Q4 2019 Earnings Call

Thank you. Hello to everybody on today's call with me today are are co-founder director and chief executive officer and Mr. Haug our Chief Financial Officer Operator just mentioned today's call is being recorded and webcast replay will be available on the company's I our website am i r. Please note that the discussion today will contain forward-looking statements made under the Safe Harbor Provisions at the US private Securities litigation Reform Act of 1995 Ford looking statements involve inherent risks and uncertainties as such the company's actual results may be materially different from the office frosted a further information regarding this and other risks and uncertainties is included in the company's annual report on form 20-f for the physical year ended December 3rd.

31st 2018 and other filings as filed with the US Securities and Exchange Commission.

The company does not assume any obligation to update any forward-looking statements except as required under applicable law during this call today management will also discuss certain non-gaap Financial measures for informational purposes. Only the company's fourth-quarter and full-year 2019 earnings, press release contains a Reconciliation of the analogy of non-gaap measures wage and not active most directly comparable gaap measures now, I'll turn the call to miss you for her to take us through the review and update on the business.

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Thanks to all of you who have joined us today. I will review our business and operating results for the fourth quarter and full-year 2019. And then our CFO Chris will then follow with a full detailed review of the financial.

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In the fourth quarter of 2019 in the face of many challenges in the overall Market we continue to focus on growing are for businesses improving the educational quality of our educational offerings and services increasing operational efficiencies, achieving higher levels of customer satisfaction, and finally is Laurie new business business initiatives.

Did you are you doing yes, sorry for inconvenience usual Home Depot Thursday at the end of December twenty nine p.m. We have a total of 30806 students enrolled at our directly operated suck an increase of 30.4% year-over-year from 23627 students at the end of 2018. This growth was primarily driven by the fact, he not work extension as well as increasing utilization at our facilities both domestically and overseas.

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Do all the year of 2019 we carried out our brand portfolio strategy in response to the diverse needs of students and families while actively supporting new regulatory policies up early childhood education in 2019 specifically during the second half. We have made enhancements in the existing premium International Early Education Services off our facilities on solid foundation of the dedicated operations and performance of our map market-oriented kindergarten and inclusive facilities with our domestic operations team and educational know how piggybacking off the strong brand for a brand Equity bilingual education and. Training of our Singapore operations. We upgraded several existing location and has opened new one that now offer reinvigorated bilingual education to students going forward. We're confident that they will not only help us care to the vet.

Need a families and students but also broaden our students based and substantially generate incremental revenues and profits.

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Additionally we continue to make news progress integrating business operations across multiple geographies through resource sharing it system integration and in reaching our suite off diversify products and services are single poor business also will serve as an additional corporate base for talent development principal and staff training and an exchange Forum location for Best Practices in early childhood education in 2020. We will further execute on this integration and explore more methods for collaboration targeting additional synergies between our domestic and overseas business so that we may better serve our students and their families.

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Do you Singapore operation has also been making its own study programs which resulted in Healthy Growth in 2019 with its unique geographical location. It is well positioned to organically expand its existing Educational Services and offerings to surrounding countries and regions and to serve the needs of bilingual education package the educational site as for the Single part Market. We also pursue a high-quality acquisition opportunities further leveraging The Talented local team and solid track record in early childhood education research and promoting the growth of our Singapore operation.

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Moving on to our franchise clam learning Centre business by the end of the fourth quarter of 2019. We have more than 1,100 Play and Learn Center in operation long as we discussed in our third quarter earnings call. We have proactively slow down the pace of adding new PLC franchisees during the second half of 2019 focusing instead on upgrading our phone services and content offerings for existing franchise Partners going forward. We are emphasizing deeper penetration in cities and regions where we already have strong Market leadership off gradually establishing our presence in new areas strengthening promotional efforts and homing in on Recruitment and service support comprehensively for our PLC franchise fees to deliver better performance. Overall. We are optimistic that Early Education spending will still remain a top priority for family budget and parents standing.

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In addition to focusing are for kindergarten and Play and Learn Center business in 2019. We also pursued new initiatives Center censoring our overall strategy to build a global education ecosystem empowered by Technologies towards a better and more effective integration online version of line service for families are often develop mobile applications. I love family education apps offers structured quality educational content easily accessible to students and families with rapid changes in educational processes and costing deliveries of all sorts of information nowadays. We hope that with the help of this mobile app, we can facilitate this generation of young parents parent-child interaction with family education and children's Early Education currently at kindergarten and at home we aim to fulfill the evolving needs of parents and hope to receive good user feedback.

Over time we think that with meaningful amount of user traffic in the future the app has this potential of generating Revenue.

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I would like to briefly talk about the measures and actions we've taken since the coronavirus outbreak over the past two months. China has fought with tremendous loss against the coronavirus outbreak as a responsible corporate citizen. We have taken heightened measures regarding facility security and Health Management. Seriously, including first bought the quickly established response working group set up a health status tracking mechanism and system for the company and the facilities Nationwide to track the health conditions of students birth family and of our stock which is updated on a daily basis.

Second are established working group headquarters how quickly prepared emergency supplies and coordinated with Regional Offices to ensure local distribution to our facility across the country plus a headquarters has given heightened support for facilities in hebei Province. The epicenter in China were searching kindergarten and fifty thousand or plan learn centers are located third provide guidance on epidemic prevention and control to facilities Across the Nation and issued internal guide on covid-19 prevention and control specific to headquarters kindergartens and plc's and requiring facilities to comply and implement the measures thoroughly.

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Since we've been having a technical issue with Serena's line out, I'll briefly translate for grease on the paragraph that she just commented on we have worked diligently to provide our students young families with continuous co-parenting support resources, which facilitate at home learning and parent-child interaction in an effort to maintain educational continue birth continuity for families and teachers affected by the facility closures. We have provided free access by our self development mobile app and collaborating third-party platforms to an entire library of home education content in particular in early February. We launched a series of online educational content comprising of ten learning modules Kindergartens.

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Proven to be very popular reaching over a hundred thousand students and students in total for franchise Play and Learn centers. We also offer a 1999 Day free access to education content on the Isle of which are attracted over three hundred thousand registered users to date other parts of the efforts also include additional online training for our teaching staff during this time. We are in frequent communication with parents teachers and staff. We're actively communicating our actions and plans and getting money back from parents in this difficult time.

Wait, I want me to shoot wheezing comes to the shoes off going forward. We will continue to execute our growth strategy by focusing on our core operations advancing our digital transformation which leverages off of developed platforms and external resources and developing new and innovative ways to serve Children and Families.

Hold me in your team woman named officer to provide highlights of fourth-quarter and full-year financial results of 2019.

Thank you Grayson, Serena now, please allow me to go through a fourth-quarter and full-year 2019 Financial results. Please also refer to our earnings press release posted on our web site for a completion complete discussion of our financial performance over the past quarter and and and the past Financial year in the fourth quarter of 2019. The number of students enrolled at our directly operated facilities reached a $30,806 students and our net revenues grew 12.7% gross profit the fourth quarter increased by 24.8% as compared with the same period last year while operating income were 3.3 million u.s. Dollars versus an operating loss of around $530,000 during the fourth quarter of 2018.

For the full year 2019. We delivered a decent increase of 16.5% in revenues and a positive operating cash flow of Thirteen million dollars as compared to $800,000 during 2018.

The Health and Welfare of our children and families. We serve is of our highest priority over the past couple of years. We have invested in initiative to enhance teacher training and upgrade our operating system today. We have a very solid professional foundation in place that allows us to respond effectively to unexpected development such a drastic covid-19 outbreak despite the temporary suspension of some of our operations as a result of the disease. We remain confident that the resilience of our business.

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Reading technology into our offering we are pressing ahead with our company-wide digital strategy to drive education Innovation. We see this as a viable way for us to provide a wide spectrum of products and services and diversify revenue streams technologies will also allow us to achieve a better cost of structures and improved operating efficiencies, ultimately to deliver a long-term profitable return for our investors.

No moving on to the fourth quarter financials net revenues for the fourth quarter of 2019 increased by 12.7% to Fifty Point seven million dollars fifty five million dollars for the same quarter of 2018 service revenues for the fourth quarter of 2019 increased by 21.3% to 46.6 million month from 38.5 million for the same quarter of last year. The increase was primarily contributed by student enrollment gains in directly operated facilities in ramp-up stage and from directly operated facilities in Singapore franchise Revenue franchise Services Revenue also increased due to the expansion of our franchise Network and an increase in average child speed.

Prada revenues for the fourth quarter of 2019 decreased by 37.4% to 4.1 million dollars from 6.5 million for the same quarter of last year. The decrease was primarily due to a decrease in the amount of merchandise that we sold through the company's franchise Network cost of revenue for the fourth quarter of this year was four point nine million dollars, which is a 10.2% increase from 37.1 million for the same quarter of last year cost of revenues for services for the fourth quarter of this year was 839 Point 1 million compared with thirty three point six million for the same quarter last year. The increase was primarily due to hire staff compensation and operating costs sucks rental and material consumption as we continue to moderately expand our facility Network including directly operating facilities in Singapore require that we acquired during the second quarter of law.

Yeah.

Cost of products for the fourth quarter of 2019 was 1.8 million compared with 3.5 million for the same quarter of 2018. The decrease was generally in line with the decrease in product revenues.

Gross profit for the fourth quarter of 2019 increased by 24.8% to nine point nine million dollars compared with 7.9 US dollars for the same quarter of Tucson AZ cost margin for the fourth quarter of 2019 was 19.4% compared with 17.6% for the same quarter last year.

Total operating expenses for the fourth quarter were six point five million compared with eight million of the fourth quarter of 2018, excluding share-based compensation expense operating expenses were fast 5.6 million representing a decrease of 17.6 million from 6.8 million for the fourth quarter of 2018 selling expenses. Fourth quarter were 700700000 a quarter were 5.9 million, which is a 20.2% decrease from 7.3 million for the same quarter of 2018.

excluding

Based compensation expenses General and administrative expenses were five million u.s. Dollars for the fourth quarter of 2019 compared with 6.1 million US dollars for the same quarterback on eighteen the decrease in our G&A expenses, excluding share-based compensation expenses was attributable to are more stringent cost control measures the Cherbourg compensation expenses included in G&A were $900,000 for the quarter.

Operating income for the fourth quarter worth 3.3 million as compared with $100,000 of operating loss for the same quarter last year, but just it operating income with a 4.2 million for the fourth quarter compared with 1.1 million dollars of the fourth quarter of 2018.

Net income attributable to ordinary shareholders of all right be for the fourth quarter where to $200,000. This is in comparison with $600,000 of dollars for the same quarter of 2018 adjusted net income attributable to ordinary shareholders of our i b, which excludes the impact of nine hundred thousand of share-based compensation expect for the quarter was 1.1 million, which is in line with the one point 1 million that we had for the fourth quarter of 2018 basic and diluted net income per se. Yes attributable to ordinary shareholders for the fourth quarter. This year were both $0.01. This is in comparison with basic and diluted net income attributable to ordinary share of $0.02 for the same period of 2018.

I did just get basic and diluted net income attributable to ordinary shareholders might be for the fourth quarter of 2019 were both $0.04 compared with $0.04 and $0.03 respectively for the same quarter of 2018.

Keep it up for the fourth quarter of 2019 was 6.7 million as compared with four point three million for the same quarter of 2018, but adjusted ebitda for the fourth quarter of seven point six seven point six million dollars compared with five point five million for the same quarter of 2018. Now moving onto the full year of 2019. Am not revenues fall 2019 were 182 point three million compared with a hundred and fifty six point five million for 2018 services off for the full year of 2019 were a hundred and sixty six point two million dollars compared with 139.2 million dollars for 2018. The increase was primarily attributable to increase tuition fees to a student mixed shift enrollment increase at our directly operated facilities and the contribution from acquired facilities off.

Good news for the full year. We're 16.1 million compared to his 17.3 million or 2018 the Deep the decrease was primarily due to a decrease in the amount of merchandise that we sold through the company's franchise Network cost of revenue for the full year of 2019 was 155.5 Million compared with 130.9 million for 2018 cost of revenues cost of services revenues for the full year of 2019 was 147.7 million dollars compared with a hundred twenty one point five million for the for the year 2018. The increase was primarily due to an increase in staff compensation and higher operating such as rental and material consumption as we continue to model modestly expand our facility Network.

Cost of products revenues for the full year of 2019 was 7.9 million compared with 9.3 million for 2018 gross profit for the month 2019 was 26.7 Million compared with twenty five point six million for 2018 gross margin for the full year of 2019 was 14.7% compared with 16.4% for 2018 total operating expenses for the full year were twenty six point six million compared with twenty eight point seven million for 2018. And it's if we exclude share-based compensation expenses operating expenses were twenty two point six million compared with twenty two point 1 million for 2018.

Selling and selling expenses were 2.8 million for the full year of 2019 compared with 2.2 million for 2018 General and administrative expenses for the four years nineteen or twenty three point eight million compared with twenty six point four million for 2008 and 18, excluding share-based compensation expenses. GNA senses were nineteen point nine million for the full year of 2019 compared with nineteen point nine million for the 2018 despite Network expansion and this is Faith in Greater extent. Thanks to our stringent cost control measures.

Operating income for the full year of 2019 was $200,000 compared with operating loss of three million dollars for 2018 adjusted operating income a 2019 was 4.1 million compared with 3.7 million for 2018.

Net loss attributable to ordinary shareholders of all where I be for the full year of 2019 was 2.4 million compared with 1.8 million for 2018 adjusted net income attributable to ordinary shareholders of r y v which excludes the impact of share-based compensation expenses and changes of a redeemable down control non-controlling interests for the full year of 2019 was 1.4 million compared with 5.1 million for 2018 basic and diluted net losses per diem attributable to ordinary shareholders of how I be for the full year of 2019 were both $0.09 compared with basic and diluted net loss per radius attributable to ordinary shareholders $0.06 for 2018.

But it just did the basic and diluted net income.

Idiot attributable to ordinary shareholders for 2019. We're both $0.05 compared with $0.18 and $0.16 respectively for 2018.

You bet. For the full year of 2019 was 12.9 Million compared with 8.8 million for 2018. But adjusted ebitda for 2019 was 16.8 million as compared with 15.6 million for 2018.

In terms of business Outlook due to the evolving covid-19 situation that's creating various uncertainties around our business operation. We are unable to provide an accurate first quarter of year Tucson who Year twenty-twenty. I'll look at this point in time. Once we have more visibility into the macro conditions and the evolving status of the covid-19. We can come back and provide more accurate guidance again as we did before this concludes our prepared remarks. Thank you for your attention. We will now open the call to question operator, please go ahead.

We will now begin the question-and-answer session to ask a question. You may press * then one on your telephone keypad. If you were using the speaker phone, please pick up your handset before pressing the keys this at any time. Your question has been addressed and you would like to withdraw your question, please press star key for the benefit of all participants on today's call. If you wish to ask your questions you Management in Chinese, please immediately repeat your question in English at this time pause momentarily to assemble our roster.

The first question comes from Shawn Morgan Stanley, please. Go ahead.

How old management thank you for taking my question. I'd like to ask what would be the coronavirus impact of the operation and drug use and also would that impact the new semester the only requirement and the dial that you want capacity expansion still in the twenty20 off any color in terms of how should we think of the growth in China? And it would be helpful. Thank you.

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I'll cover it a business operations and some of our heightened security measures in place and then I'll let our Chief Financial Officer Chris provide comments on you know, Regulatory and Define a firstly during the facility closures. We take preventative measures to ensure the health of our students and staff at our facilities.

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Serena seems to be having another technical issue. So I'll briefly translate for Grace. So first of all in response to the outbreak, we have set up a coronavirus wage academic response working team and started implementing facility suspension of our facilities swiftly. And also we carried out daily help tracking a reporting mechanism to attract the health status of our enrolled students and their families as well as our faculty and staff members at our facilities and also the working response the the the working group has also quickly started planning and preparing protective equipment and related supplies for the prevention of or local epidemic our regional centres and subsidiaries have coordinated the distribution locally and the headquarters level. We have given direct support and allocated.

prevention equipment and gear for facilities in the covid-19 affected who Bay province

We have also created a prevention manual with very detailed guidelines and control measures for the epidemic prevention and we have made preparations for defecting communal areas in our facilities and learning tools and toys in classroom Etc repeatedly and will stand by and get ready for resuming normal for the operation.

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In the time of facility closures home-based education and learning has become more important with more than 20 years of experience. We want to dedicate our continuous efforts and share with families across the country are educational content and offerings for the continuity of Education following the outbreak we act as quickly thanks to our dedicated. And it team who have worked tirelessly even during the Chinese New Year holidays. We have successfully rolled out on educational contents of various categories and interactive education experience in record time.

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In terms of educational content with our abundance of educational resources at hand. We have quickly developed various of online educational offerings and share our life practices and know-how in the field of Early Education throughout years with more children and families. This content and activities are easily accessible via our self develop a global based applications through many apps and third-party video platforms.

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to maintain education continuing T. We offer support resources to children and their parents in this difficult time to carry on their education and learning without disruption month.

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In terms of platform and Technology, we continue to advance our digital strategy which leverages our internal and external resources and continue to accelerate the development of our online merge offline model.

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we have also announced donations and three actors of online educational content.

So she she don't control or are you talking about a phone call? He sounds and leave here with a month. You don't keep it. In fact, we're still pursuing our strategic objective of building a powerful education ecosystem or Global portfolio learning dedicated to children's education and continuing to bring about educational Innovation empowered by Technologies.

Uninterrupted commitment to provide good joint education at our facilities and with parents help at home. We will continue to improve our ability to transform utilize our operations overall to our unique online merge offline model while leveraging our quality educational content in doing so we aim to optimize our service proposition and look forward to more revenue-generating ability in March. We have set trials in paid content offered online at facility or rather as pilot. We are hopeful to introduce paid online content to a broader audience upon good reception from the piloting basis and will further promote it in the second half of life.

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Firstly is the fabric for events and showcases. We will demonstrate our preventive measures and actions and our disinfecting efforts at the city level with our teaching staff ready to welcome our students back to facilities.

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Secondly is the PDA Meetings online. Well briefed on all the measures we've taken and proactively communicate our ongoing plan effectively retain students and keep their families and parents and East.

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Thirdly is that we also have prepared the shooting of the first class video for the preparation of facility reopening.

Hi Anthology. Cilantro Toyota, home visit our other telephone check in with the enrolled parents in the two weeks duration prior to a Facility reopen to conduct health status tracking and home parents through anxiety during this difficult time.

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For the enrolled students who haven't attended at our facility before each facility has set up classes with teachers assigned ready to reopen during facility closer communication between parents and teachers are already in place to removal based applications.

Thank you, Serena relating to the the question that LT just raised. Maybe I'll add a few additional comments on top of what Grace has just mentioned Faith following the outbreak of the covid-19 the government and and education bureaus our Regulators have actually issued a couple of preferential policies which are relevant issue our business operation. I'll give you a few examples. First of all four facilities operating on government-owned or soe owned properties. The government has offered some rental reduction policies given the impact on business due to the outbreak so we for some of our facilities they are located in in in such, you know project so we are able to receive the rental reduction in this regard.

And also education Regulators have announced their plan to increase the scope and size of government subsidies available to qualified kindergarten operators wage and also fully take into consideration the covid-19 impact on private businesses local governments across, you know, a number of provinces have also allowed reductions and delays in the payment of social insurance premiums. So I think these measures and policies are actually helping us better navigate through this difficult and uncertain a. Of the covid-19 having said that I think we're also well aware of the impacts on our financial and business performance this year for life, you know, did you see the temporary suspension of our facilities until further notice from the government? Our first quarter performance will be actually adversely affected dead.

Due to the several uncertain.

She's surrounding the covid-19 outbreak and the evolving, you know situations has also led to some uncertainties for us to you know, as I just mentioned accurately forecast 2020 Revenue, but we would like to share more color with you on the following.

First of all, actually before the Chinese New Year. We have already completed most of our promotion and student enrollment work for the coming new semester, We have maintained a very close contact with the children and their parents and families to strengthen their confidence and ensure their willingness to come back to our facilities after we reopen at them and also as for the impact on opening up new kindergartens on, you know acquire acquiring existing ones as mentioned in our previous conference call. We anticipate that for this year. We will probably have similar level of newly opened or acquired m&a kindergarten facilities wage compared to 2019. We expect that the overall Target remains unchanged but most of the new facilities will likely to, you know, open up for business in the second half of the Dead.

Yeah, and also as we mentioned in a previous conference call, we have intentionally slowed down the expansion of our franchise play & Learn Center network box are of the view that we will achieve a moderate expansion this year because the the the the coronavirus does impact on the promotion of our franchise worth Learning Center business. Uh, but uh, but season one is, you know are typically low low season or quiet. So, I think we think that the impact from the covid-19 will be relatively limited and lastly I would like to share a bit more color on our cost control measures. We had implemented very stringent cost control measures across all of our business and functional units actually starting the second half of 2019 and this have actually yep.

Very positive results already. If you look at our fourth quarter financials looking into this year. We will continue to carry out these cost control measures wage. For example, we will optimize our staff structure which we already did we will be cutting discretionary spending such as corporate travel, you know daily life or expenditures as well as professional fees.

And I think you would probably also be interested in in our cash flow and and cash position right now. We I think we remain strong on our balance sheet as we have, you know, still sufficient cash balance. Therefore. We we actually do not anticipate major cash-flow issues at this stage because of the covid-19 found the suspension of our facilities and when when our facilities resume operation, we will actually be able to collect tuition fee again from the for the new semester in that will further strengthen our balance sheet. And as for the the question or your comment about the revenue recognition, I think the the the the conclusion is during the covid-19. Because our operation operations are suspended so our kindergarten business for for this. I won't be able to recognize much of the revenue.

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Because all of the contracts are still valid. So the revenue recognition for this part of the annual fee are still we're still able to recognize them but to a lesser extent the revenue from the sale of merchandise on the franchise, Revenue will indeed be affected as well. So I hope that address your question l c ROM

Oh, yeah. Yeah, that is very clear. Thank you very much.

As there are no further questions now. I'd like to turn the call back over to the company for closing remarks. Thank you Andrew. Thanks everyone for joining us today. If you have any further questions, please do not hesitate to contact us at we hope you have a pleasant day.

This concludes this conference call. You may now disconnect your line. Thank you.

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