ATA Creativity Global

Greetings. Welcome to ATA Creativity Global's second quarter 2023 financial results 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. Please note this conference is being recorded. I will now turn the conference over to Alice Yang 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 Globals, or ACGs, results for the second quarter and six months ended June 30, 2023. It 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 ACGs' 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 with terms such as anticipate, believe, could, estimate, expect, forecast, future, intend, 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, including initiatives and adjustments taken by ACG as China eased COVID-19 pandemic-related restrictions, market demand for and market acceptance and competitiveness, of ACG's portfolio training programs and other education services. Although the company believes that the expectations reflected in these forward-looking statements are reasonable as of today, those statements are subjected 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 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 the second quarter and six months ended July, June 30, 2023, are converted from RMB using an exchange rate of 7.2513 RMB to one U.S. dollar. The noon buying rate as of June 30, 2023. All historical conversions are accurate as of the time reported, unless as noted. The company reports the financial results under U.S. GAAP in RMB. and all percentage 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. 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 azhang 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. Rob Aizuma, will provide a brief overview of operating and financial highlights for the second quarter of 2023. 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 the call over to ACG CFO, Mr. Rob Aizuma. Please go ahead, Mr. Sima.

Thank you, Alice, and welcome, everyone. And good evening to those in America, and a very precious everyone's time. We were pleased to see positive enrollment trend from the fourth quarter of 2023 continue into the second quarter. We saw some fantastic months at the start of the year when domestic and international travel restrictions were lifted in China. However, enrollment levels normalized over the course of the second quarter of 2023. Total student enrollment for the second quarter 2023 award was 928 compared to 1,018 in the prior year period. However, excluding 155 students who were enrolled in the foreign language training business that were disposed of in third quarter 2022, student enrollment actually increased 7.5% year over year. We also achieved stable growth in net revenue compared to the prior year period, which was primarily due to increased service delivered for portfolio training and overseas daily counseling. We delivered 28,698 credit hours for the portfolio training program in Q2, a 13% increase from the prior year period. As a result of increased growth profit and lower operating expenses, we also reported improved year-over-year bottom line results. We were particularly excited about our overseas summer programs this year. As this is the fourth summer, we resumed offering this type for programming since the COVID-19 pandemic. With so strong demand for those offerings, many of which have been delivered at this point in time and have been filled with the positive feedback we have received from students thus far. We remain excited about the prospects of all major lines of business in the remainder of the year. With that, I will quickly reveal the financials. Total net revenues for second quarter 2023 increased 6.5% to RMB 36.2 million. compared to RMB 34 million in the second quarter of 2022. It was primarily driven by increased revenues from portfolio training and overseas daily counseling services. Despite a lack of revenue from the disposal of foreign language training services business, portfolio training services represented 78.1% of the total net revenue during the period. Growth margin improved to 39.5% during second quarter 2023, compared to 35.6% in the prior year period. The increase in growth margin was primarily due to increased net revenues, while the cost of revenue remained relatively stable from the prior year period. Net loss due to ACG narrowed to RMB. 17.2 million during second quarter 2023 compared to RMB 22.1 million in the prior year period, which was primarily a result of increased net revenues and decreased operating expenses during the period. Turning to the fourth half of 2023, net revenue increased to RMB 78.6 million compared to RMB 76.2 million in the prior year period. Growth margin improved to 42.1% from 41.2% in the prior year period. Net loss attributed to ACC narrowed to RMB $35 million compared to RMB $37.9 million, primarily due to decreased operating expenses. Moving to the balance sheet, we continue to be in a solid financial position with US dollars $7.8 million in cash and cash equivalents. Working capital deficit was US$35.9 million and total shareholders' equity was US$15.2 million at June 30, 2023 compared to working capital deficit of US$33 million and shareholders' equity of US$20.8 million respectively at the December 34, 2022. With that, I'd like to turn it over to Kevin who will expand upon our outlook and growth practice.

Thank you, Suma. Riding the positive momentum we experienced at the beginning of 2023 with the lifting of pandemic-related restrictions, we continued to see growing demand for our offerings, particularly in portfolio training and overseas studies consulting service. which more than offset a lack of revenue contributions from the foreign language training service we disposed of in third quarter 2022. We saw a wave of new students arrow during first quarter 2023, which is the two normalized levels in second quarter 2023. We anticipate students' elements will continue to grow at a stable rate in the improved market environment. Overseas study consulting service continues to gain momentum as an increasing number of students are looking to apply for overseas art school and institutions. We leverage our teaching resources and international institutional partnership to support our students with active academic program and comprehensive counseling service, working as a trusted advisor throughout the application process. We remain optimistic about the potential of our business as more and more students seek to initiate or reinitiate their art study journey in a past pandemic We are extremely proud to be part of their journey and take pride in our comprehensive high-quality offerings and first-class teaching staff, extensive educational resources, and above all, the positive student outcomes resulting from education with ACG. We will continue to explore ways to expand our portfolio of service, which targets a wide spectrum of arts-related topics for all kinds of students in different stages of their studies, and look forward to serving an increasing population of students as a leader in the creative arts education industry in China. I'd now like to hand the floor over to Jun Zhang, ACH's president, to provide an update on our current growth initiatives. Jun will make his remarks in Mandarin, which will be followed by an English translation. Jun, please go ahead.

Thank you, Kevin. ACG has been through the peak of income for the first half of the year. We have always tried to fully support students' artistic creative potential and help them achieve success in both academic and professional fields. We are deeply impressed by the strength of our students during the pandemic and feel proud of the achievements they have achieved. Since the beginning of 2023, we have noticed that students have increased their interest in our project. We feel that students are eager to participate in various time-based projects The project will provide students with an in-depth experience of the six content modules. Visiting locations include not only the campus of the University of Tokyo and the University of Tokyo, but also the art museum, art museum, special area and art processing room. Participating students will have the opportunity to conduct chemical exploration in the art field. We believe this project, as well as all other projects this summer, Thank you, Kevin. It has been a truly rewarding first half of the year for ACG as we welcome students back to campus in person.

fully returning to the face-to-face communication and interaction with our students that has been more challenging to come by in recent years. Our goal has always been to help students explore the full potential of their arts pursuits and achieve what they define as success from an academic and professional perspective. We have been impressed by the perseverance demonstrated by several of our students during the pandemic and are particularly proud of their achievements. Since the beginning of 2023, There has been growing demand for our program, with many students seeking to experience hands-on projects or educational tours that provide an opportunity to explore other parts of the country or the world. We're confident that ACG will be able to maximize our strength in research-based learning, curating projects and programs that adapt to the changing world of the arts and nurture students' sensibilities in related fields, which we believe is incredibly valuable beyond their schooling. This summer, on top of regular internships, boot camps, and summer school programs, we continue to host domestic intangible cultural heritage themed camps, covering three heritage sites across China in Yunnan Province, Guizhou Province, and Gansu Province. These unique programs allow participating students to really immerse themselves in a local environment and learn from experts in various fields, including photography and film, ethnic minority groups, cultures, mineral oil painting, and painted sculptures. In addition to these domestic programs, ACG will also launch a design innovation camp experience in Tokyo, Japan, co-hosted by the CINO Japanese Education Exchange Association. This project will provide students with an immersive experience covering six content modules, not only at the campuses of the University of Tokyo and Waseda University, but also at art venues, local neighborhoods, and art studios. Participating students will have the opportunity to explore interdisciplinary art study and gain local access to different artistic styles and schools of Japan. This program aims to help students who may be interested in studying abroad to learn how to understand foreign arts and culture from multiple perspectives, looking for both a historical and traditional presentation and modern design display of Japanese culture. We believe this program, along with all our other programs this summer, will serve as a good starting point for resuming our overseas programs since the pandemic. And we cannot wait to hear the feedback from our students. Starting this summer, most students who want to apply for overseas schools have started to work intensively on the portfolios. Our staff have been working closely with students on the presentation ideas and projects that will become key pieces of the portfolio. And it is always gratifying to see the culmination of the students' hard work as they undergo the application process. ACG has maintained a leading role in the creative arts field. Our competencies stem from a proven track record of delivering positive student outcomes, our amazing teaching staff experiences in all major areas of art around the world, a strong and growing network relationship with renowned arts institutes, and the ability to launch relevant products of interest to students. ACJ's comprehensive set of offerings and services is meant to serve a large diverse student population. And we continue working to increase our brand awareness among students of different age groups. By introducing more options for superior educational arts experiences, we aim to better serve these students. With that, I'll turn it back over to Kevin.

Thanks, Jeanne and Alice. We are pleased with ASU's achievements in the first half of 2023 and are excited about the opportunities for the remainder of the year. We are always thinking ways to improve our student experience and believe we are well equipped to exude our growth strategy by expanding our service to meet their demands. With that, Aubrey, 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 the handset before pressing the star keys. One moment while we pull for questions. As a reminder, there's star one on your telephone keypad. There are no questions at this time. I would like to hand it back to Kevin 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 or our investor relations from the ACT 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.