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

Thank you for standing by, and welcome to the Propel Funeral Partners Limited H1 FY '26 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Ms. Lilli Rayner, Co-CEO. Please go ahead.

Thanks, Alaric. Good morning, everyone, and thanks for joining Propel's FY '26 half year results briefing. It's a pleasure to present to you today alongside my fellow Co-Founder and Co-CEO, Fraser Henderson; and Propel's CFO, Arash Noaeen. First and foremost, we'd like to acknowledge client families who have farewelled loved ones, particularly those who have suffered a recent loss. We also extend our thanks to Propel's staff for their continued commitment to providing essential and caring funeral and related services to the communities we serve across Australia and New Zealand. In terms of the agenda for the presentation lodged with the ASX this morning, I'll summarize the first half results and then provide a brief overview of Propel's business. Arash will cover the financials in more detail, including providing color on the debt refinance announced earlier today. Fraser will touch on industry trends, acquisitions and conclude with the outlook for the remainder of FY '26, and then we'll take questions at the end of the presentation. Turning to Slide 6 for a summary of the results. Revenue increased 3.1% to $118.8 million on the back of a 3% increase in total funeral volumes, including acquisitions. Comparable average revenue per funeral was circa 2% above the PCP, noting that network average revenue per funeral was in line with the PCP. Operating EBITDA increased to $30.3 million and operating NPAT increased to $12.4 million. Cash flow conversion remains healthy at over 95%. From a capital management perspective, the Board declared an interim dividend of $0.075 per share, fully franked, up from $0.074 per share in the PCP, reflecting a payout ratio of 83%. And Propel ended the first half with a gearing ratio of 29%. Following the refinance of its debt facilities, Propel's pro forma net leverage ratio was 2x, and it has funding capacity of $182 million, including the new $50 million accordion facility. Arash will provide further details on the company's financials shortly. In terms of growth, the company completed two acquisitions during the first half, adding 3 locations to its network. And Propel has now committed $306 million on acquisitions since its IPO in 2017. Fraser will provide an acquisition update and talk more on the company's outlook towards the end of the presentation. And I'll now provide an overview of Propel's business. Turning to Slide 8. This slide illustrates how Propel's network has evolved. Propel started with 1 funeral home in Queensland in 2013. And today it operates from 208 locations across Australia and New Zealand, including 41 cremation facilities and 9 cemeteries. Of those 208 locations, the company owns 126, which are held at cost on the balance sheet at over $245 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 to date in FY '26. These brands are an important part of the goodwill of each business. The charts on Slide 10 illustrate Propel's track record. The company has delivered strong, long-term growth in key metrics. I won't go through each chart, but as you can see, Propel's funeral volumes, revenue and operating earnings experienced growth in the first half of FY '26. 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 2.8%. In the first half, comparable average revenue per funeral was up circa 2% in constant currency. 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, averaging approximately 99% since FY '15. In the first half of FY '26, cash conversion remained healthy at over 95%. Propel is the only listed death care company on the ASX. And before I hand over to Arash, 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, 2025, Propel's share price has materially outperformed the ASX 300. For investors who participated in Propel's IPO and subsequent share issues and who retained their shareholding as at 31 December, 2025, Propel has generated a total shareholder return of 88% on a pre-tax basis, including dividends. This equates to total shareholder value accretion since the IPO of close to $400 million pre-tax. We thank our shareholders for their ongoing support. And I'll now hand over to Arash, who will provide further detail on the half year results.

Thanks, Lilli, and good morning, everyone. Today, I will cover 5 key areas. Firstly, I'll provide an overview of Propel's first half results by an analysis of the income statement. Secondly, I'll touch on the key drivers of revenue, operating earnings and margin. Thirdly, I'll provide an analysis of the cash flow statement. I'll then touch on the balance sheet. And finally, wrap up with the debt refinancing announced today and other capital management matters. Please turn to Slide 15. In the first half, Propel generated revenue of $118.8 million, up 3.1% on the back of higher funeral volumes. Comparable average revenue per funeral was circa 2% above the PCP, noting that the network average revenue per funeral was in line with the PCP. Propel reported gross margin of 69.7% with the comparable gross margin in line with FY '25. Operating costs were all maintained at circa 44% of revenue, which was favorable to FY '25 and in line with the PCP. Operating EBITDA increased to $30.3 million. In terms of other items of note on the income statement, depreciation was in line with the PCP, reflecting prudent investment levels. Interest expense on the senior debt was also in line with the PCP with the impact of higher drawn debt used to fund acquisitions and property purchases, offset by a lower average effective interest rate. Operating NPAT increased to $12.4 million and the adjusted effective tax rate was 29.6%. The waterfall on Slide 16 sets out the sources of revenue growth on the PCP. The chart shows the full period impact of the acquisitions made in the PCP, which was immaterial given our largest acquisition, Decra, completed in early July 2024. The impact of acquisitions completed during the calendar year 2025 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 3% and average revenue per funeral for the group was in line with the PCP. This was primarily driven by pricing impacts, offset by foreign exchange and acquisition impacts, noting that recent acquisitions currently generate below network average revenue per funeral. In terms of organic on the center of this slide, comparable businesses reported funeral volumes in line with the PCP and a circa 2% increase in comparable average revenue per funeral with pricing impacts being partially offset by funeral mix towards the end of the first half. As you can see on the bottom right of this slide, the operating EBITDA margin was 25.5%, 0.5% lower than the PCP, primarily impacted by recent acquisitions and the revenue mix in the first half. Disciplined cost control resulted in comparable operating costs being only 1.6% above the PCP, which was below current inflation. Moving to the cash flow statement on Slide 17. Operating cash flows increased 2.6% with cash flow conversion healthy at over 95%. In respect of investing activities during the period, Propel deployed $1.8 million in connection with acquisitions and $0.4 million relating to earn-out payments, acquired 4 freehold properties, 3 of which were previously leased for a total consideration of $6.2 million and incurred capital expenditure of circa $12.3 million with maintenance CapEx of 4.9% of revenue. The financing activities during the period largely reflect the proceeds from senior debt to fund acquisition and property purchases. Moving to Slide 18. There are 4 main points of note on the balance sheet. One, as at 31 December, 2025, Propel had net debt of $142.8 million. Two, freehold properties owned by Propel are held at a depreciated cost of approximately $245 million. Three, prepaid contract funds totaled approximately $83 million, which are largely invested with third-party friendly societies who primarily invest the funds in cash and fixed interest. During the period, prepaid contracts that turned at need in Australia accounted for less than 10% of the group's Australian funeral volumes. And finally, the reduction in equity on the prior balance date related to non-cash movements in the foreign exchange reserve as a result of a 7% fall in the New Zealand dollar against the Australian dollar. Turning to Slide 19. In respect of capital management, as Lilli mentioned earlier today, Propel is pleased to announce that Propel and Westpac agreed to extend the maturity date of its existing $275 million debt facilities from October 2027 to October 2029, improve the pricing, which all other things being equal, as at balance date would result in annualized interest cost savings of circa $0.7 million. In addition to this, a new $50 million accordion facility has been established, drawdown of which is subject to satisfaction of customary conditions. Propel remains in a strong funding position with $182 million of available funding capacity, including the new $50 million accordion facility. It should also be noted that the company remained comfortably in compliance with its debt covenants, reporting a pro forma net leverage ratio of 2x. And finally, Propel declared a fully franked interim dividend of $0.075 per share, up from $0.074 per share in the PCP. I will now hand over to Fraser, who will cover industry trends, acquisitions and conclude with the outlook for the remainder of FY '26.

Thank you, Arash, and good morning, everyone. Some of you may be familiar with the graph on Slide 21, which shows that the number of deaths is forecast to both increase and accelerate in Australia and New Zealand. Death volume is the most significant driver of revenue in the death care industry. In Australia, death volumes grew by 1.1% per annum between 1990 and 2025, and the ABS forecast that it will increase by 2.9% per annum from 2026 to 2035 and 2.4% per annum from 2036 to 2045. Whereas in New Zealand, death volumes grew by 0.9% between 1990 and 2025 and Stats NZ forecast that it will increase by 2% per annum from 2026 to 2035 and 1.8% per annum from 2036 to 2045. 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. Slide 22 shows how Propel's estimated market share in Australia and New Zealand has grown in the last decade from circa 1% in 2015 to circa 10% in 2025. It is worth noting that notwithstanding this significant increase, the market remains highly fragmented with many hundreds of independent operators in both countries. We expect to grow our market share through both partnering with existing operators, but also through selective organic expansion in the years to come. 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 $306 million on acquisitions. And during the first half of FY '26, it completed the acquisitions of Jones & Co Funeral Services in Tauranga, Broadway Funeral Home in Matamata and Jacobson Memorials in Auckland. The company continues to explore many other acquisition opportunities with multiple vendor discussions continuing and the acquisition pipeline remains robust. Turning to Slide 25. Propel has a strong track record and a defensive market position in a favorable sector thematic and is well funded and well positioned to continue its growth profile. Slide 25 provides some of Propel's key attributes, but to highlight a few, Propel operates in a highly fragmented and essential service industry and stands to benefit from favorable demographic tailwinds. Propel owns assets and infrastructure that are difficult to replicate. And Propel is well funded to continue its acquisition-led growth strategy. And with the management team and non-executive directors owning approximately 7% of the company, this ensures a strong alignment with fellow shareholders. Turning to Slide 26. Propel is cycling a 3% contraction in comparable funeral volumes in the PCP, including a material contraction in Australia in the 3 months ended 30 April, 2025. Propel remains well placed to navigate natural fluctuations in the death rate and continue consolidating a highly fragmented essential service industry benefiting from long-term demographic tailwinds. With its current market position, Propel is well positioned to continue to generate sustainable long-term growth and value creation and expect to benefit from its strong funding position and improved pricing and the acquisitions it has completed to date and other potential future acquisitions in both Australia and New Zealand. Before I hand back to the moderator for questions, I want to echo Lilli's earlier comments and thank our client families for entrusting the funeral homes and the Propel network at what often is a very difficult time. I also want to take this opportunity to thank all our staff for their ongoing dedication to the communities we serve. With that, I'll now hand back to the moderator to invite questions.

[Operator Instructions] Your first question comes from Elizabeth Miliatis from Macquarie.

Just the first one is just on the year-to-date trading. Can you give a bit of color on how you guys are doing so far for the year?

Yes. Thanks for the question, Elizabeth. I mean, we have decided to move away from providing comments on short periods of trading. Experience suggests it's not a meaningful time period and providing sort of granular detail for short periods of time I think can often lead to incorrect conclusions. But what we will say that there have been no major surprises in trading so far in Q3.

And Fraser, maybe just to add to that, Liz, I think it's important to point out, which we give in the outlook that we're comping a 3% contraction in our organic funeral volumes in the second half. Now what we have said that's new today is that it was a material contraction between the months of February and April. So we've obviously just entered that period. Time will obviously tell how we would perform against that comp. But certainly, the comps are easier in the second half.

Okay. Got it. That's helpful anyway. And just on the margin profile from Q1 and Q2, there was a bit of a deterioration from Q1 to Q2 in terms of the EBITDA margin. That is pretty seasonal. But was there any sort of surprises there? I think the contraction was almost 3%. It has sort of bounced around a fair bit historically, somewhere between 1% and even as much as 4% or 7%. So just wondering if there was anything unusual in that?

Thanks, Liz. I'll take that one. Yes, look, you're right. In terms of Q2, it was below Q1 and there is seasonality in that Q2 is typically below Q1. We did in our AGM trading update did provide that Q1 margin, which was in line with the PCP. There was probably 2 influences in terms of the Q2 margin being below the PCP. One being the nature and timing of the acquisitions. And what I mean by that is both acquisitions were in New Zealand, which typically run at a lower margin. And two, was in the period which is typically lower margin as well. And then the other point on -- the other influence on that was the revenue mix that we experienced late in that Q2 period. And look, they were both mitigated somewhat by disciplined cost management with costs being well maintained, noting that our comp OpEx was up 1.6% for the half. Hopefully, that gives you some color on that.

Your next question comes from James Bales from Morgan Stanley.

I guess, just touching on the margin. You talked a little bit about price growth of 2% on a comp basis and mix being an impact there. Is there anything you can do about that or is that just part of life?

James, I'll take that question. So look, you're right, there was some mix impact towards the end of Q2. And look, it's not unusual in December for that to be the case, James, just as, I guess, we lead to the sort of festive and holiday period. Some client families choose a lower value funeral. And we have seen, I guess, a little bit of softness in our New Zealand business from a mix point of view. So those 2 factors certainly impacted, I guess, the average revenue per funeral at the back end of Q2. And to Fraser's point, that mix at the start of Q3 has certainly improved at the end of Q2. In terms of, I guess, cushioning the impact of that, as you would be aware, the cost base is pretty fixed in our business, James. But obviously, there's areas that we can touch on around sort of the staffing. So pools of casual staff, obviously, if we're not doing as many full-service funerals, you don't necessarily need to use that casual staff as an example. So there's some cushioning effect based on volume and pricing. But as I said, it's a largely fixed cost base.

And when you say fixed cost base, is that at the COGS line?

OpEx, OpEx.

So then on -- like gross margins declined a little bit both versus the first quarter and year-on-year. Is there something that -- like how do you expect that to play out in terms of pricing being an offset to that? And what should our expectations be for the second half and beyond?

In terms of the gross margin there, it was similar impacts in terms of what I described in terms of EBITDA margin and being that revenue mix in Q2 near the end and the acquisition impacts. In terms of how -- look, the gross margin was from a comparable perspective in line with FY '25. I think that 70% is still reasonable to assume for the second half.

Okay. And then maybe just on volumes. You called out flat organic volumes versus PCP. How -- do you have a view on how that compares to the broader market?

Well, interesting, James, actually, Stats NZ came out last week with their 2025 calendar volumes. And I know that it's only sort of 25% to 30% of our market. But interestingly, they are now -- have disclosed sort of their third consecutive contraction in volumes in NZ. So I think it's well understood that as a result of the pandemic and following that period, we had periods of quite high volatility in volumes, James. So obviously, material growth, and then that was followed by material contraction. And I think over the past sort of 18, 24 months, we've seen those volumes sort of rebase. So yes, I think that's an interesting anecdote on the NZ volumes. Now we are only 10% of the market across Australia and New Zealand. So we're certainly not the index. But I think that's an important point to point out.

Yes, that's helpful color. And then maybe just one last one. M&A, I understand it's always lumpy, but it seems to have slowed down a little bit. Is that just normal sort of pipeline inconsistency or has there been any internal reassessment of quality and return hurdles?

Yes, I'll take that, James. Yes, I think more of the former rather than the latter. So there's definitely no change in strategy or pricing that we're willing to pay for assets. I think we've been consistent and we see the pricing being consistent over the last sort of 20-odd years in the industry. I think the pipeline remains robust. There are multiple ongoing conversations, some of which are well advanced. It's just -- it's one of those things that we've just got to wait for them to drop and be patient with our sort of fellow partners or future partners.

[Operator Instructions] There are no further phone questions at this time. I'll now hand back to Mr. Henderson for the closing remarks.

Thanks, and thank you all for joining today's call. Lilli, Arash 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. Thank you, everyone, and have a good morning.

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