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Edited Transcript of EROS earnings conference call or presentation 15-Jul-19 12:30pm GMT

Q4 2019 Eros International PLC Earnings Call

Mumbai Jul 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Eros International PLC earnings conference call or presentation Monday, July 15, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kishore Arjan Lulla

Eros International Plc - Executive Chairman, Group CEO & MD

* Prem Parameswaran

Eros International Plc - Executive Director, Group CFO & President of North America

* Rishika Lulla Singh

Eros International Plc - CEO of Eros Digital & Director

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Conference Call Participants

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* Timothy Wilson Nollen

Macquarie Research - Senior Media Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Eros International Plc's Fiscal Year-End 2019 Earnings Conference Call. This call is being broadcast live on the Internet and a replay of the call will be available on the company's website.

This morning, the company published its earnings press release on its website, erosplc.com. The company would like to remind everyone listening that during this call, it will be making forward-looking statements under the safe harbor provision of the federal security laws. The company's actual results may differ materially from those projected under forward-looking statements.

During the call, the company will also discuss non-GAAP financial measures and talk about its performance. You can find a reconciliation of these measures to the GAAP financial measures in the company's press release.

I would now like to turn the call over to Mr. Kishore Lulla, Executive Chairman and CEO of Eros International Plc. Please go ahead, sir.

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Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [2]

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Good morning, everyone. Thank you all for joining today's earnings call. We are pleased to share with you a very strong set of results, cementing our 40 years of market leadership position, solid business fundamentals and continued growth in Eros Now.

This year results showed that the business has evolved significantly from last year with 45% of combined revenue generated from digital and ancillary business and adjusted EBITDA margins expanded to 38%. This is truly a testament to our transformation as we transitioned to a digital business driven by Eros Now group. As we continue to develop our digital platform and adapt to the dynamic global media landscape we operate in, I wanted to take the opportunity to reiterate our milestones along this journey. At the core of our company lays the ability to deliver premium Indian films entertainment to the mass with unparalleled distribution capacity. Almost 20 years ago, we developed the first theatrically integrated film studio model in India. It's a testament to our leadership and DNA that we have been able to maintain and grow our market share in this rapidly changing industry.

Furthermore, Eros films have been amongst the most successful Indian films released in China. Notably, Andhadhun released in April 2019, which is now the third highest grossing Indian film ever to be released in China collecting over $43 million.

Our recent successful releases in China mark our entry into significant market, and we look forward to continued exposure in this region as we reach out to larger audiences in other countries. We were also blessed with one of our deepest and the richest Indian content libraries in the world. Over the last decade, Eros has been responsible for 36 of the top 110 highest grossing Indian language films at the box office.

Even in the digital age, premium content is still immensely available. We've pioneered the first OTT studio model in India, over 7 years ago, backed by our rich library and forthcoming slate.

Our industry relationship spanning over 40 years allow us access to the best talent across the nation. Our library is constantly evolving and initiating new and innovative content appealing to the audiences globally. The recent -- this started in the inaccurate campaign by the short-sellers aimed at damaging the company for simply a repetition of the court case that took against us, which was dismissed with prejudice as was their subsequent appeal. The Board is assessing strategic alternatives with the object of maximizing shareholder value and has engaged Citigroup to -- with this process. It is ongoing and the company will update accordingly as and when there are material developments. I would really like to thank all of our shareholders and stakeholders for their support.

And I would like to ask Rishika to join us in this conference. Thank you.

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Rishika Lulla Singh, Eros International Plc - CEO of Eros Digital & Director [3]

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Thank you, K. L. Hello, everyone. I'm really excited to share with you momentous Eros Now growth. The last quarter witnessed the growth of the subscriber base by 18% to 18.8 million monthly paid subscribers. This growth surpasses the guidance at the start of the year and stands at a whopping 130% year-on-year growth compared to 7.9 million paid subscribers for FY '18.

We would like to reiterate our targets of 50 million paid subs in 3 years. Our registered user base is 155 million users, which includes an additional 12 million registered users in the last quarter alone. Nearly 1/3 of this base has been added in the last 12 months, which indicates that we have been able to increase our consumer funnel, but more importantly, a larger part of the funnel is being converted into the paid subscriber base.

From a distribution perspective, a very strong quarter for Eros Now in India, we concluded commercial deals and launched with 2 key partners in India, Tata Sky and BSNL. Both partnerships are a direct contribution to decide on one of the direct-to-consumer play for Eros Now, and have been the primary reason for serious surge on all metrics, including paid subscriptions and time spent. To differentiate its strategy from the larger VoD universe in India, was the launch of our partnership with Verizon to target viewers in rural India, wherein, Eros Now, as-a-service, is up and running across 5 villages in Uttar Pradesh, and launching in Rajasthan in the upcoming quarter. These partnerships are key to growing our base and scale within India.

Additionally, our international distribution has seen 2 landmark deals, one with Virgin Media in the U.K. And with Apple, we are launching, in over a 100 countries, being the only international partner for their new services plan. Our compelling content proposition and intelligent technology are continually improved upon.

Today, according to Counterpoint Research, 68% of Eros Now users come to the platform daily in comparison to 59% for Prime Video and 56% for Hotstar. Eros Now is building for Tier 2, Tier 3 India, where we deliver deep and frequent entertainment to the masses in an on-demand environment. Our promise is to deliver the highest quality experience, be it the customer journey, technology, content, all customer service at the most affordable price. The tango between movies and originals worked beautifully as we derived walk-ins by a popular movie title and ensure that originals get adopted and build episodic viewing techniques for cinematic content.

With the most prolific distribution across telcos and distribution partners, we are the best suited to serve India and the diaspora.

I'm now passing it on to Prem Parameswaran.

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Prem Parameswaran, Eros International Plc - Executive Director, Group CFO & President of North America [4]

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Thank you, Rishika, and good morning to everyone. And thank you for joining us again today on our earnings call. We have made many accomplishments this year, which we are proud of. I look forward to sharing them with you in more detail. This year, we generated $304.6 million in gross revenues before the impact of IFRS adjustments compared to $268.1 million in fiscal year 2018, which represents a 13.6% growth rate on a like-for-like basis.

Adjusted EBITDA for the year was $103.8 million compared to $83 million last year, which represents an increase of 25.1%. Moreover, our adjusted EBITDA margins expanded significantly over the prior year to 38.4%, significantly above our initial market guidance of 35%. This is the first time since fiscal 2015, we have achieved over $100 million in adjusted EBITDA.

We ended the quarter with $135.8 million of cash on our balance sheet. On a 12-month trailing basis, our net debt as of year-end was $145 million and our net leverage ratio remains conservative at 1.4x. The majority of our debt has a long-term maturity profile and we have no significant near-term debt maturities.

Now turning back to the operations. Our digital and ancillary businesses posted its strongest annual results ever, generating a $123 million compared to $85 million in fiscal 2019, which represents a growth rate of 44.8%. This includes our fast-growing Eros Now business. This is also the first year our digital business has generated more than our film and TV syndication businesses, which demonstrates our shift to digital is well underway.

Our theatrical business generated $69.5 million in revenue this year compared to $79 million in fiscal '18. We released 72 films this year as compared to 24 films in fiscal 2018. Our TV syndication business generated $77.5 million of revenues this year compared to $97.2 million last year. As of March 31, 2019, our Eros Now platform had over 154 million registered users, and as Rishika pointed out, 18.8 million monthly paying subscribers. We'd previously guided the market to achieving 16 million paying subs by fiscal year-end, a target we were proud to achieve 3 months ahead of schedule.

Eros Now business continues to grow at a fast pace, fueled by increasing consumer demand, higher Internet penetration and most importantly because of our compelling premium content.

To recap some of our highlights, our digital business grew 45%, over $100 million in adjusted EBITDA, 18.8 million monthly paying Eros Now subs and a conservative balance sheet.

We want to thank you for being on this call. And now we're happy to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Tim Nollen of Macquarie.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [2]

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I've got several things to ask here actually. Maybe first of all on some fundamentals for the full year. It looks like your film release number was pretty good, but your revenues were down. I assume that is because of the mix of big-budget versus smaller-budget films. And you referenced your shift to digital, which is pretty clear with the digital and ancillary growth. I just want to make sure your film and your TV numbers were down, your Eros Now and digital and ancillary numbers were up quite a lot. This is all I assume part of the focused shift towards content production for Eros Now and in some ways I guess deemphasizing the film and the TV distribution business, if you could just clarify that, please? Also on Eros Now, you talk about increasing conversion rates from 8% to 12% in your press release. Are we talking about like a twofold or threefold increase in the price per sub on those direct-to-consumer relationships? Those were the types of numbers I think we were talking about previously, want to make sure those are still the types of numbers we're talking about now. And then couple of other things. You mentioned an impairment charge, which is quite a large number I thought, a little surprised to see that given the monetization potential your film content on Eros Now. So if you could please address that? And I guess lastly, you had -- I don't see a reference in the press release as to Sarbanes-Oxley compliance. I think this was something that you were looking toward at some point. I wonder if you could update us on that, please.

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Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [3]

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Yes. Good morning, Tim. So I will take the first question. I think you are totally, absolutely right. As stated before that the focus is not on the high budget films, focus is, even if you look at it, we had higher releases, but you know medium releases, which have done well on the box office. But higher releases gave us a bigger amount of theatrical revenues last year. So we had one big high-budget film, which we didn't have any in this. We had medium-budget and the low-budget films. And the focus is in the next years to come is how do we become a digital company rather than only a theatrical or even a syndication company. That's what the focus is going to be. Second question on the Eros Now, I would like Rishika to answer that on the conversion rates.

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Rishika Lulla Singh, Eros International Plc - CEO of Eros Digital & Director [4]

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Tim, the conversion rates are bounced off from our own internal conversion rates in terms of how we've been able to convert our funnel overtime due to past performance. However, it's important to know that this doesn't include or involve any changes in ARPU, as we are trying to reach out to Tier 2 and Tier 3 cities in India, moving out of metros to achieve scale. It's important for us to our pricing to remain competitive and conservative as we plan to achieve that to hit 50 million subs over the next 3 years.

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Prem Parameswaran, Eros International Plc - Executive Director, Group CFO & President of North America [5]

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Tim, it's Prem. And let me answer the impairment charge. So the impairment charge was part of IAS 36 under the IFRS accounting rules, which require a company basically to reassess the carrying book value of assets, both on a regular and annual basis and also in case of the irregular events. Example of these irregular events include major change in market conditions or technology, expectation of future losses or a material change in the listed equity value or negative cash flows. In this propose, the equity value of our company, our market cap has gone down. During fiscal year-end 2019, due to the significant decline in the market value, we tested impairment for carrying the value of net assets of the group exceeding our market capitalization and expenditure towards the purchase of content and film rights exceeding the positive cash flow from operations. Accordingly, we recorded a noncash impairment loss of $423 million net of taxes as an exceptional item within the P&L. This impairment loss recorded has been reduced from the carrying amount of goodwill, trademark, content/film rights and long-term advances to content vendors. This is a one-time exceptional item, which has no cash impact on the business.

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Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [6]

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And also this is reversible. As soon as the market capitalization of the company goes up, this could be reversed back to the same value also.

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Prem Parameswaran, Eros International Plc - Executive Director, Group CFO & President of North America [7]

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That's right.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [8]

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So can I jump in on that? So there's no change in your assessment of the actual real value of the film content, as it seems to me, it's -- the value is still there. I mean your Eros Now platform is growing, you should be able to monetize that more effectively. So it's the other items that are creating the...?

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Prem Parameswaran, Eros International Plc - Executive Director, Group CFO & President of North America [9]

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That's right.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [10]

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Okay. And on your transition from small company status, Sarbanes-Oxley compliance?

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Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [11]

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Yes. I think we will be transitioned to the Sarbanes-Oxley Act and I think when we will be filing our 20-F so we'll be filing our status on that also, which will be in the next 2 weeks.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [12]

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Okay. So that will be for March 2019 year-end, you expect you will be...

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Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [13]

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That's right.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [14]

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Applied in your 20-F. Okay. Excellent. And actually just related to that, this is your March quarter you're reporting now and I understood that...

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Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [15]

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No. These are full year results, no? Tim. These are full year results.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [16]

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Yes, yes. I know it's full year results for the year ended in March. I wonder if you could give us any view on when you might be reporting your June quarter results. And if there's anything at all you can say about the June quarter?

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Prem Parameswaran, Eros International Plc - Executive Director, Group CFO & President of North America [17]

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See, I think as we've said that we are -- our focus is on Eros Now and how do we grow the subscribers, as Rishika said, the 3-year target is 50 million subs. Yes, the focus of the company's strategy is the digital revenues, and secondly, working on the theatrical releases is the second thing. So how do we strengthen the B2C customers also, not only the telcos and not only the B2B2C, that's the focus the company's doing so whereby growing the subscriber base and producing high-premium content and higher EBITDA. So you have seen the EBITDA margin has gone up to 38.4%, that is resulting from the digital revenues as envisaged before.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [18]

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Okay. And if you don't mind me asking one last question, please, I know it's a lot. The credit ratings downgrade that you had in India, early June or so, I know you've put a release out a couple of weeks ago saying that you've paid all those bills and that should all be taken care of. Can you just update us on really what happened? And are we really sure that, that situation is taken care of? And is there something you can do now to get that credit rating reversed?

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Prem Parameswaran, Eros International Plc - Executive Director, Group CFO & President of North America [19]

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Yes. So I think the credit rating will be definitely -- we've taken up with the credit agency, yes, it should be reversed and there is nothing outstanding and we are in -- basically, there's no short-term maturities or -- in the next 12 months. And there is no technical default of any banks today serving us of any default of any interest payments or any loan overdue or any loan at all due as on date today.

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Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [20]

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And if I could just add, Tim, look, we've previously communicated publicly that all outstanding interest payments have been made. Two, in terms of CARE, I've gotten used to CARE now having really used to S&P and Moody's, but CARE obviously is an Indian credit rating agency. We are working with them to try to restore our investment grade status. It is highly unusual, right, to go 10 notches down, very unusual. And so we're working with them. There is a process in place to restoring your -- as per their guidelines, but I think we're trying to restore it sooner if we can. Two, there were reports or there was kind of fake news or false reports about Moody's in their withdrawal of their rating. Just to clarify for the record that we as a company had asked Moody's to withdraw their credit ratings -- withdraw their services, quite frankly, just because we do not have any institutional public bonds outstanding. We did the same thing with S&P as well.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [21]

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So you asked Moody's to withdraw coverage of Eros, essentially?

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Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [22]

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That is correct. That is correct.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [23]

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Okay. That's an important point, I think.

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Operator [24]

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(Operator Instructions) And we have a follow-up question from Tim Nollen of Macquarie.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [25]

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Well, okay, so I guess I'm back then. So the accusations that drove down your share price over the last couple of months. You referenced today in your press release that you had engaged Skadden Arps to do a full review. I think it was 2016 of everything basically. I just wonder is there anything that you can say that would be either the same or different now versus then in your corporate structure, your reporting systems? Anything that can reassure us that everything still holds from that Skadden review?

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Prem Parameswaran, Eros International Plc - Executive Director, Group CFO & President of North America [26]

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Yes, Tim. The -- obviously, nothing has changed since the Skadden review came out per se in terms of our internal reporting except they've gotten better. As you can attest, we've had Grant Thornton as our auditor, the fifth-largest auditing firm in the world. And they've consistently been auditing our reports. I think what's interesting too is if you look at the class-action that happened in the past with some of the similar nefarious people who have done it or back at it again, you'll notice that, that suit, that class-action was dismissed with prejudice, which is actually a pretty big deal. And then your appeal was also dismissed. So now you see some of these same types of things again. And it's really the short and distort crap, for a lack of a better word, that comes out. And it's quite frankly alarming to the market, alarming to companies like ours and others and it's something that we're going to take on.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [27]

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So is there anything with your corporate structure or your payment systems or anything like that, that is kind of brought about these attacks that you can do differently going forward?

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Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [28]

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I think, Tim, we are just observing our internal controls also so that it doesn't ever happen again. But the main point to note is any, all the other short reports, which have been published, there is nothing new, which has not been dismissed by the affiliated court with prejudice, so -- and which was not covered by the Skadden into their review. So that's the main point.

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Operator [29]

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And ladies and gentlemen, we have reached the allotted time for questions and answers today. I would now like to turn the call back over to Mr. Kishore Lulla for any additional or closing remarks.

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Kishore Arjan Lulla, Eros International Plc - Executive Chairman, Group CEO & MD [30]

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Thank you, everyone, thank you all of our shareholders, thank you, stakeholders, for supporting the company. And have a good day.

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Operator [31]

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Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.