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

Thank you for standing by, and welcome to the Propel Funeral Partners FY '24 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Albin Kurti, Managing Director. Please go ahead.

Thanks, Ryan. Good morning, everyone, and thanks for joining Propel's FY '24 Full Year Results briefing. First and foremost, I'd like to acknowledge bereaved client families who farewell loved ones during FY '24. 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 '24, 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 '24 was another record year for Propel. The company achieved material growth in key financial and operating metrics on the back of higher funeral volumes and stronger average revenue per funeral as contributions from acquisitions more than offset a contraction in 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 deploying over $100 million on 12 acquisitions, which significantly broadened the company's network in new and existing metropolitan and regional markets across Australia and New Zealand. And thirdly, Propel has made a positive start to FY '25 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 decentral 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 24% to $209.2 million on the back of a 20% increase in funeral volumes and 4% increase in average revenue per funeral. Propel continued to grow earnings and maintained a healthy operating margin. Operating EBITDA increased 21% to $55.4 million, and pro forma operating NPAT increased 12% to $23.4 million. Cash flow conversion remained strong at 99%. From a capital management perspective, the Board has declared a final dividend of $0.072 per share fully franked, resulting in total dividends of $0.144 per share fully franked in connection with FY '24, up from $0.14 in the prior year and reflecting a payout ratio of 85%. Propel ended the year with a gearing ratio of 23%, a net leverage ratio of 1.6x, and has available funding capacity of $153 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 37 locations to its network in FY '24, completing 11 acquisitions in New South Wales, Queensland and New Zealand. Subsequent to year-end, Propel completed a previously announced acquisition in New Zealand, adding 2 locations to its network. Propel has now committed approximately $295 million on acquisitions since its IPO in November of 2017, and 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 strong funding position and acquisitions completed to date and other potential future acquisitions in what remains a highly fragmented industry. I'll talk more about the company's 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 11 years. Propel started with 1 funeral home in Queensland, and today, it operates from 198 locations across Australia and New Zealand, including 38 cremation facilities and 9 cemeteries. Of those 198 locations, the company owns 118 of the properties, which are held at cost on the balance sheet at $230 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 during and since FY '24. These brands are an important part of goodwill of each business. The charts on Slide 10 illustrates Propel's track record. Propel has maintained a strong growth trajectory. I won't go through each chart. But as you can see, Propel's funeral volumes, revenue and operating earnings experienced material growth in FY '24. The chart on Slide 11 shows Propel's average revenue per funeral since FY '15, which has grown at a compound annual growth rate of 3.2%. In FY '24, average revenue per funeral increased by 4% and on a comparable basis by 5.5%. Turning to Slide 12. 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 '24, cash conversion remained strong at 99%, 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 issue price of $2.70 and was admitted into the ASX 300 index in March this year, a significant milestone for the company. As you can see from the chart on this slide, as at 30 June 2024, 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 30 June 2024, Propel has generated a total shareholder return of 105% on a pretax basis, including dividends. This equates to total shareholder value accretion since the IPO of $465 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. Propel delivered a resilient result in FY '24, reporting within its guidance despite a contraction in industry death volumes. 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 FY '24 results by an analysis of the pro forma income statement. Secondly, I'll touch on key drivers of revenue, operating earnings and margins. Thirdly, I'll provide an analysis of the cash flow. I'll then touch on the balance sheet and wrap up with capital management. Please turn to Slide 15. Propel generated revenue of $209.2 million in FY '24, an increase of 24.2% on the prior year. The increase was driven by the full year impact of acquisitions completed in FY '23 and the part year impact of acquisitions completed during FY '24. Furthermore, the performance was impacted by a 5.5% increase in comparable average revenue per funeral, partially offset by contraction in industry death volume. Propel reported a gross margin of 69.8%, impacted by the gross margins of recent acquisitions. Pleasingly, the comparable gross margin exceeded 71%. The company generated operating EBITDA of $55.4 million in FY '24, an increase of 20.5% on the prior year. In terms of other items of note on the income statement and consistent with the half year, we've disclosed relevant numbers on a pro forma basis, reflecting the impact of the capital raising completed earlier this year, including lower interest expense and expanded share capital as it could have occurred on 1 July 2023. As a result, pro forma net interest expense was circa $2.8 million higher than FY '23, primarily reflecting higher interest rates. The average effective interest rate was 6.6% compared to 5.1% in the prior year. Propel generated pro forma operating NPAT of $23.4 million in FY '24, 12.2% higher than the prior year, noting that operating earnings per share was impacted by expanded share capital. In terms of non-operating items, acquisition and transaction costs totaled $3.3 million, including stamp duty on business combinations, reflecting the busy M&A period. The adjusted pro forma effective tax rate was 29.7%. The waterfall on Slide 16 sets out the sources of revenue growth on the prior year. The chart shows the full year impact of acquisitions made in FY '23, the part year impact 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 the slide, total funeral volumes increased 20%, and average revenue per funeral increased circa 4%. In terms of organic on the center of this slide, comparable businesses experienced a circa 6% decrease in funeral volumes, having cycled positive organic growth in 2 consecutive prior years of circa 9% and circa 1% and a 5.5% increase in comparable average revenue per funeral. These 2 factors contributed to organic revenue being in line with the prior year. As you can see on the bottom right of this slide, the operating EBITDA margin was resilient at 26.5%, considering the industry volume headwinds. Operating costs were well controlled during the year despite the inflationary environment. Moving to the statutory cash flow statement on Slide 17. Operating cash flow increased 20.5% on FY '23 driven by contributions from acquisitions. Cash flow conversion remained strong at 99%. In respect of investing activities during the year, Propel deployed $91.5 million in cash in connection with acquisitions and $2.2 million relating to earn-out payments. Acquired 4 freehold properties not connected to a business combination, 2 of which were previously leased for a total consideration of $8.8 million and incurred capital expenditure of circa $15.6 million. Maintenance CapEx amounted to 6% of revenue. The financing activities during the year largely reflects the net proceeds from the capital raising of $97.6 million, a subsequent reduction in senior debt, net of funding acquisitions and dividends paid during the year. Moving to Slide 18. There are 3 main points on the balance sheet. 1, as at year-end, Propel had net debt of approximately $106 million; 2, freehold properties owned by Propel are held at depreciated cost of approximately $233 million; and 3, Propel's prepaid contract funds totaled approximately $84 million, which are largely invested with third party friendly societies who primarily invest the funds in cash and fixed interest. 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 at need in Australia accounted for less than 10% of the group's Australian funeral volumes consistent with FY '23. Turning to Slide 19. In respect of capital management, during the year, Propel expanded its senior debt facilities to $275 million, which mature in October 2027. After allowing for binding commitments on the Decra acquisition, which completed subsequent to 30 June and other property purchases, Propel has available funding capacity of $153 million. Propel remained comfortably in compliance with its debt covenants, reporting a net leverage ratio of 1.6x against covenant limit of 5x. And finally, Propel declared fully franked dividends totaling $0.144 per share in FY '24, up from $0.14 per share in FY '23, noting that the company issued circa 20 million ordinary shares during the 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 21, which shows 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 9% per annum between 1990 and 2019, and the ABS forecasts that they will increase by a further 2.5% per annum from 2024 to 2030 and 2.9% per annum from 2030 to 2040. Whereas in New Zealand, death volumes grew by 0.8% per annum between 1990 and 2019. And Stats NZ forecasts it will increase by 1.9% per annum from 2024 to 2030 and 2.1% per annum from 2030 to 2040. Please note that we've excluded 2019 to 2023 from the CAGRs 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 is not necessarily linear and can fluctuate from time to time. The funeral industry is highly fragmented in both Australia and in New Zealand, with Propel the second largest in both countries. Slide 22 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 2023 has grown in the last 9 calendar years from circa 1% in 2015 to circa 9% in 2023. However, it is worth noting that notwithstanding that significant increase, circa 70% of the market in Australia is still owned by entities other than Propel and the largest operator. Turning to Slide 23. 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 $295 million in acquisitions, including $104 million on 12 acquisitions in FY '24. Since 1 July 2024, we have completed the acquisition of Decra in Christchurch and also committed to acquiring 4 properties with a combined purchase price of circa $9.5 million, excluding stamp duty. These properties include funeral homes where we were the existing tenant as well as greenfield and brownfield opportunities. 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 '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, our 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. The company expects to benefit from favorable demographics in Australia and New Zealand, its strong funding position and acquisitions completed to date, and other potential future acquisitions. Historical experience suggests the contraction in industry death volumes in FY '24 should be temporary, given prior period declines have rebounded quickly and the growing and aging populations in Australia and New Zealand. In that regard, Propel has started FY '25 with positive trading momentum. In the month of July 2024, revenue growth over the PCP exceeded 20%, reflecting strong growth in funeral volumes, including contributions from acquisitions and material growth in comparable funeral volumes and higher comparable average revenue per funeral. In conclusion, and as I summarized at the onset, I think the 3 key takeaways from our presentation today are: 1, FY '24 was another record year for Propel. The company achieved material growth in key financial and operating metrics on the back of higher funeral volumes and stronger average revenue per funeral as contributions from acquisitions more than offset a contraction in industry death volumes, which is expected to be temporary; 2, it has been a busy period of corporate and M&A activity with Propel expanding its debt facilities, completing an equity raising and deploying over $100 million on 12 acquisitions, which significantly broadened the company's network in new and existing metropolitan regional markets across Australia and New Zealand. And 3, Propel has made a positive start to FY '25 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. 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, congratulations on the results. A few questions from me. I think to start off with the trading update. Very strong words there. Very nice to see. Usually, July is a pretty seasonal period in the first quarter. But maybe if you all can elaborate on whether this July was much stronger than the usual seasonality? Or how -- how the start of FY '25 will sort of reflect the rest of the first quarter performance?

Thanks for your question. Yes. Look, I think what I'd say is that you're right, July and the winter period is typically a seasonally strong period for our industry. That's certainly been the case last month. And I'd say that it was the case in July last year, but we were cycling a very strong PCP this time last year. So you have to obviously look back probably a couple of years now. But in terms of July trading, where we're encouraged that it's been a positive start to FY '25. And as I called out, revenue growth over the PCP was 20%, and that reflected both strong organic growth in comparable funeral volumes and average revenue per funeral. But it's only 1 month, but it's an important month.

And then secondly, I think the pricing looks pretty strong as well, especially the 5.5% from comparative -- on a comparative basis. Would there be opportunity in FY '25 for that gap between the overall business and comparative to narrow somewhat better to drive a better overall average revenue per funeral?

Look, we're always looking for ways to optimize our average revenue per funeral, Chami. And really, I think we've demonstrated -- I think the company has demonstrated over the last sort of 24 months its ability to keep pace with CPI. And we don't foresee any significant deviation from that assuming mix is stable.

That's great, Albin. If I could just the last question would be on the acquisitive market. I mean, your largest year, it's been about 9 months since the last year in private. How does the market look? And does FY '25 look -- how does it look relatively to the last year?

Morning, Chami. I mean the pipeline remains pretty robust. We're actively engaged with a number of exciting opportunities but always the tricky thing is timing of when they land. So I'm positive about FY '25 and beyond. Compared to last year, I think I'd say mirror the language I used last year, so it's no better, no worse, but I think it's strong, actively engaged with a number of opportunities, and I can see that continuing beyond this year.

Your next question is from the line of Sophia Mulligan with Macquarie.

Congratulations on a great result. I guess I'll just pick up on the last question a little bit with the acquisition pipeline. Just in terms of the size of the acquisitions that are out there at the moment, and what's really required now to move the dial?

Yes. I mean the full spectrum, I think there's large and small metro and regional. But yes, in terms of changing the dial, I think we're opportunistic and wouldn't -- we look at everything. And then obviously, it comes down to pricing. But I don't think we would necessarily sort of look at it from a dial changing perspective. We just look at can we -- are they accretive acquisitions and make sense to us at the time.

Yes. That makes sense. And just on the pricing growth, obviously, the 5.5% organic growth you see was a great outcome. Do you think next year the drag of acquisitions on pricing growth will be less?

Look, I think Sophia, certainly, that will have an impact, given that the more recent acquisitions have been at a low level. And I think our long-term CAGR, as we called out in the presentation, has been 3.2%. And you'll need to form your own view about what the inflationary outlook is over the next 6 to 12 months. But I would imagine over time that we will gravitate towards our long-term CAGR.

Your next question is from the line of Meira Jackson with Barrenjoey.

Just the first question from me. Could you give us some color around what organic revenue growth was versus 20% total revenue growth you indicated in July '24?

For the month-- is that the question?

Yes, it's just for the month.

Yes. I don't think we've given that granularity for 1 month, but I'll just reiterate that the organic funeral volumes were materially higher than the PCP, and we saw a higher organic average revenue for funeral as well. It's only 1 month, so we don't typically give that granularity for 1 month.

Okay. Great. And then just my second one, how should we think about EBITDA margin into FY '25?

So look, I guess, from a margin perspective, we've always delivered those margins in the mid-to-high 20s. Obviously, in FY '24, we had a slight contraction on FY '23, just given where comparable volumes sat. And they were obviously 6% down. So to have sort of a margin contraction of 80 basis points, we thought was pretty good going given that contraction. In terms of '25, it obviously depends on where the organic volumes sit. We've had an encouraging July. But as Albin said, that's only 1 month. And then the other key impacts are obviously where average revenue per funeral [ with ] inflation and then the margins of recent acquisitions, which, as Albin also mentioned, have had a slight drag on average revenue per funeral and on margin.

I think maybe just to add to that little, just to give you a sense or to give everybody a sense for the financial impact of the 6% contraction in comparable volumes. I mean that equated to around 1,000 funerals. And at a gross average revenue per funeral of $8,000 to $9,000 depending on mix. That translates to a revenue swing, an organic revenue swing of around $8 million or $9 million. So you can apply your own margin assumptions, your incremental earnings margin assumption. But from our perspective, we think the incremental earnings impact was material to the full year earnings result.

Great. And then just my final question. CapEx was up a lot on year in FY '24. Just how should we think about CapEx in FY '25 and beyond?

So the CapEx number in '24, I think you're referring to the $24 million in the cash flow line. That's actually 3 components. So we've got our maintenance CapEx in there about $12.5 million. We've got growth CapEx of $3 million. And then we actually acquired 4 freehold properties that were not connected to business combinations for $9 million. So I think that $9 million is probably the delta that you might be missing. We've been on record saying from a maintenance perspective, we typically target between 3% and 5% of revenue. We're slightly above that in FY '24, but there were some delays in some delivery of hearses that occurred in '24, which is why I think we ended up above that range. So from a '25 perspective, I think maintenance should head back towards that 3% to 5% of revenue. And we are often working on growth projects from time to time. So I think another $5-ish million to growth projects probably makes sense as well.

Ladies and gentlemen, there are no further questions at this time. I will now hand back the conference to Mr. Kurti for his closing remarks.

Well, thank you. 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. Have a great day.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect your lines.