ATA Creativity Global

Greetings and welcome to ATA Creativity Global 2020 third quarter and nine months financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. To ask a question today, you can press star one on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Caroline Sohn of the Equity Group. Please proceed.

Thank you, operator, and hello, everyone. Thank you for joining us. The press release announcing ATA Creativity Global's, or ACG's, results for the three and nine months ended September 30th, 2020 is available at the IR section of the company's website at www.atai.net.cn. As part of this conference call, the company has the company's slide presentation available on its website. A replay of this broadcast will also be made available at ACG's website for the next 90 days. Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward-looking statements in the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terms such as anticipate, believe, expect, future, plan, outlook, and will, and include, among other things, statements regarding ACG's future growth and results of operations, ACG's strategy of becoming a leading international education service provider, ACG's plans for mergers and acquisitions generally, the benefits of the Huangqiu Yimeng acquisition, ACG's ability to operate efficiently and maintain continued financial strength under unusual circumstances, ACG's growth strategy and subsequent business activities, market demand for ACG's portfolio training programs and other education services, the impact of the COVID-19 outbreak on ACG and its operations, and Xiaofeng Ma. The company believes that the expectations reflected in its forward-looking statements are reasonable as of today. Those statements are subject to recent guarantees that could cause the actual results to differ dramatically from those projected. There can be no assurance that those expectations will prove to be correct. Information about the risks associated with investing in the ECG is included in its filings with the Securities and Exchange Commission, which we encourage you to review before making an investment decision. The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in marketing conditions, or otherwise, except as required by law. Regarding the disclaimer language, I would also like to refer you to slide two of the conference call presentation for further information. All U.S. dollar amounts in this conference call relating to financial results for the three and nine months ended September 30, 2020 are converted from RMB using exchange rate of 6.7896 RMB to one U.S. dollar. The noon buying rate as of September 30, 2020. All historical conversions are accurate as of the time reported unless otherwise noted. The company reported its financial results on the U.S. GAAP and RMB and all percentages calculated in the presentation are based on RMB unless otherwise noted. For those of you following along with the accompanying PowerPoint presentation, there is an overview of the company on slide three, and management will be referring back to this deck throughout the prepared remarks. In addition, we are more than happy to take investor questions through our webcast portal or via email to the company. On today's call, the company's CFO, Ms. Amy Tung, will provide a brief overview of operating and financial highlights for the third quarter and first nine months of 2020, and then ACG's Chairman and CEO, Mr. Kevin Ma, and President, Mr. Jun Zhang, will conclude the remarks with a discussion of the company's outlook as well as its long-term growth strategy before opening the floor for questions. With that, I'll turn the call over to ACG CFO, Ms. Amy Tung. Please go ahead, Amy.

Thank you Caroline, and welcome everyone. Good evening to those in America. We appreciate everyone's time. With the public health situation in China continuing to improve, nearly all of our training centers have resumed traditional in-person Delivery of coursework since late in the second quarter. However, some students continued to pursue their coursework online during the third quarter of 2020. Should any location see a resurgence of positive cases, it will be necessary that we revert to online-only delivery once again. So, we remain mindful of the threats that the virus poses and have taken extra precautions. to prioritize the health and safety of our students, faculty, staff, and employees. Since the pandemic started at the beginning of 2020, we have seen enrollment within our portfolio training program continue to increase with each passing quarter. While some students have decided to postpone their coursework, many have demonstrated an impressive ability to adapt to the unusual circumstances in which We have found ourselves and we have put forth efforts to ensure that we are fulfilling the academic and emotional needs while our training centers were closed for several months. Our results for the third quarter of 2020 continued to be impacted by the ongoing pandemic environment, mainly our educational travel services systems as almost all tours were canceled. We continue to partner with select prestigious offices and institutions in offering some short-term online boot camps during the third quarter. We also launched new internship programs to allow our students to gain experience in the working world at certain globally recognized companies. For the third quarter of 2020, credit hours delivered for our portfolio training programs decreased from the prior year previous which was primarily a reflection of the continuing COVID-19 environment. However, there was a 58.2% sequential increase from the number of portfolio training credit hours delivered and reported in quarter two, which we believe was a result of traditional in-person delivery becoming increasingly available during the quarter and also speaks to the effectiveness and many students continue to pursue their studies remotely. We provide a year-over-year breakdown of these credit hours and additional operating metrics on the next slide. Later in the presentation, Kevin and Jun will provide an update on current operations and where they stand. Student enrollment for the period 1,225 out of which 666 were enrolled in the portfolio training program. The portfolio training program consists of time-based programs and project-based programs and we provide the breakouts of the credit hours delivered during the previous compared to the prior year comparable period in our presentation. Revenue is recognized proportionately per credit hour delivered. However, as the total credit hours of project-based programs are not too determined, the progress of the project-based program, which is measured by credit hours delivered compared against the total credit hours expected to be delivered, is re-evaluated at each quarterly and annual financial reporting stage. With that, let's move to the financials of the quarter. I wanted to remind everyone that for the results shown for this period, we have applied acquisition accounting and base purchase price allocation adjustments to various assets acquired and liabilities assumed from the Guangzhou Yimeng acquisition. As a result, certain line items will include adjustments from amortization of the difference between the carrying value in Guangzhou Yimeng's book and the fair value assessed from the PPA process applied to the Feng Shui Yimen acquisition. I will highlight where we saw some impact on our financials due to this PPA adjustment for the 2020 back quarter. It is also important to note that the financials shared here include contributions from Feng Shui Yimen for only a portion of the third quarter in 2019. From August 6th through September 30th, whereas we have a full quarter of results for the comparable 2020 period. Total net revenues for the third quarter of 2020 were 42.2 million RMB compared to 40.6 million RMB in the third quarter of 2019. Net revenues for this quarter include a PPA adjustment decrease of 6 million RMB. Course margin was 37.4% during the 2023 quarter compared to 35.9% in the prior year period. Excluding the PPA adjustment to net revenues, gross margin for the 2020 third quarter would have been 45.2%. Net income attributable to ACG was 19.3 million RMB for the period compared to a net loss of 25.2 million RMB in the prior year period. This change was primarily contributed by a one-time fair value marked up gain of 34.1 million RMB recognized for one of the company's strategic investments, which completed a new round of funding during the quarter. Moving to financial highlights for the first nine months of 2020, total net revenues for the year-to-date YTT period were 101.3 million RMB compared to 43.6 million RMB in the prior year period Total net revenues for the period include a PPA adjustment decrease of 18 million yuan a year. Gross margin was 33.7% for the first nine months of 2020, compared to 34.3% in the prior year period. Excluding the PPA adjustment to net revenues, gross margin for the first nine months of 2020 would have been 43.7%. And net loss from Continuing operations attributable to ACG was 33.3 million RMB in the first nine months of 2020 compared to debt loss of 56.3 million RMB in the prior year period. Finally, we continue to be in a solid financial position with 16.5 million U.S. in cash and cash equivalents on the balance sheet. Working capital deficits was 19.9 billion U.S. and total shareholders equity with 38.3 million US at September 30th, 2020 compared to working capital deficits of 11.7 million US and shareholders equity of 43.9 million US respectively at December 31st, 2019. This past May, our board of directors authorized the repurchase of up to 1 million US of the company's issued and outstanding ADS from time to time in open market and privately negotiated transactions. As no additional shares were purchased since August, the company had repurchased 450,337 ADS at an average stock price of 1.2631 US dollars by November 1st, 2020. This share repurchase plan remains in effect until December 31, 2020. With that, I would now like to turn it over to Kevin, who will expand upon our outlook and growth strategy.

Thank you, Amy. At the beginning of 2020, the world was faced with an increasingly grim situation as the pandemic made its way from city to city and then country to country. We all found ourselves needing to adapt to a completely foreign environment. Having completed the acquisition of Huanshou Yimeng just a month before the end of 2019, ACG was in the fortunate position of having substantially assimilated the two companies by early 2020 when China began to see the initial devastating impact of the pandemic. Timing played a key role in our successful transitioning of coursework to our online platform as we had worked to develop a technology system that would support Huanqiu Yimeng's daily operations and leverage our leadership influence, management, and analysis, all of which were crucial elements contributing to our successful navigation of challenges created by the pandemic. Throughout those pandemic conditions, we have continued to adapt while thinking new ways to leverage our online platform. For example, we have a highly recognized teacher who is an expert in a certain subject based at one of our training centers in a first-tier city in China. This teacher can also be made available to students in other cities with remote learning. We feel that this is a natural evolution of our platform. The pandemic environment has only served to accelerate students' interest and acceptance of online as a viable learning vehicle. As Amy mentioned at the beginning of this call, the public health situation in China has improved to a point where nearly all of our training centers have received our traditional in-person delivery of coursework and we anticipate this will help drive enrollment growth in future periods. However, I want to emphasize that we remain cautious when it comes to ensuring the safety of our students Jun Zhang, ACG's President provided an update on our current growth initiatives. Jun will make his remarks in Mandarin, which will be followed by an English translation.

Thank you, Kevin. In the third quarter of 2020, we saw that the number of new applicants for the project increased significantly. Compared to the second quarter, the number of new applicants for the project increased by 50%. The number of classes increased by 58.2%. We believe that this is the result of more and more schools in the third quarter recovering from traditional offline classes. At the same time, many students continue to study online. Although the situation in China has improved, we expect that the new coronavirus will still affect our international study business. I would like to point out that the demand and interest in studying abroad is still very high, but the global pandemic has temporarily cut off many students from their plans. The autumn and winter seasons are the season for studying abroad, but we are still committed to cooperation with some famous overseas art schools and institutions to provide replacement products for our traditional study abroad projects. As Amy mentioned, these programs include short-term online training camps and opportunities for famous companies in various fields such as fashion and architectural design. Although we can now resume traditional marketing activities for potential students, we have already realized that the online and mobile Internet marketing methods of diversified stars are increasingly attractive to students. We will continue to strive to strengthen the ability to lead the industry Thank you very much. Thank you, Kevin.

For the third quarter of 2020, we saw significant improvement in enrollments for the portfolio training program from the prior sequential quarter. Enrollments by headcount increased by 50%, while the number of portfolio training credit hours delivered increased by 58.2% from Q2. We believe this was a result of the resumption of traditional in-person delivery of coursework at more and more training centers during the third quarter. At the same time, many students continue to pursue their studies online. While the public health situation in China has improved, we anticipate the pandemic will continue to have an impact on our international educational travel business. I would like to note that demand for and interest in studying abroad remains high, but the circumstances of the global pandemic have placed many students' plans on hold for the time being. The fall and winter do tend to be lighter travel seasons, but we continue to work with a few well-known overseas art schools and institutions in offering alternatives to our traditional travel programs. As Amy mentioned, these include short-term online boot camp programs and internships at recognized firms in various fields like fashion and architectural design. While we are now able to resume marketing to prospective students as we would have traditionally, we are seeing increased traction from the diversified new online and mobile marketing initiatives. We continue working to strengthen lead development, sharing of teaching resources between campuses, and implementation of what will be an ongoing offering of online coursework. As we continue to focus our efforts on improving our online platform and offerings, we are maintaining conversations with our overseas partners about ways in which we can work together in this pandemic environment. Technology will continue to be an important element in our growth initiatives, even after the impact of the pandemic has subsided. and ensuring our students have the necessary access to the resources and support they need, whether in person or online, is a key priority. With that, I'll turn it back to Kevin.

Thanks, Jun and Carrie. To conclude, ACG is optimistic about the opportunities ahead as the year 2020 comes to a close. We continue to be in a solid financial position and have increased our operating efficiency. over the course of this year. Our students have proven resilient under the most challenging of circumstances and I am pleased that our institution was able to adapt to meet and hopefully exceed the expectations over the past several months. We continue to monitor the global situation closely as the impact of the pandemic is still being heartfelt in many places around the world. Thank you to our students and our hardworking employees, as well as our associates, families, and friends for their ongoing support. Everyone please stay safe and healthy. With that, all right, let's obey the four questions.

Thank you. At this time, we will conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star one to ask a question at this time. One moment while we poll for questions. Once again, ladies and gentlemen, that's star one to ask a question at this time. There are no questions in queue. I would like to turn the call back over to management for closing comments.

Thanks again to all of you for joining us. If anyone has questions for us, please feel free to reach out directly to us or our investor relations from the equity group. We are always available to speak to investors and look forward to speaking with you all during our next quarterly call. Thank you.

This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.