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Edited Transcript of CARU.NS earnings conference call or presentation 6-Aug-19 10:30am GMT

Q1 2020 CL Educate Ltd Earnings Call

NEW DELHI Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of CL Educate Ltd earnings conference call or presentation Tuesday, August 6, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Arjun Wadhwa

CL Educate Limited - CFO

* Nikhil Mahajan

CL Educate Limited - Executive Director & Group CEO of Enterprise Business

* R. Satya Narayanan

CL Educate Limited - Founder & Chairman

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Conference Call Participants

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* Sandeep Talwar;Banyan Tree Advisors;Director

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the CL Educate Q1 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Mr. Arjun Wadhwa, CFO of CL Educate Ltd. Thank you, and over to you, sir.

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Arjun Wadhwa, CL Educate Limited - CFO [2]

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Thanks, Raymond. This is Arjun here. I'm joined on this call by my co-panelist Nikhil Mahajan, who is the Executive Director of CL Educate; and Satya Narayanan, the Chairman of CL Educate.

I'll walk you through the early slides before handing it over to Satya for the Consumer Business.

If you can start on Slide #6, please. This will give you a consolidated financial snapshot of how the quarter was for us. Our net profit grew 14% about INR 70 lakhs to INR 5.59 crores compared to INR 4.9 crores same time last year. Our EBITDA margin is up 300 basis points and EBITDA itself is up to INR 12.78 crores, that's almost a 25% growth. You'll see a similar growth in our number of enrollments, another 25% to about 30,762 as compared to 24,000 last year. And our revenues remained stable, reasonably flat. It was INR 87 crores last year and it's INR 86.2 crores this year. The primary difference you see over there is on account of implementing Ind AS 115 where we took the entire impact of 115 in the final quarter. Whereas this year because it's a year through Ind AS 115 having been implemented, the impact has been -- will be taken on a quarterly basis. So you'll notice that the comparative number for Q1, Q2 and Q3 will be slightly off on account of Ind AS 115 impact because the entire impact last year was taken in the final quarter.

I'll move ahead to Slide #7. This gives you a little bit more details on that -- on the figures that we shared previously. Our revenues, as I shared earlier, are down about 1%. Our expenses for the same period are down about 2.5%. This is largely on account of the business integration that we've done over the course of the last year for the acquisitions that we had made in the previous financial. So on account of those optimizations having kicked in, our costs have come down by a couple of crores. This has resulted in our net profit growing 14% whereas the EBITDA impact, you notice, is 25%.

The EBITDA impact is about 10 percentage points higher than the net profit impact largely on account of Ind AS 116 getting implemented in this quarter itself and as most of you are probably aware, the 116 impact on account of rent also has a corresponding impact on depreciation and interest. So the EBITDA is a little bit higher and will continue to be the same as you compare quarters going forward.

The other financials, the EPS, the EBITDA margin and the net profit margin are also there for you to see.

I'll move forward to Slide #8. This is how the segmental revenues look. As shared previously, our total revenues are more or less flat compared to the previous year. The consumer Test Prep is down 18% in the publishing space. As I said, this is largely on account of Ind AS 115, where we have -- where we now account for sales return on the revenue side and that's adjusted when declaring revenue rather than it coming lower in the -- on the expenses side. So that is the reason for that significant impact that you see of 18%.

Correspondingly, you'll see our institutional business having grown 9% from INR 3 crores to about INR 3.3 crores.

I'll now hand you over to Satya for a quick overview of our Consumer Business.

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R. Satya Narayanan, CL Educate Limited - Founder & Chairman [3]

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Hi. Good afternoon, Satya here. I'll take you straight away to Slide #12, which covers the Test Prep Business.

You see in the Consumer Business, one of the important pivots that we are making is to move slowly and surely towards the more clearly visible placements-driven jobs-driven areas within Test Prep also outside of Test Prep. For example, the programs that we have such as banking, RBI, GATE, Civil Services, all of these are straight. They take you into a job or a career kind of segment.

So machine learning, data science, AI is the new practice that we started about a year ago and if you look at Slide #12, what you'll find is that, that one, as well as the GATE online programs, have begun to find traction in the early pilots that we have launched and this is what you're seeing reflecting as growth in volumes in the Slide 1 that Arjun took. We have grown our digital business about 38%. And volume growth is about 25%. And if you look at this slide, we have added about 7,000 new customers in GATEflix, that is in our GATE online program. And machine learning, we have added about 5,000 students here.

So one of the things that we see as a very solid shift that is happening in the market and we want to catch that shift, is the consumption of programs at home, digitally, on mobile and also to be able to break down the products into more consumable sachets of smaller sizes. And you'll see that happening. So the result of which is going to be that at the headlines number, the average price realization will look smaller as we move into the future. And the volumes will look larger and that's a good success to have because these are higher EBITDA businesses, which goes directly into the homes of the consumers, at home or even inside institutions.

Our challenge continues to be the flatness of the MBA, which is a flagship, the offline program. And the growth of the online MBA Test Prep though looks reasonably attractive and we are focused on offline and online separately. They deliver different volumes of growth but we're focused on both of them.

IPM is a new program that IIMs launched. It has been there with IIM Indore for almost a decade now. But IIM Rohtak has launched the program. This is the integrated program in management for undergrad students after Class 12. This one, we hope will see a lot of traction. And on a year-on-year basis right now, we are seeing 2.5 to 3x growth in numbers and this could be a good growth engine within the test prep over the next 3 to 4 years.

Machine learning, just a couple of points about that. We -- as you are aware, we covered it in the last analyst call also and a couple of press releases we have put out in our investor zone on our website. We have an AICTE-approved internship program, which is mandatory for all students in technical institutions to do 2 internships. And this one would get counted as one of those 2 internships. We have had 15,000 students registered out of which about 4,600 are active learners and the other end of this funnel results in jobs being given out to students and as we speak, we are putting out our first batch of 26 students into companies who will pick them up straight from our cloud recruitment platform, Aspiration. Ai.

If you look at the bottom of the slide, you have a YouTube video, the link of which is also available on the investor zone for you to download and see. It gives you a very clear view of how does this service work whether for a student or even for an institution to increase their placement outcomes through data science, AI, ML and we will add more programs once we see a lot more tractions and revenues on this.

For publishing, I will request Nikhil to pick it up from here.

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Nikhil Mahajan, CL Educate Limited - Executive Director & Group CEO of Enterprise Business [4]

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Thank you, Satya. Good afternoon, everybody. I'll cover the 3 other verticals of the businesses. First, in the Publishing business. There are 2 or 3 key highlights, which I want to bring to your notice. One, Q1 usually is the lowest quarter for the Publishing business, not just for us but almost for everybody in the industry because during the summer vacation most schools and colleges being closed the book sales are at their lowest point. The business usually starts picking up when the schools and colleges reopen towards end of June, July.

If you will look at it, this is one vertical where we see 17%, 18% decline in revenue, which is not that at the operating level but it's largely driven on 2 counts of what Arjun articulated a couple of minutes back is the way sales returns have to be accounted for now under the new revenue accounting standard, Ind AS 115.

Earlier, the sales return -- or anticipated sales return was netted off at the margin level at this -- in the P&L. However, now, the sales have to be reduced and hence, that dual sales numbers of this year and the Q1 sales number of the preceding first quarter is strictly not comparable because last year, when it was the first year of 115 implementation we were still evaluating how it will work out and it was only in the final quarter that we accounted for the entire adjustment and not on a quarterly basis. So that is one aspect.

The second aspect is this year, CBSE has announced change in pattern of exams for the boards of Grades 10 and 12 for next year and we have to change our curriculum and books, which go into the market for both Grade 10 and 12. Some of it resulted in the business spilling over from the month of June on to July.

Job market has been pretty tight in the conventional areas of technical as well as nontechnical segments. Many of you would be aware that GATE test takers are down by about 35% from the 9.5 lakhs test takers in 2015 level. And that has a cascading effect on the number of people who are actually either buying new books or coming for prep for exam for technical jobs like GATE or engineering services or any other technical jobs at non -- the other public sector or government enterprises, which don't take through GATE.

This industry continues to remain tight on -- the returns continue to plague -- is one of the biggest problems and challenges. The returns continue to remain high and consequently, the ability to collect data because of the extreme fragmentation remains high not just for us but for almost everybody in the industry.

Now coming to the Enterprise business. If we look at the Enterprise business also has been more or less flattish. Corporate business anyhow is lower in this quarter predominantly because some of our leading corporates were international customers. They had their annual closings in June. And they usually spend the least amount of money in this quarter. Their new year budgets get released in July and we have a reasonably sound pipeline for the coming 2 quarters and we anticipate the business to pick up.

Institutional business has grown by about 10% during this quarter. Again, once the admission season for the previous cycle gets over by end of July, the new year business begins to pick up. We already are seeing reasonable traction on that and I think the numbers will be much better and positive-looking as we move into Q2 and Q3.

I think that's the basic update I have from my side. On the organizational updates, there's one specific update on the consolidation and the merger thing. We have received the stock exchange approval from both BSE and NSE and as well as SEBI. The NCLT filings are expected to happen this week. We have done a lot of pre-work in terms of getting necessary creditor approval prior hand so that very few meetings are required to be called by NCLT for necessary approvals. Going forward, we expect that at the NCLT level we should take another 6 to & 7 from now on for the process to get completed. So hopefully before that fiscal year is out, this consolidation should have taken shape. We will keep you updated over the next couple of quarters on the developments on this front.

With that, I come to the end of this presentation and we're happy to take any questions as you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Amit Varma who's an individual investor.

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Unidentified Participant, [2]

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So my question is actually on the cash flow. I've been asking this question to Investor Relations for almost 2 weeks. I haven't got an answer. So what was the cash flow situation at the end of the year? That's Q4.

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Arjun Wadhwa, CL Educate Limited - CFO [3]

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March '19 or the expected March '20?

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Unidentified Participant, [4]

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Yes, March '19 for the financial year.

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Arjun Wadhwa, CL Educate Limited - CFO [5]

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Amit, we put up our financials for the previous financial year last week in the investor zone. You should be able to access them now. If you go to the investor zone link, there's a section there which has the financial statements. Under that, you will see the FY '18/'19 results. The CL Educate standalone financial statements will have the cash flow for that organization and so on for the rest of the organizations. Okay. Are you able to access the links?

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Unidentified Participant, [6]

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I will just look up into that link. But what was the -- do you have -- offline or -- off-hand what is the...

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Arjun Wadhwa, CL Educate Limited - CFO [7]

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We'll have the link shared and sent across to you so that you can access the cash flow.

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Unidentified Participant, [8]

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The other question I have for Satya. Satya, basically, we were discussing that apart from MBA, the other 4, 5 sections, which you wanted to grow. We are not seeing that growth in that segment, the science segment or the school's segment. Would you want to highlight what are the challenges that we have in growing that part of the business?

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R. Satya Narayanan, CL Educate Limited - Founder & Chairman [9]

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Yes. Amit, Satya here. So the lines that are responding quicker from the marketplace, Amit, that is where we are doubling down and focusing harder and these 2 are in the area of our GATE and the job-oriented courses, which is AI, ML, data sciences, okay? Within the core business, what we call as the basket of 8 to 12 aptitude products, which is given by the IPM and the variance of law, they're showing good progress. But the large, big benefit of it will come when our engineering and tuitions also pick up. So if you ask me where do we expect growth in the next 12 months other than the MBA, I would say it would be from entire data school portfolio of products, GATE and IPM. The others will take 24 months for us to see a significant uptick in volumes and numbers. And we are trying some ways of breaking through, which would be a little out of the box. I will keep that as a pilot that is underway and share it when more results show up on our dashboards.

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Operator [10]

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And the next question is from the line of Sandeep Talwar from Banyan Tree Advisors.

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Sandeep Talwar;Banyan Tree Advisors;Director, [11]

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Yes, Satya. Congratulations on a good set of numbers. Just a few questions I had. 1, I find that your other expenses have come down quite dramatically in this quarter versus last year. If you could shed some light on that. What is the reason for that? And 2, what is the total number of employees and was it the same number last year?

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Arjun Wadhwa, CL Educate Limited - CFO [12]

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Sure. Sandeep, this is Arjun here. I'll respond to that. The other expenses are down on account of a number of factors. One of them being our rent. We've shifted to our new premises. The rental cost of that are significantly lower. In addition to that, because of Ind AS 116, the entire rental expenses of the organization as a whole has got reclassified as assets and depreciation and interest gets marked on that now. So because of that reclassification, the rental expense has come down by 96 lakhs on a stand-alone basis and even more on a console basis when you add the impact that it's having on Keystone. So that is one of the primary reasons why the other expenses are down.

Other parts of the other expenses includes business promotion, marketing expense, a lot of event-related expenses related to Keystone. So in a lot of different areas, you'll find marginal decrease, which are at a consolidated basis, show INR 2 crores change, INR 83.85 crores last year to INR 81.7 crores for total expenses, a large chunk of which come from the other expenses factor.

Your second question was regarding the number of employees. Actually, the number of employees are more or less the same. One of the conscious efforts we've made this year is to focus on building more muscle than fat. So we've increased the number of people in our sales team across the organization. And because of the integration that we've done of our businesses on account of the acquisitions we did last year, there's some rationalization of manpower that happened across our network.

Additionally, one major change that happened was last year, we had a lot of company-owned centers in quarter 1, which became franchise centers by this time this year. So the manpower that were on our roles for those company-owned centers at that point in time are now shifted onto our business partner roles. So the quantum itself is more or less identical. It would be in the range of about 600 people. But if I were to look at the breakup of them across different businesses and across different SBUs, it would be -- that's where the primary change has happened. Does that address your query?

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Sandeep Talwar;Banyan Tree Advisors;Director, [13]

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Yes. I did get -- another follow-up question. What is your stated dividend policy? What percentage of profits do you expect to give out as dividends every year?

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R. Satya Narayanan, CL Educate Limited - Founder & Chairman [14]

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Sandeep, Satya here. Our stated policy is that we will give 10% of PAT as a minimum -- during the course of the year. We adhered to that last year. And this year, we'll keep an eye on how we are going and at an appropriate stage, the Board will consider what should be the actual action this year.

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Sandeep Talwar;Banyan Tree Advisors;Director, [15]

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Isn't that a little low for a business which does not require so much capital?

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R. Satya Narayanan, CL Educate Limited - Founder & Chairman [16]

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That's a minimum benchmark that we have set, Sandeep. It doesn't stop us from giving more than that. And at the same time, we also are a little mindful of the fact that in the current scenario where we are competing on one hand with the legacy offline players and hugely funded startups, we don't want to be very radical. But we are keeping an eye and we understand that we are an asset-light business. We can return more. But we are still in a stage of discovery of some new business-creating ventures. So we will do that. Investment etc...

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Operator [17]

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(Operator Instructions) The next question is from the line of [Muthu Kumar] from [Independent Research].

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Unidentified Analyst, [18]

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My question is -- Satya mentioned about the higher EBITDA, which could be expected where you get into the digital phase of consumption TV programs and breaking down into smaller sachets. So just on the larger scheme of things, can you tell us what would be the kind of EBITDA margins at the corporate level we can expect for the company going ahead?

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Arjun Wadhwa, CL Educate Limited - CFO [19]

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[Muthu], are you mentioning about the absolute figure or the change in the composition?

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Unidentified Analyst, [20]

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The absolute figure also. The absolute figure largely. Like in terms of what kind of terms of numbers you can look at on the corporate level?

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Arjun Wadhwa, CL Educate Limited - CFO [21]

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Yes, just as a matter of our investor disclosures, we -- as for our Board debated things we don't talk about projected numbers. But we are working towards 2 outcomes. So [Muthu], we're looking at expanding it in terms of superior outcomes in 2 directions. One is while we show a healthy growth of EBITDA as an indicator of health in itself the other important thing that we're focused on is the composition of how much comes from traditional offline business, which actually literally is a 15% EBITDA business because if we charge a 25% royalty and a 10%, 11% growth in operating expenses, that's a 15% EBITDA business.

Whereas our online programs are anywhere between 45% to 90% EBITDA, depending upon which program we're talking about. For example, if you take a CAT or a law or a civil services test series or a self-consumption canned program there is no operating or delivery costs actually just goes up and the consumer picks it up. Whereas if it is a delivered live online, but it goes to your home, it's a 45% to 50% EBITDA business. So our whole effort is to see if the growth in volumes happen and the composition of the offline to online is captured healthily. Then the weighted average of our EBITDA could move to upwards of 20%, 25% over the next 24 months as a -- at a weighted average.

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Unidentified Analyst, [22]

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Okay, okay. Also one follow-up question related to the numbers. Arjun, can you tell us on the financial costs there has been an 86% jump in the numbers that you had predicted. To what extent it is actually not the Ind AS effect?

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Arjun Wadhwa, CL Educate Limited - CFO [23]

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86%. I'm sorry, I didn't quite catch that number that you're referring to.

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Unidentified Analyst, [24]

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INR 205 crores of financial costs as compared to the last year INR 110 crores.

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Arjun Wadhwa, CL Educate Limited - CFO [25]

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This was more on account of taking working capital loans. And largely because of the rental expenses that have got moved into the -- on account of Ind AS 116. The reclassification of what was earlier a rental expense last year now gets reclassified partially as depreciation and partially as the finance cost. So there's -- together, there's a 96 lakhs increase over here on a cumulative level as against an 82 lakhs decrease in the other expenses. So the net impact on a PAT level is about 14 lacks, but the cumulative impact of the finance and depreciation level is 96 lakhs as against the rental impact of 82 lakhs.

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Operator [26]

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(Operator Instructions) As so there are no further questions, I'd like to hand the conference back to the management team for any closing comments.

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Arjun Wadhwa, CL Educate Limited - CFO [27]

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Okay. Thanks, Raymond. Thank you very much to everyone who logged in and participated today. We'll be back in another 3 months for the Q2 investor call. Thank you so much for your time, and speak to you again soon. We remain available at our email addresses and the phone numbers that we've shared in our presentation. Should you have any additional queries, please feel free to get in touch with us. Thank you.

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Operator [28]

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Thank you very much. On behalf of CL Educate, that concludes the conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.