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

Thank you for standing by, and welcome to the Propel Funeral Partners Limited 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, Ryan. Good morning, everyone, and thanks for joining Propel's FY '26 Full 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. Before I start, we'd like to take this opportunity to acknowledge client families who have farewelled loved ones, particularly those who have suffered a recent loss. We would also like to 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 FY '26 results and then provide a brief overview of Propel's business. Arash will cover the financials in more detail. Fraser will touch on industry trends, acquisitions and make some concluding remarks, including in respect of the outlook, and then we'll take questions. Turning to Slide 6 for a summary of the results. Revenue increased to $226.6 million in FY '26 within guidance on the back of a 1.1% increase in total funeral volumes. Comparable average revenue per funeral was circa 2% above FY '25, noting that network average revenue per funeral was marginally below the prior year, impacted by recent acquisitions and ForEx. Propel reported operating EBITDA of $55.3 million, again within guidance and operating NPAT of $20.7 million. Cash flow conversion remained strong at over 100%. From a capital management perspective, the Board declared a final fully franked dividend of $0.069 per share, resulting in total fully franked dividends of $0.144 per share in connection with FY '26, consistent with the prior year. And Propel ended the year with a gearing ratio of circa 30% (sic) [ 30.9% ]. Following the refinancing of its debt facilities earlier in the year, Propel's net leverage ratio was 2.2x at year-end, and it currently has funding capacity of circa $170 million (sic) [ $169 million ], which will support Propel's acquisition-led growth strategy. Arash will provide further details on the company's financials shortly. In terms of growth, Propel expanded its network by 6 locations in FY '26, and Propel has now deployed $314 million on acquisitions since its IPO in 2017. Fraser will provide an acquisition update and talk more on the company's outlook later in the presentation. But before he does, I will provide a brief 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 213 locations across Australia and New Zealand, including 42 cremation facilities and 9 cemeteries. Of those 213 locations, the company owns 130, which are held at depreciated cost on the balance sheet at over $250 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 during and since FY '26. These brands are an important part of the goodwill of each business. The charts on Slide 10 illustrate Propel's track record since FY '15. I won't go through each chart, but notwithstanding a period of earnings moderation in FY '26, Propel has delivered growth across key metrics for over more than a decade. 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 2.7%. In FY '26, comparable average revenue per funeral was up 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 FY '26, cash conversion remained strong at over 100%. The pie charts on Slide 13 illustrate the diversified nature of Propel's revenue in FY '26. The chart on the left shows Propel's country split, which is weighted approximately 75% to Australia and 25% to New Zealand. The chart in the middle of the slide shows Propel's regional metro split, which was weighted 53% to regional in FY '26. Importantly, when we look at revenue by operating business on the right-hand side, this chart demonstrates the significant diversification of Propel's network, which comprises of over 60 operating businesses across Australia and New Zealand. In summary, Propel is an essential service provider of scale with diversified and defensive revenue streams. I'll now hand over to Arash, who will provide further detail on Propel's FY '26 results.

Thanks, Lilli, and good morning, everyone. Today, I will cover 5 key areas. Firstly, I'll provide an overview of Propel's full year results via 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, I'll wrap up with some commentary on capital management. Please turn to Slide 15. In FY '26, revenue increased to $226.6 million within guidance and reflecting comparable average revenue per funeral growth of circa 2% on the prior year, contributions from acquisitions, partially offset by unfavorable ForEx impacts. Propel reported a gross margin of 69.8% with comparable gross margin of 69.9%, 10 basis points above FY '25. Operating costs were well maintained at 45% of revenue, in line with the prior year. Operating EBITDA was $55.3 million within guidance and included a circa $1 million unfavorable ForEx impact. In terms of other items of note on the income statement, depreciation was up 2% on the prior year, reflecting acquisitions and property purchases made during FY '26. Interest expense on the senior debt was in line with FY '25 with the impact of higher drawn debt used to fund acquisitions and property purchases, offset by a lower average effective interest rate following the refinancing of Propel's banking facilities earlier in the year. Operating NPAT was $20.7 million with an adjusted effective tax rate of 29.5%. The waterfall on Slide 16 sets out the movement in revenue on the prior year. The chart shows the full period impact of acquisitions made in FY '25, the part period impact of acquisitions completed during FY '26, ForEx movements and the organic performance of the businesses held for the comparable period. As you can see from the comments on the bottom left of the slide, total funeral volumes increased 1.1% and average revenue per funeral for the group was marginally below FY '25 with the benefits of pricing being offset by ForEx and acquisition impacts. Please note that recent acquisitions generated below network average revenue per funeral. In terms of organic on the center of this slide, comparable businesses reported funeral volume circa 2% below the prior year and a circa 2% increase in average revenue per funeral, reflecting pricing impacts and funeral mix. As you can see on the bottom right of this slide, the operating EBITDA margin was 24.4%, 0.5% below prior year, primarily impacted by recent acquisitions and operating deleverage. Comparable operating costs were 0.7% below FY '25, reflecting, among other things, disciplined cost control. Moving to the cash flow statement on Slide 17. Operating cash flows were $54.9 million with cash flow conversion strong at over 100%. In respect of investing activities during the year, Propel deployed $5.2 million in connection with acquisitions and $1.3 million relating to earn-out payments, acquired 7 freehold properties, 4 of which were previously leased for total consideration of $7.9 million and incurred capital expenditure of circa $10.4 million with maintenance CapEx at 4.6% of revenue. The financing activities during the year largely reflect the proceeds from senior debt to fund acquisitions and property purchases. Moving to Slide 18. There are 4 main points of note on the balance sheet. One, as at 30 June 2026, Propel had net debt of $151.2 million. Two, freehold properties owned by Propel are held at a depreciated cost of approximately $252 million, representing circa 60% of Propel's market capitalization as at 30 June 2026. 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 year, prepaid contracts that term at need accounted for less than 10% of the group's unit volumes. And finally, the movement in equity on the prior balance date related to a noncash reduction in the foreign exchange reserve as a result of a greater than 10% strengthening of the Australian dollar against the New Zealand dollar. Turning to Slide 19. In respect of capital management, Propel refinanced its debt facilities early in the year, extending the maturity date of its existing $275 million debt facilities to October 2029, improving the pricing and entering into a new $50 million accordion facility. Propel currently has available funding capacity of approximately $170 million. The company remains comfortably in compliance with its debt covenants, reporting a net leverage ratio of 2.2x against a covenant limit of 5x. And finally, Propel declared a fully franked dividend of $0.144 per share in connection with FY '26, in line with the prior year. I'll now hand over to Fraser, who will, among other things, cover industry trends and acquisitions before making some concluding remarks in respect of the outlook.

Thanks, Arash, and good morning, everyone. Turning to Slide 21. This slide shows that the funeral industry remains highly fragmented in both Australia and New Zealand, with Propel the second largest operator in both countries. Propel's estimated combined Australia and New Zealand market share is circa 10%, having performed close to 23,000 funerals in FY '26. Significant consolidation runway remains with more than 500 businesses still independently owned by entities other than Propel and the largest operator. During and since the end of FY '26, Propel completed the acquisition of 5 businesses and has now deployed approximately $314 million on acquisitions since its IPO in FY '18, averaging circa $37 million per year. Propel continues to explore other potential acquisition opportunities with multiple vendor discussions continuing. However, the timing of any future acquisitions, as you would appreciate, is unknown. 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 Australia and New Zealand as the baby boomers approach and exceed the median age of death, noting that the eldest of the baby boomer generation reached the median age of death next year and the year after, depending on their gender. Death volumes in Australia and New Zealand are forecast to increase by 2.8% per annum from an historical average of 1.1% per annum. Death volumes are the most significant driver of revenue in the death care industry and 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. Slide 22 also lists some of the evolving market trends the industry is experiencing. I won't go through all of these, but by way of example, the majority of client families choose a full-service funeral despite no service, no attendance offering is being available. Lower value digitally-led competitors remain active, especially in metropolitan markets, noting that these providers are largely reliant on third parties for both infrastructure and resources, and there is evidence of recent material price increases by those providers. Client families are increasingly researching providers online. And whilst the funeral industry is not immune from digitization, including AI, the human element of the funeral remains central to the overall experience of client families. Turning to Slide 23. This slide summarizes some of the ways Propel is positioning itself to capture growth against the favorable long-term demand backdrop I've just talked about. Inorganically, our acquisition-led growth strategy is underpinned by a highly fragmented industry, a strong pipeline with relationships developed some over many years, our position as trusted partner and preferred succession path for many vendors and Propel's available funding capacity. From an organic perspective, key focuses are digital marketing and website enhancement, sharpening lead generation and conversion and deepening grassroots community engagement. Propel businesses are also seeking to reinforce the value of the funeral among their communities as well as enhancing their product offerings and benefiting from digitization efficiencies. As a business, Propel is also selectively expanding some of its metro brands to other areas, which can leverage off existing infrastructure, including company-owned cremation facilities. Of course, meanwhile, we continue to focus on BAU matters such as procurement initiatives, network efficiency, cost discipline and asset utilization. Moving to Slide 25, which provides an investment summary overview. Propel is the #2 provider in the Australian and New Zealand funeral industry and owns assets and infrastructure that are difficult to replicate. It operates in over 210 (sic) [ 213 ] locations, including 130 owned properties, which are valued at depreciated costs of over $250 million (sic) [ 252 million ]. Propel operates in a highly fragmented and essential service industry and stands to benefit from favorable demographic tailwinds. Propel is well funded to continue its acquisition-led growth strategy and with the management team and nonexecutive directors together owning a substantial interest in the company, this ensures a strong alignment with fellow shareholders. In terms of the outlook, please turn to Slide 26. Propel expects to benefit from favorable demographics in both Australia and New Zealand, a strong funding position and acquisitions completed to date and other potential future acquisitions in what remains a highly fragmented industry, noting that negotiations with multiple vendors are continuing regarding the opportunity to join Propel's growing network. The company intends to provide an FY '27 trading update at the AGM in November. But with respect to the month of July 2026, Propel generated revenue of circa $21.5 million, benefiting from comparable average revenue per funeral growth exceeding 3%, which is above the company's long-term CAGR and resilient funeral volumes despite a benign winter flu season and a material contraction in industry death volumes, which is expected to be temporary. 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 in 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. And finally, I want to recognize Brian Scullin's retirement from the Board earlier today. We were extremely fortunate when he agreed to join Propel as Chair when Propel was a little more than an idea on a whiteboard. Lilli, Arash and I have learned much from Brian over the last 14 or so years, and we wish him well in his retirement. With that, I'll now hand back to the moderator to invite questions.

[Operator Instructions] Your first question comes from Christian Waked from Jarden.

First question on the July trading update. I mean it implies flat year-on-year revenue. And given prices are up 3% and FX is a 3% headwind, is it fair to assume like-for-like volumes are down 4% for the month?

Christian, thanks for your question. So I think you did summarize that well in terms of the revenue for July. So we disclosed $21.5 million. But obviously, that included that $600,000 FX headwind. So if you back that out, revenue would have been close to $22 million. What we also disclosed was that there was a material contraction in industry death volumes based on the BDM data in Australia. And certainly, Propel wasn't immune from that contraction. So I think that's an important point to point out. And obviously, July is an important month for the industry as well. From an average revenue per funeral perspective, obviously, that ticked up above 3% in July. So that was pleasing from our perspective. But we think we will give more color on FY '27 trading as we sort of get to the AGM and we're through that busier winter and early spring trading period.

Yes. And just a follow-up on the market volume specifically, I mean, from what we're seeing is the market appears to be down more like 8% to 10% in July. Are you back to winning share in July? And I guess what has changed in July versus prior halves when there's been implied share loss?

Yes. So the contraction in July from an industry perspective was material, as you point out, but it's 4 weeks of trading, Christian. So I don't think we want to get hung up on super short periods of time given the industry volumes do oscillate. So I don't think you can glean anything meaningful into market share losses or gains in a 4-week trading period.

Yes, understood. And just one last question. C2B growth in FY '26 was very well controlled. If things were tougher again in FY '27, could you replicate the 2% cost growth of FY '26? Or is there no more room for efficiencies?

Thanks, Chris. I'll take that. Look, I think, we've managed the cost quite well. I think it will depend partly on the volume growth. But I think being below PCP with some of the acquisition [ packs ] would be difficult. But I think we can still manage the costs well.

Your next question comes from Elizabeth Miliatis from Macquarie.

The first one is just around acquisitions. Obviously, it sounds like still a key part of the strategy and you've got a great balance sheet to support that. We haven't really made very material acquisitions since calendar year 2023. Just curious what the pipeline is looking like? Are we hopefully nearing closer to a period of more acquisitions coming through? Any color would be great.

Elizabeth, thanks for the question. Yes, I mean, hopefully, we are. Yes, I mean, I think we -- the team is busy, and we have got a number of conversations at various stages of those negotiations to bring acquisition opportunities to the table. So we still remain confident about the pipeline. And I think you talked about scale and some of those opportunities in the pipeline are large multi-brand multi-location opportunities. So, yes, I think it would have been good to announce some today, but I think there is nothing to disclose as of this morning, but the pipeline remains robust.

Okay. Got it. That's really clear. And just if I can touch on the winter -- sort of the weak winter period and obviously, not great for volumes. Is that typically a bit of a catch-up period if there is a weaker winter and a weaker flu season, maybe 6 or 12 months, there's a bit of a catch-up? Or is that -- it might take a few years to roll through?

Yes. I mean I think -- yes, look, if you think about it, people generally die because they're old, Elizabeth. There's an event that might trigger it, but it's because people are getting older. And so although flu is sort of a precursor to that, I think if you haven't died this winter, then you're more likely to die in the coming season. So when there is a sort of pullback of death volumes, you would expect all other things being equal to there be a catch-up in due course.