ATA Creativity Global

Greetings and welcome to ATA Creativity Global's fourth quarter and full year 2020 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 you would like to queue up for questions now, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Carolyn So, of the Equity Group. Thank you. You may begin.

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 fourth quarter and year ended December 31, 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 an accompanying 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 within 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 plans for mergers and acquisitions generally, ACG's ability to operate efficiently and maintain continued financial strength under unusual circumstances, ACG's growth strategy, anticipated growth prospects 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 ACG's plan and anticipated benefits of the measures implemented in response to the COVID-19 outbreak. Although the company believes that the expectations reflected in its forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties 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 risk associated with investing in ACG 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 market 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 fourth quarter and year ended December 31st, 2020 are converted from RMB using exchange rate of 6.525 RMB to one U.S. dollar, the noon buying rate as of December 31st, 2020. All historical conversions are accurate as of the time reported unless otherwise noted. The company reports its financial results under U.S. GAAP in RMB and all percentages calculated in the presentation are based on RMB unless otherwise noted. For those of you following along with a company PowerPoint presentation, there is an overview of the company on slide three. In addition, we are more than happy to take investor questions during today's Q&A session 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 fourth quarter and full year 2020. And then 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. In 2020, the global COVID-19 pandemic presented a series of challenges to people and businesses at a level that nobody could have predicted. The virus has had tragic consequences for so many. At ATA Creativity Global, we were very fortunate to have been in a position to navigate the changes created by the critical public health situation in China in the first half of 2020. Having closed on our acquisition of Guangzhou EMA in early August of 2019, our two companies had substantially assimilated by early 2020 when the significance of the pandemic is becoming increasingly apparent. displayed a key role in our successful decisioning of coursework to the online platform. We also worked to upgrade technology systems that support the daily operations of the combined company and leverage our leadership in finance, management and analysis. We are proud that the team here at ACG demonstrated a strength and resilience under these unprecedented circumstances. Putting the well-being of our students and staff first by transitioning all in-person coursework to online delivery in early February. And I would also like to applaud the students as well as the teachers and staff supporting them for their perseverance and dedication to the continued pursuit of their creative education. The public health situation in China improved as we headed toward the middle of the year. and nearly all of our training centers were able to resume traditional in-person delivery of coursework by late second quarter. We did see that some students continued to pursue their coursework online even when traditional delivery became available again, and we are pleased to continue offering online options for coursework, generally more introductory and lecture-style in nature. which lend itself to this delivery method and offer students increased flexibility. We have worked through enrollment deferrals and the more significant impact to our international educational tourists and study abroad offerings due to travel restrictions as a result of the pandemic by developing certain domestic art-themed travel programs and online bootcamp alternatives partnering with well-known overseas art schools and institutions. These programs that were newly developed during the 2020 year are part of our research-based learning business, formerly known as the educational travel business. We are pleased that our students have been able to continue their studies with a certain level of normalcy at ACT, especially during the busy fourth quarter term Many of them are working to complete their portfolios ahead of application deadlines. For the fourth quarter of 2020, credit hours delivered for our portfolio training programs decreased from the prior year period as with the preceding 2020 period. This was primarily a reflection of the continuing COVID-19 environment. However, there was a 2.8% sequential increase from the number of portfolio training credit hours delivered and reported in Q3. We provide a year-over-year quarterly breakdown of these credit hours and additional operating measures on the next slide. Student enrollment for the period was 1,122, out of which 636 were enrolled in the portfolio training program. The portfolio training program consists of time-based programs and project-based programs, and we provide a breakdown of the credit hours delivered during the period compared to the prior year comparable period in our presentation. Revenue is recognized proportionately per credit hours delivered. However, as the total credit hours of project-based programs are not to determine the progress of a project-based program, which is measured by credit hours delivered compared against the total credit hours expected to be delivered as we evaluated at each quarterly and annual financial reporting date. As I mentioned earlier, the fourth quarter tends to be the period in which we deliver the most credit hours as many students are working to complete their portfolios ahead of year-end application deadlines. And while we did see a year-over-year decrease in credit hours delivered, We are pleased to have achieved sequential increase in this metric since Q1 2020 when we began to see the initial effects of the COVID-19 pandemic take hold. With that, let's move to financials for the quarter. I wanted to remind everyone that for the results shown for this period, we have applied acquisition accounting and made purchase price allocation adjustments, PPA, to various assets acquired and liabilities assumed from the Huantiu Yimeng acquisition. As a result, certain line items will include adjustments from amortization of the difference between the carrying value in Huantiu Yimeng's book and the fair value assessed from the PPA process applied to the Huantiu Yimeng acquisition. I will highlight where we saw some impact on our financials due to this PPA adjustment for the fourth quarter and full year 2020. Total net revenues for the first quarter of 2020 increased 12.4% to RMB 60.8 million from RMB 54.1 million in the fourth quarter of 2019. Net revenues for this quarter include the PPA adjustment degrees of RMB 6 million. Growth margin was 48.5% during the 2024 quarter, A significant increase from 38.6% in the prior year period, excluding the PBA adjustment to net revenues, gross margin for the 2020 fourth quarter would have been 53.1%. Net loss attributable to the ACG increased to RMB 24.8 million for the period, compared to net loss of RMB 70.9 million in the prior year period. This was primarily the result of an RMB 30 million decrease in loss from operations and an RMB 20.7 million decrease in impairment loss of long-term investment. Moving to financial highlights for full year 2020. It is important to note that results for 2020 include the full year's worth of contributions from Quantio e-mails. while 2019 increased only about 5 months of contributions. Total net revenues for the annual period were RMB 162.2 million compared to RMB 97.8 million in the prior year. Total net revenues for the period include a PPA adjustment decrease of RMB 24 million. Gross margin improved to 39.2% for 2020 compared to 36.7% in the prior year. Excluding the PPA adjustment to net revenues, gross margin for 2020 would have been 47.1%. This was a direct result of our internal cost restructuring and expense savings initiatives to increase overall operational efficiencies to offset the impact of the COVID-19 pandemic has had on our business. and others. A net loss attributable to ACG was RMB 92.2 million in 2020 compared to net loss of RMB 122.3 million in the prior year. This improvement was primarily driven by a RMB 10.3 million decrease in loss from continuing operations and a RMB 25.1 million decrease in long-term investment impediments and provision charges from the prior year. We continue to be in a solid financial position with US$17.3 million in cash and cash equivalents on the balance sheet. Working capital deficits with US$23.6 million and total shareholders' equity with US$30.5 million at December 31, 2020 compared to working capital deficits of US$11.7 million and shareholders' equity of US$43.9 million respectively at December 31, 2019. Last May, our Board of Directors authorized the repurchase of up to US$1 million of the company's issued and outstanding ADS from time to time in open markets and share privately negotiated transactions. As part of this share repurchase plan, the company repurchased 450,337 ADF at an average stock price of USD 1.2631 during the course of the year. The plan expires on December 31, 2020. With that, I would now like to turn it over to Jun, who will expand upon our outlook, growth strategy, and current initiatives before opening it up for Q&A. Kevin, unfortunately, had an urgent matter to attend to and was unable to join us today. Jun will make his remarks in Mandarin, which will be followed by an English translation. Jun, please go ahead.

Thank you, Amy. 尽管我们在2020年吸取了宝贵的经验,但是我认为大多数都会愿意将它置身于身后。 I am proud to face the challenges faced by each and every group of ACE. I believe that our company is now becoming stronger for this. We use technical platforms that can do various courses and professional courses, not only to cover a wider group of students, but also to optimize our educational resources, so that other regions may not have the opportunity to access and many other students. Now we provide a more convenient and easy-to-visit knowledge system for students, and we are developing an internal system to monitor sales clues more closely. Although ACG is not familiar with its personal courses, we believe that if it performs well, it can also switch to online courses. In the case of China's public health situation maintaining stability, we can continue to combine traditional face-to-face training and long-term training. Providing services to students who may not have been able to serve in the past will help promote the future enrollment number growth. The work we do in 2020 allows IT to better locate opportunities for growth in 2021. We are happy to see that in the fourth quarter The number of new applicants has remained stable, and the number of assignments and training classes has slightly increased. This is because many students are still working hard to complete their assignments. With the continuous release of admission notices from some colleges, some students have already started to see the learning results they have worked hard for, but most students will receive their admission notices in the middle of the year. With the effective control of the public health situation in China, we will continue to provide offline courses, We will continue to invent new products because we can We are very proud of the opportunity we found in 2020. We believe that the foundation of change in 2020 will provide more opportunities for the company's future development, especially when more and more countries seek to vaccinate their citizens and finally achieve community immunity, the impact of the COVID-19 epidemic will gradually dissipate. We still have to observe the state of global travel this summer, but we are working on the appropriate planning and hope to plan according to whether the cooperative school is planning to hold regular first-time projects or similar projects to satisfy everyone's interest in studying abroad and the high demand. ACG maintains flexible and fast adaptability. We are also planning various solutions in advance to deal with different situations. As mentioned before, we are developing a convenient sales clue management and tracking internal system that will allow sales teams to access centralized management information. We believe this will strengthen the overall capability of each marketing channel and enable us to fully play out the new online and mobile sales advantages. If we learn something from 2020, it is the importance of technology for future development. In this regard, we are committed to investing resources to continue to use advanced technology and improve our platform with the introduction of new functions. Even after the epidemic, this will still be an important factor in our continued development. Of course, face-to-face interaction and interaction are valuable, especially for students. However, we are increasingly seeing that in today's video classrooms and video meetings, many interactions are also effective and involved. No matter what kind of model we adopt, our goal is to ensure that students can obtain sufficient resources and support when accepting creative education. Overall, ACG is optimistic about the opportunities for the future. We hope that the global pandemic will soon reopen all over the world and our financial situation will remain stable. And in 2020, Thank you Amy. I think most everyone is glad to put 2020 behind us despite the valuable lessons we have learned.

I am proud of the way everyone at ACG came together to overcome the challenges we faced, and I believe our company is now stronger for it. We utilize technology platforms that we can now leverage as a delivery method for various courses and majors, which will allow us to not only reach a wider student population, but also enables us to take advantages of our teaching resources, making highly sought after teachers available to students in our geographic areas who might not otherwise have had the opportunity to learn from these instructors. We now have a more convenient and accessible support system for students and are also developing an internal system to more closely monitor sales leads. While ACG is known for the personal attention of its programs, we believe this can also translate to online programs if executed properly. As the public health situation in China remains stable, the combination of being able to continue our traditional in-person delivery of coursework and serving students we may not have been able to serve previously via distance learning will help drive enrollment growth in future periods. The work we did in 2020 has positioned ACG well to capitalize on our growth opportunities in 2021. We were pleased to see enrollments remain stable during the fourth quarter with portfolio training credit hours increasing slightly as many students work to complete their portfolios. Some students have already begun to see the results of their hard work as acceptance letters from some institutions have started to go out, but the majority will be in the middle part of the year. With the public health situation in China effectively contained, we continue to offer in-person delivery of coursework with an option to complete some courses online, and we are working to build out our online offerings. As an alternative to international travel, we offered domestic educational tours this past year, one of which took place in Sichuan that provided students with a wonderful opportunity to explore and experience nature. We also offered online boot camps and internship opportunities. We continue to explore the potential of new offerings and are proud to have found opportunities to increase our growth prospects in the extremely unusual year of 2020. We believe the groundwork we have laid in 2020 will afford us many opportunities for future growth, especially as the effects of COVID-19 subside with more and more countries looking to vaccinate their citizens and eventually reach herd immunity. It remains to be seen how worldwide travel will be impacted this summer, but we are planning accordingly and are looking to accommodate the high demand for and interest in studying abroad, depending on whether partner institutions plan to hold their usual summer programs or a variation of them. ACG remains nimble and quick to adapt, and we are planning ahead to accommodate varying scenarios. As noted earlier, we are preparing to launch a new internal system for lead management and development, which will allow the sales team to access centralized information. We believe this will bolster overall sales efforts from all channels and allow us to take even greater advantage of our newer online and mobile marketing initiatives. If we learned anything from 2020, it was that technology is the absolute way of the future. In that regard, we are dedicated to investing resources to continue utilizing the best technologies and advancing our platform as newer capabilities become available. This will continue to be an important element in our growth initiatives even after the pandemic is behind us. There is certainly value in meeting and interacting face-to-face, especially as a student, but increasingly we are seeing that a lot of interaction is just as effective and personable online in today's world of video classrooms and meetings. Regardless of mode, our goal is to ensure that students have the necessary access to the resources and support they need when it comes to pursuing their creative education. To conclude, ACG is optimistic about the opportunities ahead. We are hopeful to be able to put the global pandemic behind us and that the world will begin to open up again soon. We remain in a solid financial position, even more so with the increased operating efficiencies gained over the course of 2020 and into 2021. I'd like to thank our students and employees, as well as our associates, families, and friends for their ongoing support. Everyone, please stay safe and healthy. With that, operator, let's open it up for questions.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad A confirmation tool will indicate your line is in the question queue. You may press star 2 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. One moment please as we poll for questions. There seem to be no questions at this time. I would like to pass the floor back over to management for any closing remarks. This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.