the growth in average revenue per funeral was obviously stronger than what we experienced in the cost base. And obviously, what we talked about in February was some of our suppliers putting through out-of-cycle increases. But I guess, 3 points that are relevant to the '24 guidance is that we typically apply a measured approach to passing on those cost increases to our client families through pricing. I think 1 of the key points in the '23 results was the fact that our employment cost as a percentage of revenue and our occupancy cost as a percentage of revenue were actually lower than they were in FY '22. So I think that was a great sort of outcome considering the inflationary environment. And then obviously, in '23 as well, we didn't see any deterioration in that operating margin. We actually saw it expand. So I think we feel good about the pricing power of the industry.

Your next question comes from the line of James Bales from Morgan Stanley.

I guess the first 1 is, it appears that it's definitely gotten tougher for the industry in the second half in lower volumes. Have you guys seen any change in M&A multiples or vendors willingness to transact?

James, thanks for your question. I mean, I think probably no is the short answer. I mean, I think we have been busy, but I think they're not acquisitions and partnerships that we've created overnight. There have been long-standing relationships that we've been building over the many, many years. And in terms of pricing, I think we would still say, we pay within a range of tolerance, and obviously, it's the upper end of that range when the larger multi-site businesses with real estate and cremators, but no real contraction on multiples or expansion. And in terms of the pipeline, it's similar to what we say each time. It's active. It's -- and we're confident and pleased with those people that are wanting to join our growing network.

Got it. And then Lilli, you mentioned the cost of debt earlier in the call at 5.1% for FY '23. How should we think about that into FY '24?

Yes. So James, obviously, from an interest perspective, we disclosed that, that average effective interest rate was 5.1% in FY '23. But I won't sort of speculate on what interest rates will or won't do in FY '24. But I guess, we have given some good color in our presentation around what the pro forma net debt amount is after we complete the acquisitions that we've announced. And obviously, that effective interest rate gives you some color on the margin as well. So I think you can kind of make an educated assumption on what that means for interest costs, James, just noting that there's obviously also a line fee of 75 bps on the undrawn debt as well.

Okay. That's helpful color. And then is there any scope for recycling some of the capital or finding alternative sources? And the sort of volume or the value of property keeps going up, and it's something that obviously has long-term strategic value, but potentially, it could sort of accelerate lower cost forms of funding for M&A. Is that something that's on the radar at all?

James, it's Albin here. Look, it's not something we would rule out. As you would appreciate, capital management is something that is a standing agenda item for the Board, and it's something that the Board regularly considers. You may have picked up that there are 2 small surplus properties that we -- that are available for sale at the moment are held for sale, which we expect to liquefy in the coming months. There may be opportunities to do -- to liberate other capital. But nothing that we're actively pursuing in this half other than the 2 that I've mentioned, but that is optionality that exists within our balance sheet.

And obviously Albin, those properties are there for sale or price is higher -- materially higher than the cost price.

And can you give us some context on why you've decided to sell those and why you think that they don't belong in the portfolio?

Yes, sure, James. So of the 2, 1 of the properties is vacant land that is adjacent to 1 of our regional funeral homes that we had toyed with an idea of using but have decided against that. And so it is surplus through requirements. The other is a small metropolitan property that we only very recently acquired. It was 1 of several that was acquired as part of an acquisition that performs a very low number of funerals and is considered noncore. So we identified it as surplus to requirements, but it came with the package, so to speak. It's not something we do lightly.

There are no further questions at this time. I'd like to turn the call back over to Mr. Albin Kurti, for the closing remarks.

Well, 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.

This concludes today's conference call. You may now disconnect.