ATA Creativity Global

Greetings and welcome to the ATA Creativity Global's second quarter 2022 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alice Jung of The Equity Group. Please proceed.

Thank you, Hector, and hello, everyone. Thank you for joining us. The press release announcing ATA Creativity Globals, or ACG, results for the second quarter and six months and the June 30th, 2022, is available at the IR section of the company's website at www.ata.net.cn. As part of this conference call, the company has an accompanying slide presentation available on its website. A replay of this broadcast would 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, could, estimate, expect, forecast, future, intent, look forward to, outlook, plan, should, will, and similar terms and includes, among other things, statements regarding ACG's future growth and results of operations, ACG's plans for mergers and acquisitions generally, ACG's growth strategy, anticipated growth prospects, and subsequent business activities, market demands for and market acceptance and competitiveness, of ACG's portfolio training programs and other education services, the impact of the COVID-19 pandemic on ACG and its operations, and ACG's planned and anticipated benefits of the measures implemented in response to the COVID-19 pandemic. Although the company believes that the expectations reflected in its forward-looking statements are reasonable as of today, those statements are subject to risk 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 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 forelooking 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 the second quarter in six months and the June 30th, 2022 are converted from RMB using an exchange rate of 6.6981 RMB to one U.S. dollar. The noon buying rate as of June 30th, 2022. All historical conversions are accurate as of the time reported, unless otherwise noted. The company reports its financial results on the U.S. gap in RMB, and all percentages calculated in the presentation are based on RMB, unless otherwise noted. For those of you following along with the company PowerPoint presentation, there is an overview of the company on slide three. In addition, we're more than happy to take any questions during today's Q&A session or via email to the company. You may send emails to me, Alice Zhang, by emailing azhang at equityny.com. On today's call, the company's CFO, Mr. Ruobai Sima, will provide a brief interview of operating and financial highlights for the second quarter of 2022. Chairman and CEO, Mr. Kevin Ma, and President, Mr. Jun Zhang, will follow with an update on the company's outlook and its long-term growth strategy before opening the floor for questions. With that, I'll turn it over to ACG CFO, Mr. Robert Sima. Please go ahead, Sima.

Thank you, Alice, and welcome everyone, and good evening to those in America, and we appreciate everyone's time. And during the second quarter of 2022, we were pleased to continue supporting our students who chose to continue pursuing their creative arts education via online delivery, and due to local resurgence of COVID-19, in some of our core cities, including Shanghai and Beijing. For late March to early June, we temporarily closed some of our training centers to comply with local lockdown procedures. We are pleased that this restriction has since been lifted and we are able to serve our students in person once again. Total student enrollment remained stable at 1,018 during the period compared to 1,051 in the second quarter of 2021. As a result of temporary training center closures and citywide lockdowns, total credit hours delivered for portfolio training programs decreased by 10.8% compared to the prior year period, which impacted our financials during the period. The impact on portfolio training and research-based learning revenues were partially offset by increased revenue contributions from overseas study counseling services. With the public health situation in China improving once again, we expect demand for our portfolio training and research-based learning programs to rebound. We continue to see significant demand for overseas arts-building study programs and we are confident in ACG's ability to increase its market share in the international creative arts education industry. During the second quarter of 2022, we delivered a total of 25,387 credit hours for our portfolio training programs. We have continued to encourage the ongoing shift in our portfolio training mix in favor of project-based programs versus time-based programs. This is evident in the breakdown where project-based programs credit hours account for 57.8% of total credit hours delivered during the period. With that, let's move to financial highlights for the second quarter and fourth half of the year. Total net revenue for the second quarter of 2022 were RMB 34 million compared to RMB 36.8 million in the second quarter of 2021. As mentioned earlier, the decrease was primarily due to the decreased contributions from the portfolio training and research-based learning services that were impacted by local COVID-19 resurgence and subsequent lockdowns in some of our key cities, including Shanghai and Beijing. Growth margin was 35.6% compared to 43.4% in the prior year period. The decrease were primarily due to decreased revenues during the period, while cost of revenues remained relatively stable year over year. Net loss attributable to ACC was RMB 22.1 million, which compared to a net income attributed to ACC of RMB 14.1 million in the prior year period. The difference here was primarily due to a one-time investment gain for RMB 33.5 million as a result of the disposal of of the company's K-shelf education assessment business in the second quarter of 2021. Turning to the fourth half of 2022, net revenue increased slightly to RMB 76.2 million compared to RMB 74.4 million in the same period of 2021. Growth margins remained stable at 41.2% compared to 41.5% in the prior year period. Net loss attributable to ACC was RMB 37.9 million compared to RMB 4.9 million. Moving to the balance sheet, we continue to be in a solid financial position with U.S. dollar 9 million in cash and cash equivalents. Working capital deficit was U.S. dollar 33.4 million and total shareholder equity were U.S. dollar 22.9 million at June 30, 2022, compared to working capital deficit of U.S. dollar 30.2 million and shareholder equity of U.S. dollar 30 million, respectively, at December 34, 2021. With that, I'd like to turn it over to Kevin, who will expand upon our outlook and growth strategy. Kevin? Thank you, Sunil.

While the ongoing environmental crisis from unexpected circumstances during the first half of the year, we are pleased with ACG's ability to quickly adapt as necessary. This is where our training centers were impacted by local lockdowns in such as Suzhou, as well as top tier cities where we serve a lot of our students, such as Shanghai, Beijing, and Guangzhou. We admire that the tenancy demonstrated by the students who choose to continue their studies with ACG even in online format. Our mission is to deliver the qualities, curriculum, and ongoing support for our students regardless whether it's in person or remote. In second quarter 2022, we continued to especially create the high quality learning experience via online format such as the ACG OC Master's Program. We introduced the program to our students when the pandemic first began in early 2020. And we have seen interest in this program. over the past two years, even when their public health situation was improving. During the quarter, we also deployed a strategy to streamline our organizational stretch. We began introducing full-time teaching staff into ACE's internal management roles to help drive potential growth of the campaign. to their day-to-day teaching responsibilities, we were able to quickly incorporate the feedback they received from our students into improving our operations. We believe this presents the opportunity for us to create a more direct line of communication with our target customers, especially our students, to better understand and be prepared to meet involving math needs. We believe our current portfolio of offering and our efforts to enhance our curriculum to be related to today's students and the society we live in continues to address ACG in the creative arts education marketplace. We are optimistic about our outlook in the second half of 2022 and look forward to the application season where we can have positive outcomes for our students. I'd now like to hand it over to Jin Zhang, the president, to provide an update on our critical initiatives. Jin will make his remarks in Mandarin, which will be followed by an English translation. Jin, please go ahead.

Thank you, Kevin. The environment will continue to be in an epidemic environment that may deteriorate at any time. We still maintain a high level of attention and closely monitor the management of the community. In this summer, we and Jingdezhen's well-known ceramic art center cooperated to launch a unique project called Ten Thousand Characters. The students learned about the flower, ceramic shape, glass painting, and heat melting techniques through the project. They also visited the studio of world-famous artists. experience the creation process of masterpieces, and gain the opportunity to show their creations. In terms of operation, ACG continues to invest in upgrading our education system. In the main business, online, continuous development of new projects, in order to meet the needs of the students and the community, we will continue to provide online services, actively and flexibly adjust, upgrade, and customize our educational products. In addition, ACG will continue to launch We will continue to focus on supporting our students to carry out creative art learning. As Kevin said, for students who choose to go overseas and continue to grow, we expect to enter a busy season in autumn. We will also continue to work hard to consolidate the relationship with our partners and institutions, and believe that through the first wave of Okay, next is Kevin.

Thank you, Kevin. The systems and procedures that we have put into place in response to the COVID-19 pandemic in early 2020 have provided a strong foundation for our organization and have enabled us to be flexible when we're faced with unexpected circumstances. Since 2020, we have continued to invest in building, maintaining, and advancing the technology, supporting our service delivery to ensure a seamless and pleasant learning experience for our enrolled students. We understand that we continue to operate in an ongoing pandemic environment that could worsen at any given moment, and we remain alert in monitoring the situations at our training centers. This summer, we cooperated with one of the famous ceramic art centers in Jingdezhen and launched an exclusive program named Wan Xiang Zisheng, through which our students learn about blue and white porcelain, ceramic shading, glass painting, and hot melting techniques. The students also visited the studios of some world-renowned artists to experience the creation process of masterworks and had the opportunity to exhibit their own works towards the end of the program. On the operations side, ACG continues to invest in upgrading our teaching system and developing new programs across major business lines. We will continue to provide online offerings and remain committed to being flexible and responsive in adjusting, upgrading, and customizing our educational products, as we acknowledge the various needs of our student population. In addition, ACG will introduce new programs that reflect the ever-evolving creative arts industry, including programs with cutting-edge content related to metaverse, NFTs, and more. In the remainder of 2022, we will continue to focus on supporting our students in their creative arts studies, As Kevin mentioned, we expect to enter a busy application season this fall for those who choose to further their education overseas. We're also committed to solidifying our relationships with our institutional partners and remain confident that our first-class teaching staff, new marketing strategies that allow us to precisely target our potential student audience, and the efforts to streamline our internal organization structure will enable us to grow the business. ACG's mission is to provide quality learning experiences that cultivate and enhance students' creativity. We continue to believe that our offerings, top-rate stuff, and history of helping our students achieve positive outcomes will differentiate us from our competitors. With that, I'll turn it back over to Kevin.

Thanks, Jean and Alex. In conclusion, we are proud to be serving a We divide the students' population and are pleased with the financial results we have been able to achieve despite the challenges in compared to the five in 2022. ACT is committed to assisting our students with pursuing their goals in the creative art world and we expect to continue improving and expanding our portfolio of offerings to better serve With that operator, let's open it up for questions.

Thank you. At this time, we'll 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 tone 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, while we poll for questions. Ladies and gentlemen, there are no questions at this time, and I'd like to turn the call back over to Mr. Kevin Ma for closing remarks.

Thanks again to all of you for joining us. If anyone has questions for us, please feel free to reach out directly to us for 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 concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.