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

Hello, and welcome to the Propel Funeral Partners Limited 1H FY '24 Results Briefing. [Operator Instructions] I will now turn the conference over to Mr. Albin Kurti, Managing Director. Please go ahead.

Thanks, Sara. Good morning, everyone, and thanks for joining Propel's FY '24 Half Year Results Briefing. First and foremost, I would like to acknowledge brave client families who farewelled loved ones during the first half of FY '24. I also acknowledge and 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, 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 material growth in key financial and operating metrics in the first half of FY '24 on the back of higher funeral volumes and average revenue per funeral as contributions from acquisitions more than offset a material contraction in the industry death volumes, which is expected to be temporary. Secondly, it has been a busy period of corporate and M&A activity with Propel expanding its debt facilities, completing an equity raising and committing $92 million on 8 acquisitions so far in FY '24, which significantly broadened the company's network in new and existing metropolitan and regional markets across Australia and New Zealand. And thirdly, with a strong funding position, Propel is well placed to navigate natural fluctuations in the death rate, the current inflation 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. First half revenue increased 22.8% to $102 million on the back of a 17.4% increase in funeral volumes and a 4.5% increase in average revenue per funeral. Propel continued to grow earnings and maintained a healthy operating margin. Operating EBITDA increased 18.5% to $27.4 million, and pro forma operating NPAT increased 6.7% to $11.7 million. Cash conversion remained strong at over 100%. From a capital management perspective, the Board has declared an interim dividend of $0.072 per share fully franked, representing a payout ratio of 83%. And Propel ended the first half with a pro forma gearing ratio of 20% and has available funding capacity of $172 million, which will support Propel's acquisition and growth strategy. In terms of growth, during the first half, the company completed 4 acquisitions, and subsequent to 31 December 2023, has completed a further 3 acquisitions and signed a binding sale agreement to acquire a long-established multisite funeral services provider in Otago, New Zealand, which is expected to complete in the second half of FY '24. And since its IPO in November 2017, Propel has committed $284 million on acquisitions. Fraser will provide an acquisition update shortly. In terms of our outlook, the company has made a positive start to the second half of FY '24 and expects to benefit from favorable demographics in Australia and New Zealand, its 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 our 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 10.5 years. We started with one funeral home in Queensland, and today, we operate from 187 locations across Australia and New Zealand, including 37 cremation facilities and 9 cemeteries. Of those 187 locations, the company owns 113 properties, which are held at depreciated cost on the balance sheet at $223 million. Slide 9 shows Propel's main operating brands in Australia and 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 or announced to date in FY '24. These brands are an important part of the goodwill of each business. The charts on Slide 10 illustrates Propel's historic growth in funeral volumes and revenue. As you can see on the left, the company performed over 10,600 funerals in the first half of FY '24, up 17.4% on the PCP. The chart on the right shows that Propel generated half year revenue of $102.9 million, up 22.8%. 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 $27.4 million in the first half, up 18.5%. The chart on the right shows that Propel generated pro forma operating NPAT of $11.7 million, up 6.7%. 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 3.1%. In the first half of FY '24, average revenue per funeral was stronger, up 4.5% and up 6% on a comparable basis. 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 '24, cash conversion remained strong and stable at approximately 101%, which is pleasing. Propel is now the only listed death care company on the ASX. And before I hand over to Lilli, I want to briefly touch on the company's performance since its IPO. The company listed in November 2017 with an issue price of $2.70. And as you can see from the chart on this slide, as at 31 December 2023, Propel's share price has materially outperformed the ASX 300 Index. For investors who participated in Propel's IPO and subsequent share issues and who retained their shareholding as at 31 December 2023, Propel has generated a total shareholder return of approximately 107% on a pretax basis, including dividends. This equates to total shareholder value accretion since the IPO of $368 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. Propel delivered a resilient result in the first half despite a material contraction in industry death volume. Contributions from acquisitions resulted in growth in key financial metrics, which I'll touch on shortly. Today, I will cover 5 key areas. Firstly, I'll provide an overview of Propel's first half results for an analysis of the pro forma income statement. Secondly, I'll touch on key drivers of revenue, operating earnings and margin. Thirdly, I'll provide an analysis of the cash flows. I'll then touch on the balance sheet and wrap up with capital management. Please turn to Slide 16. Propel generated revenue of $102.9 million in the first half, an increase of 22.8% on the PCP. The increase was driven by the full period contributions of 5 acquisitions completed in FY '23, with part period contributions of 4 acquisitions completed during the reporting period, a circa 6% increase in comparable average revenue per funeral, partially offset by contraction in the industry death volumes. Propel reported a gross margin of 69.4% impacted by the gross margins of recent acquisitions. However, the gross margin on a comparable basis exceeded 70%. The company generated operating EBITDA of $27.4 million in the first half, 18.5% higher than the PCP. In terms of other items of note on the income statement, we've elected to disclose relevant numbers on a pro forma basis, reflecting the impacts of the capital raising announced in January this year, including lower interest expense and expanded share capital, as if it has occurred on the 1st of July 2023. As a result, pro forma net interest expense was circa $1.6 million higher than the PCP, reflecting higher drawn debt and interest rates. The average effective interest rate was 6.1%. Propel generated pro forma operating NPAT of $11.7 million in the first half, 6.7% higher than the PCP, noting that operating earnings per share was impacted by industry volume headwinds, higher interest expense and expanded share capital, partially offset by contributions from acquisitions. In terms of nonoperating items, acquisition costs totaled $1.9 million, including stamp-duty on business combinations, reflecting the busy M&A period. 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 contribution of acquisitions completed during the year and the organic performance of businesses held for the comparable period. As you can see from the comments on the bottom left of this slide, in the first half, funeral volumes increased 17.4%, including contributions from acquisitions. Average revenue per funeral increased 4.5%, impacted by pricing and recent acquisitions. Businesses owned from the -- for the comparable period experienced a circa 6% increase in average revenue per funeral, offset by a 9.8% contraction in comparable funeral volumes. This follows a material growth in 2 consecutive PCPs of circa 5% and 8%, respectively. As you can see on the bottom right of this slide, the operating EBITDA margin was resilient at 26.6%, considering the industry volume headwinds, and operating costs were well controlled during the period. Moving to the statutory cash flow statement on Slide 18. Operating cash flows increased 19.7% on the PCP, driven by contributions from acquisitions. Cash flow conversion remained strong at 100.8%. In respect of investing activities during the first half, Propel deployed $76.2 million in cash in connection with acquisitions and $1.8 million relating to earnout payments and incurred capital expenditure of $8 million. Maintenance CapEx amounted to 6% of revenue. The financing activities during the period largely reflect the proceeds from senior debt to fund acquisitions and dividends paid. Moving to Slide 19. There are 3 main points to mention on the statutory balance sheet. One, as at 31 December 2023, Propel had net debt of approximately $175 million, circa $82 million higher than the start of the period. Two, the 113 freehold properties owned by Propel on 31 December 2023, were held at depreciated costs of approximately $216 million. And three, Propel's prepaid contract funds totaled $75.7 million, which are largely invested in third-party friendly societies who primarily invest 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. 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 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. Our pro forma balance sheet reflecting the impact of the capital raising has been included in the appendix. Turning to Slide 20. In respect of capital management, in December 2023, Propel expanded its senior debt facility limit by $20 million to $275 million. The debt facilities mature in October 2027. After allowing for the estimated net proceeds of the recent capital raising of circa $87 million and binding cash commitments on acquisitions totaling $15 million, Propel has available funding capacity of $172 million and a pro forma net leverage ratio of circa 1.5x against a covenant limit of 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 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 volume is the most significant driver of revenue in the death care industry. In Australia, the ABS forecasts that death volumes will increase by 2.5% per annum from 2023 to 2030 and 2.9% per annum from 2030 to 2040, whereas, in New Zealand, Stats NZ forecasts that death volumes will increase by 1.9% per annum from 2024 to 2030 and 2.1% per annum from 2030 to 2040. A few industries have the benefit of the certainty of this sort of tailwind. However, death volume growth is not necessarily linear and can fluctuate from time to time. The funeral industry is highly fragmented in both Australia and New Zealand, with Propel the second largest in both countries. Slide 23 shows how Propel's estimated market share in Australia based on the provisional mortality statistics provided by the ABS for the 9 months ended 30 September 2023 annualized and the actual number of funerals performed by Propel in Australia in calendar year 2023 has grown from circa 1% in 2015 to circa 9% in 2023. 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. This dynamic is not dissimilar to the New Zealand market, where the majority of funeral home operators are independent. 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 $284 million in acquisitions. And during the first half of financial year 2024, Propel deployed approximately $78 million on business acquisitions and properties in New South Wales and in New Zealand. Subsequent to 31 December 2023, Propel deployed and/or committed approximately $14 million for executing conditional sale agreements to acquire IC Mark, which operates from 2 locations in Levin in New Zealand; Penhall Funerals, which operates from one location in Orange, New South Wales; Howard & Gannon, which operates from one location in Taradale, New Zealand; and Southern Funeral Home, which operates from 5 locations in Otago, New Zealand. Completions of the acquisitions of IC Mark, Penhall Funerals and Howard & Gannon occurred during January, February this year, and the acquisition of Southern Funeral Home is expected to occur during this half of FY '24. Moving forward, Propel will continue to explore other potential acquisition opportunities in what is a highly fragmented industry, 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 '24. 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 16% 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. In terms of the company's financial results for the remainder of FY '24, 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. Historical experience suggests the contraction in industry death volumes in calendar year '23 should be temporary given prior period declines have rebounded quickly, the unusually benign winter flu season and the growing and aging populations in Australia and New Zealand. In that regard, Propel has started the second half of FY '24 with positive trading momentum. In the month of January 2024, revenue growth over the PCP exceeded 25%, reflecting strong growth in total funeral volumes, including contributions from acquisitions and positive comparable funeral volume growth and higher average revenue per funeral. Based on the company's first half results and outlook for the remainder of the financial year, Propel reaffirms its FY '24 guidance, the revenue in the range of $200 million to $220 million and operating EBITDA 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. And it should be noted that death volumes fluctuate over short time horizons and inflation is expected to impact funeral-related pricing and costs. In conclusion, and as I summarized at the outset, the 3 key takeaways from our presentation today are: one, Propel achieved material growth in key financial and operating metrics in the first half of FY '24 on the back of higher funeral volumes and average revenue per funeral as contributions from acquisitions more than offset a material contraction in industry death volumes, which is expected to be temporary. Two, it has been a busy period of corporate and M&A activity with Propel expanding its debt facilities, completing an equity raising and committing $92 million on 8 acquisitions so far in FY '24, which significantly broadened the company's network in new and existing metropolitan and regional markets across Australia and New Zealand. And three, with a strong funding position, Propel is well placed to navigate natural fluctuations in the death rate, the current inflation 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. With that, I'll hand back to the moderator to invite questions.

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

Albin, Lilli and Fraser, firstly, congratulations on the results today. Three quick questions from me. Firstly, good to see the positive comparable funeral volume growth in January. How much sort of a trend -- I know it is a tough question. I suppose to answer more on the volume front. But how much would you sort of articulate this as a trend? And would this imply volumes returning back to possibility?

Look, I think it's important to note that it is only 1 month, but we're certainly -- I think it's an encouraging early sign at the start of the second half of the financial year that the volume pendulum might -- maybe starting to swing back. But as I said, it's only 1 month. So I'm not sure you could call a trend after 1 month. We probably want to see comparable volumes remaining positive for a quarter or 2 to make a trend call.

Perfect. And then secondly, you've noted a bit of inflationary impact there. Have you seen any of this being played out or evident in current pricing and the ability to sort of pass through pricing?

Well, I think like all industries, we're certainly -- our industry is not immune from the inflationary environment that we're currently in and we have experienced over the last 12 to 18 months. But I think our -- I think all things considered, our operating margins held up pretty well. I think we've disclosed that our average revenue per funeral growth in the half was 4.5% and on a comparable basis was 6%. So we feel as though we've demonstrated not only in this half, but over the last 18 months that we've been able to pass through within reason the inflationary cost pressures that we and other companies are confronting.

And Albin -- maybe just to add to that, Chami, obviously, last year we were talking about these out-of-cycle price increases from some of our suppliers. I think it's fair to say, Albin, that we've seen an easing of some of those out-of-cycle increases. So inflation is still elevated, but I think has moderated to a certain extent.

Perfect. And also maybe given that you've got market share in some new geographies, which are key and which should hopefully be material contributors, has the acquisition pipeline or the interest coming from more inbound, has that changed, improved much more? Or how is that going?

I mean, I don't think it's changed materially, Chami. But I think we remain active. The pipeline remains strong. And the number of inbound versus outbound calls sort of -- I suppose that changes slightly over time as we become better known within the industry. But I think each time we do one that probably creates a couple of inbound calls. But yes, I don't think there's been any significant or material change over the last sort of half year or year, but the pipeline itself remains pretty strong. And obviously, our funding position now puts us in a good position there.

Your next question comes from the line of Max Moser-Finch with Barrenjoey.

Could you just please unpack the 25% revenue growth figure for January '24? Should that revenue growth rate continue? Or does the volumes you cycle become easier so the growth should improve just for the rest of the half?

Look, I think -- I think what's important to note about January is that it only included, I think, a day or 2 of contribution from 1 of the 3 acquisitions that we've completed subsequent to 31 December. The other 2 that are completed, I think, were on the 1st or 2nd of February. And there's one that's still yet to complete. So I think that's the first point I'd make. The second point I'd make is that we've disclosed today that organic or comparable volumes in the month of January were positive or turned positive. And so I think if organic volumes remain positive in the second half along with the contributions from the 4 acquisitions that we expect will have been completed by 30 June, then we would expect revenue growth to remain strong in the second half. I think that's probably as clear of a guidance as I can give you on second half revenue growth.

And also out of the 6% organic revenue per funeral growth, how much of that was price and volume? And sort of moving into 2H '24 and beyond, how should we think about the growth, please?

Well, I think what we've set out in our presentation is that our long-term growth in average revenue per funeral, the CAGR has been 3.1%, and that's been tracking upwards over the last couple of years in the higher inflationary environment. We, like everybody, we're obviously monitoring inflation as closely as we can and we're making judgment calls around passing on inflationary impacts. And I think we've done a pretty good job of that over the past sort of 18 months. And as we enter into our budgeting process for FY '25, over the coming months, we'll obviously be making those judgment calls on where inflation is over the coming quarter or 2, what the outlook is into FY '25.

Your next question comes from the line of Sophia Owad with Macquarie.

Congratulations on a great result. Just 2 for me if that's all right. Firstly, on the organic versus acquired volume. So if you look at the acquisitions announced to date in '23 and '24, that implies, on a simple math, about 4,500 in volumes from contributions from the acquisition. So I guess if you could just delve into that a bit more and what your expectations for organic volumes are on the back of that in the second half?

Look, I think the best way to think about it is -- we've disclosed back in August last year that when we look at the first half of FY '23, organic volumes were up materially. I think it was plus 5% in the first half of FY '23 and turned around negative 4% in the second half. So the half we just reported, the first half of FY '24, we've obviously cycled, as Lilli pointed out, not only a strong PCP, but actually 2 consecutive strong PCPs of 5% and 8% organic volume growth. Our expectation is, is that the organic comps will be weaker in the second half. We've seen that play out in January, but it's only 1 month. And time will tell where we end up. And obviously, we'll lay out the data when we report our full year results in August.

Yes. That's great. And maybe following on some of that on margins. So the margin guidance at the bottom end implies about a 27% EBITDA margin. So I guess from a second half perspective, you're expecting an uptick half-on-half?

Sophia, I'll take that question. So obviously, we're pretty pleased to deliver 26.6% for the half, considering where the comp volumes ended up. And just to give you, I guess, a bit of color on the magnitude of that. So a 9.8% contraction in volumes is roughly 900 funerals and 900 funerals at an average revenue per funeral of $8.50 is obviously a revenue swing of about $7.5 million and at an incremental sort of EBITDA margin of 50% to 55%. You're talking about kind of $3 million to $4 million of EBITDA that we obviously didn't achieve in the half. So in terms of the guidance, I think it's important to point out that we were never sort of suggesting it's 54 on 200 or it's 60 on 220, and therefore, you get a margin of basically 27%. There's obviously a range of margins that can come out of that guidance range. But we're expecting the margin to fall in the mid to high 20s, which is consistent with, I guess, the margins we've delivered over a long period of time. So hopefully, that gives you some color.

[Operator Instructions] Your next question comes from the line of James Bales with Morgan Stanley.

Maybe just a follow-up to that last one on margins. So there was a 1% decline year-on-year in a soft volume period. Also, though, it seems like the acquired volumes were dilutive to the average revenue. How much of the -- of that sort of change in average price will feed through permanently to gross margin? Or is there a chance to improve the pricing on the acquired volumes?

So you're right. Obviously, the comparable average revenue per funeral was up 6% and the acquisitions have a downward impact on that. So that can be a range of different factors. But from a gross margin perspective, we obviously had a couple of impacts to that which resulted in a 60 -- sorry, 60 basis points sort of decline from the PCP. So again, those recent acquisitions with lower average revenue per funeral impacted the margin. And some of that is also because some of those businesses don't own their own cremation facilities. But the other thing actually impacting the gross margin was just sales mix, right? So the mix between the revenue from funeral operations and the CemCrem, and in the period, just given with acquired more funeral-related businesses which operate at a slightly lower gross margin, that had an impact on the overall margin. But from a comp perspective, it was good to see the comparable gross margin above the 70%.

Okay. Got it. And then maybe just one on M&A. So you spoke a little bit about pipeline earlier. Has there been any change at all in terms of willingness or urgency to sell and the multiples that you're seeing in terms of transactions in the market?

I mean I think the short answer to both of those questions is no. I mean I think most of these businesses are multigenerational and it's a matter of an event that causes their decision to want to sell or be part of Propel's network. So I don't think things like inflation, interest rates, death rates would be the trigger. So I don't think that has ever been the cause. And then in terms of pricing, again, I think when -- we sort of know what these businesses trade for and as do most business owners. And therefore, I think we look through the current interest rate environment, we look through the fact that there might have been a sort of a drop in the death rate in trying to value and trying to reach agreement with vendors. So I don't think there's been downward or upward pressure on pricing as a result of those macro factors.

There are no further questions at this time. I will turn the call to Albin for closing remarks.

Thanks, Sara, and thanks everyone 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. We thank you for joining. You may now disconnect your lines.