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Edited Transcript of PFP.AX earnings conference call or presentation 26-Aug-19 12:30am GMT

Full Year 2019 Propel Funeral Partners Ltd Earnings Call

Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Propel Funeral Partners Ltd earnings conference call or presentation Monday, August 26, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Albin Kurti

Propel Funeral Partners Limited - MD, Head of Investments & Director

* Fraser Henderson

Propel Funeral Partners Limited - Head of Mergers & Acquisitions, General Counsel, Company Secretary and Executive Director

* Lilli Gladstone

Propel Funeral Partners Limited - Head of Finance

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Conference Call Participants

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* Sam Haddad

Bell Potter Securities Limited, Research Division - Industrials Analyst

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Presentation

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Albin Kurti, Propel Funeral Partners Limited - MD, Head of Investments & Director [1]

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Thanks, Travis, and good morning, everyone. Before we start, I'd like to thank all the Propel staff in Australia and New Zealand, who do a wonderful job in serving families at a difficult time.

Turning to today's presentation. With me are my colleagues, Lilli Gladstone and Fraser Henderson. In terms of the agenda, I'll start by summarizing the key highlights of FY '19 and providing 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 revenue and earnings growth in FY '19 despite below-trend death volumes, particularly in the first half of the financial year; secondly, comparable funeral volume growth turned positive in the second half and has accelerated materially in recent months, indicating that a recovery in death volumes is underway as expected; and thirdly, management is delivering on the company's investment strategy, with Propel well placed to continue its growth momentum, having recently expanded its debt facilities and subsequently announcing its largest proposed acquisition to date in Gregson & Weight.

Please turn to Slide 6 for the key highlights of FY '19. Propel's revenue increased 17.6% to $95.1 million on the back of an 11.8% increase in funeral volumes, including contributions from acquisitions. Average revenue per funeral was up 1.4%, and on a like-for-like basis, increased by 2.8%. The company continued to grow earnings, with operating EBITDA up 10.6% to $23.8 million and operating NPAT increasing 8.1% to $13.3 million. Cash conversion remained strong at 97.4%.

From a capital management perspective, the Board has declared a final dividend of $0.058 per share fully franked, resulting in total dividends of $0.115 per share fully franked in connection with FY '19, representing a payout ratio of 78%. Propel ended FY '19 in a net debt position of $7.6 million, and subsequent to year-end, the company doubled its senior debt facilities with Westpac to $100 million, of which approximately $26 million remains available to fund Propel's growth strategy.

In terms of growth, Propel ended FY '19 with 120 locations, 17 more than at the prior -- end of the prior year. Management has been focused on executing Propel's acquisition-led investment strategy, committing approximately $117 million on acquisitions since the company's IPO in November 2017. We've expanded in Queensland, New South Wales, Western Australia and in New Zealand via our series of completed acquisitions, and we've purchased 7 freehold properties, 4 of which were previously tenanted by Propel and 3 of which relate to potential expansion sites.

In terms of our outlook, Propel expects to benefit from the accretive acquisitions completed and announced during and since FY '19 and potential future acquisitions. The company is well placed for continued growth, with expanded debt facilities and a supportive banking partner. Management remains focused on executing the company's investment strategy, and importantly, there are clear indications that a recovery in debt volumes is underway. I'll talk more about our outlook towards the end of the presentation, and we'll now provide a brief overview of the business.

Slide 8 illustrates how Propel's portfolio has evolved over the past 6 years. We started with one funeral home in Queensland, and today, we operate from 120 locations across Australia and New Zealand, including 28 cremation facilities and 9 cemeteries. Of those 120 locations, the company owns 64 of them.

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, Davis Funerals has operated in and around Auckland since 1875. The green dotted lines show those brands added to Propel's network and announced during and since FY '19. We have no intention of changing any of the brands, as they are an important part of the goodwill of each business we acquire.

The chart on Slide 10 illustrates Propel's historic growth in funeral volumes and revenue. As you can see on the left, the company performed over 11,300 funeral services in FY '19, up 11.8%. The chart on the right shows that Propel generated revenue of $95.1 million in FY '19, up 17.6%.

The charts on Slide 11 illustrate Propel's historic growth in operating EBITDA and operating NPAT. As you can see on the left, the company generated operating EBITDA of $23.8 million in FY '19, up 10.6%. The chart on the right shows that Propel generated operating NPAT of $13.3 million in FY '19, up 8.1%.

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 2.7% within our long-term target growth range of 2% to 4% per annum. In FY '19, average revenue per funeral was up 1.4% year-on-year and up 2.8% on a like-for-like basis.

Turning to Slide 13. Cash generation is a key focus. This chart shows how Propel's cash conversion has remained consistently high, averaging above 98% during the last 5 years, which is pleasing. As you can see in FY '19, cash conversion remained strong at 97.4%, slightly up on the prior year, with operating cash flows growing by 12.3% to $23.2 million. Cash conversion will continue to be a key focus.

I'll now hand over to Lilli, who will provide further detail on the FY '19 financial results.

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Lilli Gladstone, Propel Funeral Partners Limited - Head of Finance [2]

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Thanks, Albin, and good morning, everyone. We are pleased to report positive financial results in FY '19 despite challenging market conditions in the first half due to below-trend debt volumes, which started to recover in the second half.

This morning, I'll cover upon 4 key areas of Propel's financial performance: firstly, I'll provide an overview of the financial results via an analysis of the income statement; secondly, I'll highlight the key drivers of revenue and operating EBITDA growth and give some commentary on the margin; I'll then provide an analysis of the cash flows; and I'll wrap up by touching on the balance sheet and capital management.

Please turn to Slide 15. Propel generated revenue of $95.1 million in FY '19, an increase of 17.6% on the prior year. The increase was driven by the full year impact of 3 acquisitions completed in FY '18 and the part-year impact of 5 acquisitions completed during FY '19. Furthermore, the performance was impacted by growth in average revenue per funeral, offset by below-trend death volumes in the first half, which started to recover in the second half. Propel reported a gross margin of 70.7%, which was 1% higher than FY '18. The increase was primarily due to the financial profile of higher-margin crematoria acquisitions.

The company generated operating EBITDA of $23.8 million in FY '19, an increase of 10.6% on the prior year. Again, the earnings growth was acquisition-driven.

In terms of other items of note on the income statement, no performance fee was paid to the manager in FY '19. Other net income of $0.4 million largely related to the release of contingent consideration. Acquisition costs were materially higher than FY '18, primarily due to stamp duty on acquisitions completed during the year. And the reported noncash net financing charge on prepaid contracts, which is determined in accordance with AASB 15, was lower than FY '18, largely due to a reduction in Propel's implied cost of borrowing to 3%.

Propel generated operating NPAT of $13.3 million in FY '19, up 8.1% on the prior year, which translated to adjusted earnings per share growth of 8%. The adjusted effective tax rate for the year was 29.8% after accounting for nondeductible expenses and nonassessable income.

The waterfall on Slide 16 sets out the sources of revenue growth on the prior year. The chart shows the full period impact of 3 acquisitions made in FY '18, the part period impact of the 5 acquisitions completed during the year and organic growth for businesses held for 12 months or longer.

As you can see from the comments on the bottom left of the slide, in FY '19, average revenue per funeral increased 1.4% and funeral volumes increased 11.8%. In terms of organic growth in the center of this slide, the 22 funeral businesses owned throughout FY '18 and FY '19 experienced a 2.8% increase in average revenue per funeral, which was primarily influenced by pricing and sales mix and is within Propel's target growth range of 2% to 4% per annum.

Comparable funeral volumes were down 2.1% for the year. After a soft first half, it was pleasing to see the start of a recovery in the second half, which Albin will provide some color on shortly.

Importantly, observable market share was stable for these businesses. As you can see on the bottom right of this slide, the operating EBITDA margin was 25%, 1.6% below FY '18. It was influenced by below-trend death volumes on a largely fixed cost base and the financial and operating metrics of acquisitions completed in FY '18 and FY '19.

Operating costs for the 22 funeral businesses and 1 cemetery business owned throughout FY '18 and FY '19 were up 1%, notwithstanding increases in employment costs, for example, pay rises in accordance with the relevant awards and increases in third-party lease expenses.

As you can see on Slide 17, cash flows from operating activities increased to $17.4 million, primarily due to the increase in operating EBITDA. Propel experienced minor movements in working capital, and as Albin said earlier, cash flow conversion remained strong at 97.4%.

In respect of investing activities, Propel deployed approximately $26.8 million in connection with acquisitions, acquired 7 freehold properties not connected to acquisitions completed in FY '19, totaling $9.3 million and incurred capital expenditure of $3.6 million. I note that maintenance CapEx totaled $3 million, representing approximately 3.2% of revenue within Propel's target range of 3% to 5%.

The financing activities largely reflect the FY '18 final dividend of $0.064 per share for the circa 7 months post-IPO periods and the FY '19 interim dividend of $0.057 per share, both paid during FY '19, as well as the drawing of $12.9 million of senior debt.

Moving to Slide '18, I'll touch on prepaid contracts in the balance sheet. As at 30 June, 2019, Propel's prepaid contract funds totaled $47.9 million and are recognized on the balance sheet. The funds associated with prepaid contracts are largely invested with third-party friendly societies, who invest the funds in cash or fixed interest.

In accordance with AASB 15, 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 terms are made when the service is delivered. At that time, the liability is extinguished and revenue is recognized.

In FY '19, approximately 10% of Propel's Australian funeral volumes were attributable to prepaid contracts that [termed out] which was in line with the prior year. I note that there are no prepaid contracts in the New Zealand business.

As of 30 June, 2019, Propel had $5.3 million of cash, drawn senior debt of $12.9 million and freehold property at cost of approximately $76 million.

I also want to point out that Propel will adopt AASB 16 as required in its FY '20 financial statements. The estimated impact of the new accounting standard on the company's FY '20 financial statement is summarized in the Appendix on Slide 33.

Turning to Slide '19. In respect of capital management, subsequent to year-end, Propel expanded its senior debt facilities to $100 million, which now comprises 3 tranches: Tranche A matures in August 2021; and Tranches B and C mature the following year, reflecting a 3-year tenure on each tranche. As at 31 June, 2019, Propel remains comfortably in compliance with its debt covenants. After allowing for the funding of announced but yet to be completed acquisitions of just over $56 million, Propel has uncommitted debt of $26.2 million and a liquidity buffer of $28.5 million, which is available to fund the company's growth strategy.

And earlier today, the Board declared a final dividend of $0.058 per share fully franked, resulting in total fully franked dividend of $0.115 per share in connection with FY '19, representing a payout ratio of 78%.

I'll now hand over to Fraser, who will cover industry trends and acquisitions.

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Fraser Henderson, Propel Funeral Partners Limited - Head of Mergers & Acquisitions, General Counsel, Company Secretary and Executive Director [3]

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Thank you, Lilli, 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 the countries in which Propel has operations, mainly Australia and New Zealand.

In Australia, death volumes, which is the most significant driver of revenue in the death care industry, the ABS forecasts that death volumes will increase by 2.4% per annum from 2017 to 2026 and 2.1% per annum from 2026 to 2050.

Stats New Zealand forecasted death volumes will increase by 1% per annum from 2017 to 2026, accelerating to 1.8% per annum from 2026 to 2050. Few industries have the benefits of the certainty of that sort of tailwind. However, death volume growth is not linear, and can fluctuate month-by-month, quarter-by-quarter and, as with the case in 2018, year-by-year.

The funeral industry is highly fragmented in both Australia and New Zealand, and Propel is the second largest in both countries.

Slide 22 shows how Propel's estimated market share of Australia based on reported number of funerals performed, and estimated Australian death in 2018 has grown in the last 3 calendar years from circa 1.2% in 2015 to circa 5.6% in 2018. However, it is worth noting, that notwithstanding that significant increase, over 70% of the market is still owned by entities other than Propel and the largest operator.

Turning to Slide 23. Propel remains focused on executing its acquisition-led investment strategy. Since its IPO in November of 2017, Propel has deployed and/or committed almost $117 million on acquisitions. As illustrated in the slide on this -- the table on this slide, the acquisitions in aggregate are, on an annual basis, expected to contribute more than 5,000 funerals and over 3,000 third-party cremations to the Group and approximately $47 million in revenue. The acquisitions are geographically spread across Australia and New Zealand, are brands with distinct identities and are well-known in their respective markets. We are delighted that our new partners have joined, or will shortly join, the Propel network.

Last Monday, we were pleased to announce the signing of a binding sale agreement to acquire Gregson & Weight Funeral Directors for approximately $36 million, which, as Albin mentioned, is Propel's largest proposed acquisition to date.

Slide 24 provides you with some context of the scale of 2 of the 4 of Gregson & Weight's contemporary locations. The other 2 locations are also impressive.

Gregson & Weight is the market leader on the Sunshine Coast in Queensland, which is a growing region with favorable demographics. We consider Gregson & Weight facilities to be among the best in Australia. Completion of the proposed -- transaction, which we expect to be earnings accretive, is expected to occur in Q2 of FY '20 following satisfaction of the relevant conditions precedent. Propel intends to fund the acquisition from its recently expanded debt facilities.

Moving forward, management 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.

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Albin Kurti, Propel Funeral Partners Limited - MD, Head of Investments & Director [4]

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Thanks, Fraser. In terms of the outlook, Propel continues to be well positioned to generate sustainable long-term growth and value creation. We operate in a fragmented and essential service industry, with assets and infrastructure that are difficult to replicate, which stands to benefit from favorable demographic tailwinds over the long term. Although death volume growth is certain, unavoidable and predictable over the longer term, it's not linear and it fluctuates over time. In other words, death is certain, but its timing isn't.

Historical experience suggests that the year-on-year decline in death volumes in calendar year 2018 should be temporary, given prior year-on-year declines have rebounded quickly and the growing and aging population.

In that regard, the company's recent trading indicates that a recovery in death volumes is underway. As you can see from the chart on this slide, Propel's comparable funeral volume growth was down 7.8% in the first half of FY '19, was up 3.6% in the second half and accelerated to 8.5% between the 1st of May and the 31st of July.

Encouragingly, the company's positive trading momentum in the second half of FY '19 has continued into the start of FY '20. In the month of July, the company performed a record number of funerals, with comparable funeral volume growth materially higher than expectations and the prior corresponding period.

In addition, average revenue per funeral growth in July was within the company's target range of 2% to 4%. However, it's still very early in the new financial year, and as discussed, death volume fluctuates, so caution is required when forecasting over short time horizons.

In terms of the company's financial results, we expect to benefit from the acquisitions completed and announced during and since FY '19, other potential future acquisitions, although timing is uncertain, and funeral volumes reverting to long-term trends.

In conclusion, and as I summarized at the outset, I think the 3 key takeaways from our presentation today are: one, Propel achieved material revenue and earnings growth in FY '19 despite below-trend death volumes in the first half of the financial year; two, comparable funeral volume growth turned positive in the second half and has accelerated materially in recent months, including record volumes in July, indicating that a recovery in death volumes is underway as expected; and three, management is delivering on the company's investment strategy, with Propel well placed to continue its growth momentum, having recently expanded its debt facilities and subsequently announcing its largest proposed acquisition to date in Gregson & Weight.

With that, I'll now hand back to our moderator, Travis, to invite questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Sam Haddad from Bell Potter Securities.

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Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [2]

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Congratulations on the resilient result considering the difficult backdrop. Just on the recovery in volumes that we're seeing. Can you comment on how widespread that is? And what variability you're seeing across maybe metro versus regional versus -- or by state?

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Albin Kurti, Propel Funeral Partners Limited - MD, Head of Investments & Director [3]

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Sam, I won't go into specifics, but what I will say is that the positive comps we experienced in the second half was quite widespread on what was a soft prior comparable period for us. But across the network, some regions and locations performed stronger than others, as you'd expect. I think one example I will give, and this is based on data we received from birth, deaths and marriages in Tasmania, I think in February, we called out that the registered number of deaths in Tasmania in the first half had declined by 15.4% on the prior corresponding period, which was obviously very significant, whereas in the second half, death in Tasmania were up 8.8%, which is one example of the partial recovery we experienced in the second half, which we feel still has a way to go.

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Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [4]

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Okay. And sort of related to that, has the competitive environment changed like this first half versus the second half and as you go into FY '20, on the back of the improved volume backdrop?

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Albin Kurti, Propel Funeral Partners Limited - MD, Head of Investments & Director [5]

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Look, it's -- not really. I mean I don't think we've -- I don't think we can say that it's more or less competitive out there. What I think we can say is that our average revenue per funeral on a like-for-like basis was within our 2% to 4% market target range, and that's been the case in the start of FY '20 as well.

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Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [6]

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And just, it's also encouraging to see your margins, sort of, edge up from the first -- versus the first half. I estimate it's up sort of 50 basis points in the second half versus the first half. Is that -- what is that -- is that mainly the releverage on the back of the improved volume that's driving that?

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Lilli Gladstone, Propel Funeral Partners Limited - Head of Finance [7]

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Sam, Lilli. That's right. So in the first half, we delivered 24.8%. And in the second half, that margin was 25.2%. So in a typical year, the first half margin is higher than the second half because you get the benefit of the winter period. And obviously, in FY '19, we didn't have the benefit of that leverage, given the trading. Encouragingly, as those volumes have started to revert to trend in the second half, and more in particular, in the last 3 months, we have seen that margin improve further. And we're encouraged by that in terms of what that will translate to the margin in the first half of FY '20.

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Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [8]

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Yes. And based on your current business mix, what do you estimate your normalized margin to be assuming volumes continue to normalize? I sort of, on my estimate, so I'm looking at around 27%. Is that the ballpark roughly about where it should -- where the business stands at the moment?

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Lilli Gladstone, Propel Funeral Partners Limited - Head of Finance [9]

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Sam, look, I won't give specifics on what we think the margin will be in FY '20. But what I will say is, we think it will be north of 25%, which is what we delivered in FY '19, given the fact that we had our comparable volumes down 2.1%.

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Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [10]

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Okay. And just on your recent acquisitions, can you comment on how they've been performing as -- since you've IPO'd? I understand the market's been difficult, but looking through that, have they traded to expectations?

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Albin Kurti, Propel Funeral Partners Limited - MD, Head of Investments & Director [11]

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Yes, I think that's how I would describe it Sam, considering the soft market conditions in the first half. And then we've -- factoring that in. We haven't had any negative surprises.

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Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [12]

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Excellent. I guess a final question for me. Just the CapEx outlook, Lilli. Is there anything unusual to be mindful of those? Or is it just going to be between that 3% to 5% range that you've previously guided for?

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Lilli Gladstone, Propel Funeral Partners Limited - Head of Finance [13]

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Yes. So that's right, Sam. So we're obviously at the bottom end of the range in FY '19 at 3.2%. In FY '20, I would expect that to sort of tick towards the top end of the range, given the projects that we have on the go at the moment. So within the 5 -- 3% to 5% but at the top end of the range.

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Operator [14]

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(Operator Instructions) At this time, I'm showing no further questions. I'll hand the conference back to Mr. Kurti for closing remarks.

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Albin Kurti, Propel Funeral Partners Limited - MD, Head of Investments & Director [15]

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Well, thank you all for joining today's call. Lilli, Fraser and I look forward to catching up with some of you over the coming days and to providing updates on Propel's progress as and when appropriate.