ATA Creativity Global

Greetings. Welcome to ATA Creativity Global's fourth quarter and year-end 2022 financial results. 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. Please note this conference is being recorded. I will now turn the conference over to Alice Zhang 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 31st, 2022 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 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 contain 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 that include, 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 demand for and market acceptance and competitiveness of ACG's portfolio training program, 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 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 risk associated with investing in ACG is included in filings with the Securities and Exchange Commission, which we encourage you to review before making the 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. dollars amounts in this conference call relating to financial results for fourth quarter and year ended December 31st, 2022 are converted from RMB using an exchange rate of 6.8972 RMB to one U.S. dollars. The noon buying rate as of December 31st, 2022. 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 the company presentation, there is an overview of the company on slide three. In addition, we're more than happy to take investor questions during today's Q&A session or via email to the company. If you wish to ask questions, you can send your questions to the email address azh.com. A-N-G at equityny.com. And please specify whether you would like to have your name read during the Q&A session. On today's call, the company's CFO, Mr. Ruobai Sima, will provide a brief overview of operating and financial highlights for the fourth quarter and four-year 2022. As Chairman and CEO, Mr. Kevin Ma is unable to be here today. Mr. Sima will join President Mr. Jun Zhang in providing an update of the company's outlook and long-term growth strategies before opening the floor for questions. With that, I'll turn the call over to ACG CFO, Mr. Robert Sima. Please go ahead, Mr. Sima.

Thank you, Alice, and welcome everyone. Good evening to those in America. We appreciate everyone's time. Serving our students remained our top priority in 2022, and we were proud of the continued resilience of both our students and the teaching staff throughout the year as we face an unpredictable ongoing pandemic environment. Despite our core portfolio trading business being impacted by periodically lockdowns in some of our key cities in response to local COVID-19 restrictions, we were pleased to see stable demand of those programs and increased demand for research-based learning programs, overseas study counseling, and other education services. During fourth quarter 2022, we achieved an 8.2% increase in total revenue to RMB 178.5 million, which contributed to the positive bottom line result for the period. Next, income attributed to ACP of RMB 2 million. Total revenue saw a modest 2.3% increase for full year 2022, which was quite merrily due to increased contributions from other educational services and portfolio training services, excluding the one-time RMB $33.5 million investment gained from the disposal of our KTF business, recognized in fiscal year 2021, with significantly narrow losses year-over-year. Total student enrollment for fourth quarter 2022 was 908, compared to 1,052 in the prior year period. Keep in mind, the 908 includes the number of enrolled students in the Foreign Language Training Service, which was primarily operated under an entity that ACG has consolidated in the third quarter of 2022, including these 160,000 students in the prior year period. total enrollment increased year-over-year. Of the 908 students, 574 were enrolled in our portfolio training programs, compared to 569 students in the prior year period. We were pleased to see a continued shift in credit hours delivered from time-based programs to project-based programs, with project-based credit hours increased 31.9% year-over-year. accounting for nearly two-thirds of total credit hours delivered during the quarter. We have continued to consciously shift children towards more flexible project-based programs designed to be tailored to children's needs and potentially raise a higher union price. Portfolio training program revenue increased to RMB 57.8 million in the fourth quarter of 2022 compared to RMB 54.2 million in the prior year period. With that, let's move to financials for the fourth quarter and full year 2022. Total net revenue for fourth quarter 2022 increased 8.2% to RMB 78.5 million from RMB 72.6 million in the fourth quarter of 2021. It was primarily driven by increased contributions from portfolio training services other educational services, which is related to services delivered for new cooperation programs with schools and training organizations. Revenues from portfolio training services represented approximately 73.6% of total net revenue during the period. Growth margin was 60.6% during fourth quarter 2022 compared to 62.8% in the prior year period. The growth margin decrease was primarily a result of increased cost of service related to higher compensation expenses for ACG's teaching staff as they become more engaged in ACG's international management process to enhance the efficiency and quality of service delivery as well as help drive sales and business engagement. Next income attributed to ACP was RMB 2 million, compared to net loss attributed to ACP of RMB 2.5 million in the prior year period. Current to the full year of 2022 results, net revenue was RMB 206.8 million, up 2.3% from RMB 202.2 million in 2021. This increase was triggered primarily by increased revenue contributions from other educational services, which is mainly related to services delivered for new cooperation projects with schools and training organizations, and portfolio training services as noted earlier. Growth margin was 49.6% from 51.8% in the prior year. Net loss attributed to ACG was RMB 47.9 million compared to net loss of RMB 33.6 million. It was primarily due to an RMB 33.5 million investment gain related to disposal of the K-12 education assessment business in the prior year period. which was offset by decreased general and administrative expenses of RMB 10 million, related to the Tsinghua University front post pay in the prior year period, as well as RMB 6 million impairment loss on investments recorded in the prior year period. Going to balance sheet, we continue to be in a solid financial position with our US dollar 8 million in cash and cash equivalents. Working capital deficit was US$33 million, and total shareholders' equity was US$20.8 million at December 34, 2022, compared to working capital deficit of US$30.2 million and shareholders' equity of US$50 million deductively at December 34, 2021. Now, in central our attention to ATG's outlook and growth tracking, Over the course of 2022, ACG remains steadfast in its commitment to helping students achieve positive outcomes. We are very pleased that our students have continued to pursue their studies with ACG, thereby demonstrating their confidence and faith in our ability to provide them with the quality programming and emotional support they deserve and need. and for them to realize their creative style. This has been more challenging by the ongoing pandemic environment, but I would like to recognize our teaching and support staff for their dedication to the students, regardless of whether classes are delivered in person or online. The remote course delivery platform has provided us the flexibility to change classes delivery format overnight as necessary in recent years. This has been invaluable to students and teachers during the periodic lockdown and temporary campus closures that occurred in 2022. Our portfolio training programs continue to see stable demand and even delivered modest revenue growth despite the impact COVID-19 continues to have on our business in 2022. Because of our ability to deliver stable top-line results while controlling COVID-19, we have continued to narrow losses, excluding one-time items. During 2022, ACG continued to curate and launch various research-based learning programs for students to enhance students' creative journey. As international travel was highly restricted in China during the year, we focused our attention domestically and host programs such as environmental protection-themed design camps in Sanya, Hainan Province. The ceramics are the exclusive host program in Jingdezhen, Jiangxi Forest, and an intense training class for the 2022 UV International Arts Exhibition. We also offered courses surrounding more contemporary topics, such as NFTs and meta-work. All these programs were created with the idea that participating students walk away with an in-house understanding of a particular subject matter to a real lab experience. Some of those may also result in increases that can be added to students' ARC portfolios. We continue to serve as a trust advisor to students looking to apply to oversee ARC colleges and universities. Providing high quality curriculum and hands-on experience to admission counseling services. We are thrilled to share some of the initial 2020 grades for admission results we have heard from our students. Some have begun to receive offers from prestigious creative institutions, such as a fashion design program at Paterson School of Design, which is known to be quite competitive. Other schools, including Rhode Island School for Design, New York College of Art, New York State University, and University of Oxford. We opened the ACG International Art Foundation Program Center in Beijing in 2021, and I'm pleased to share that All the enrolled students at the center have started their fourth year in college in the UK. We are excited that the ACG's program designed for students that are able to follow the traditional high school path have played a crucial role in helping these students achieve the next step of their creative arts education journey. We continue to believe that our goals rely on those continue development in our institution and foster relationships with our institutional partners. After a look forward in 2023, we are optimistic about the near-term outlook for our business as international travel continues to peak up and more students realize that their desire to study overseas is more possible today than perhaps before these past couple of years. We look forward to continuing to bring positive outcomes for all students. I'd like to hand it over to Jin Zhang, ACG's president, to provide an update on our character growth initiative. Jin will make his remarks in Mandarin, which will be followed by an English translation. Jin, please go ahead.

Thank you. Come on. When our students are pursuing art studies, they show great concentration and determination. As their current partners in this journey, HEE has been working hard to ensure that our products have a low level of education and are closely related to real life. In the first quarter of 2023, one of our specialties is the Open Heart project designed by Shanghai Shifangzhou. Students who participate in the five-day project will make brand drafts, design fashion lookbooks from the beginning and have the opportunity to interview fashion idols as influencers. They also won the 2023 Shanghai Fashion Week VIP Art Award in March. In addition, due to the project, the design committee hopes to add bright students in the competition. They can not only gain the first experience as professional fashion week team members, We will also receive recommendations and practical instructions after the project is completed. ACEE initially launched online research projects during the COVID-19 pandemic. We were able to do this mainly because we established a strong partnership and partnership with international education institutions, including art schools and universities. These courses have also received praise from students. In the past few years, international travel has been impossible for many students. We have encouraged students to explore the project of China's non-material cultural heritage. Non-material cultural heritage is defined by the United Nations Educational and Cultural Organization as the various social practices of various communities, communities, and sometimes individuals as part of their cultural heritage. The concept of expression, expression, form, knowledge, skills, and related tools, food, foreign foreign In the post-epidemic era, the original universe related courses provided are the same. As the international travel continues to revive and China cancels the new crowning policy, we are in close contact with international partners. The plan is to resume the international summer summer project in 2023. As Karen mentioned, the success of the ACG International Art and Science Center, the first students to enter are currently in their first year in university in the UK. We are very happy to recruit more than twice as many students as before in 2022, and look forward to guiding them in the coming year. We are excited to create new opportunities for students to learn about non-traditional paths in the ACG International Art and Science Center. We are full of confidence in our competitive status in the field of creative art education.

Thank you, Mr. Sima. Our students have demonstrated a great deal of dedication and determination in the pursuit of art study. And as their trusted partner along this journey, ACG has strived to ensure that our offerings remain first-rate, educational, and relevant to real-world experience. In the first quarter of 2023, One of our future programs is the OpenHack project designed for Shanghai Fashion Week 2023. During this five-day long project, participating students will create branding proposals, start a fashion lookbook from scratch, and have an opportunity to interview fashion icons and influencers. Students could also win VIP access to Shanghai Fashion Week 2023, which took place this month. Additionally, as this project is designed for students who are looking to add highlights to their resume. Not only would they gain first-hand experience working as part of a professional Fashion Week team, but also complete the project with reference letters and internship certificates. ACG initially introduced online research-based learning programs during the COVID-19 pandemic. We were able to do so primarily thanks to a strong partnership base with international education providers, including art colleges and universities. and these programs have been well received by participating students. As international travel was not feasible for many students over the past couple of years, we developed programs to encourage students to explore cultural heritage by visiting cultural heritage sites in China. Intangible cultural heritage is a term used by UNESCO to describe culture beyond monuments and collections of objects. As described by UNESCO, intangible cultural heritage also includes traditions or living expressions inherited from our ancestors and passed on to our descendants, such as oral traditions, performing arts, social practices, rituals, festive events, knowledge and practices concerning nature and the universe, or the knowledge and skills to produce traditional crafts. We understand how valuable these types of learning experiences are for students applying to overseas art schools. In 2023, We plan to continue offering these programs to our students as well as other programs to keep up with the latest trends in the arts world, just like what we did with the metaverse and post-pandemic era programs. As international travel continues to pick up and as China has lifted a zero COVID policy, we're working closely with our international partners and resuming international summer school programs for the first time since 2020. As Mr. Sima mentioned earlier, The ACG International Arts Foundation Program Center achieved great success in its initial class, all of whom are currently in the first year of college in the UK. We are pleased to enroll a larger class of students in 2022 and look forward to guiding them in the year ahead. We're excited about the new opportunities that the ACG International Arts Foundation Program Center has created for the students with non-traditional study paths. We remain confident in our competitive position in the creative arts education industry. In 2023, we're prepared to optimize ACG's instructional resources by seeking different forms of cooperation with existing and potential academic partners in regional markets. We look forward to serving more students with diverse needs of our growing portfolio of offerings. This is supported by our strong operational foundation with on-site access in various cities nationwide. and first-rate teaching staff, a track record of delivering positive student outcomes, as well as a strong partnership base. With that, I'll turn it back over to Mr. Sima.

Thanks, June and Alex. In closing, we are excited about the opportunities ahead of us in 2023. We remain optimistic about taking the lead in race on the runway of China's creative arts education industry and will continue striving to become an international leader. We cannot wait to see what our students will achieve in 2023 and are committed to be the provider of new experience, valuable guidance, as well as the supporters along their art study journey. With that, operator, let's open it up for questions.

Thank you. 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. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. This will conclude our question and answer session. I would like to turn the conference back over to Mr. Zuma 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 our investor relations for 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.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.