First High-School Education Group Co., Ltd. American Depositary Shares

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the first high school education group third quarter 2022 unaudited financial results conference call. Currently, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, we are recording today's call. If you do have any objections, you may disconnect at this time. Now, I'd like to turn the floor over to Mr. Tommy Zook. chief financial officer of the company. Mr. Zhu, please go ahead.

Yes. Thank you, operator. And greetings, investors and friends. Welcome to the first high school group, education group first, third quarter 2022 earning conference call. My name is Tommy, the chief financial officer who will lead today's conference call. So we released our results earlier today prior to market open. The press release is available on the company's IR website at ir.diyi.top, as well as from Newswire Services. A replay of this call will also be available in a few hours on our IR website. So before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provision of the U.S. Private Security Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the expectation expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Also, please note that unless otherwise stated, all figures mentioned during the conference call are in Chinese . With that, Again, thank you all for joining us. I will briefly spend the next 20 to 30 minutes updating the third quarter results. Nine months ended on September 30th, 2022. For today's earnings release, all of our financial data will be dated to September 30th of 2022. but operating data such as number of enrollments and number of schools will be dated as of October 30th for a more precise and present understanding of our business. The third quarter period, starting from July, ending in September, is commonly known as the quiet period in our business. It's quiet because there are no school activities conducted during the summer months of July and August, meaning two-thirds of the three-month period, the company will have no revenue recognition. Resulting from the quietness, our revenue only grew modestly compared with September revenue recognition of last year. But the company did perform extensive preparation work for the school opening in September. Our teachers' recruitment and training is our number one priority. Secondly, we did many constructions and repairs of school properties. And third, we also completed our student recruitment campaigns. Just to give a bit of highlight into these preparations, So for the class of 2022, we recruited approximately 200 new teachers this year. These teachers are mostly consisting of new graduates or teachers with only one to three years of previous teaching experiences. Our motto is to have our senior teachers watch over and apprenticeship these less experienced and young teachers so they can quickly adapt and grow into our model. We also did some major upgrades to two of our most well-operated campus equipment. We renovated these boarding rooms for students to have better logging environment, which will also help in recruitment as well. Despite the recruitment and renovation, we were actually able to control our cost very effectively. meaning we actually have a growth in profitability despite with very little revenue recognized. For the school year of 2022, we admitted 7,963 students into our campus. As of October 31st, we have 27,777 students enrolled across 23 school programs across different regions in China. As mentioned during September's half-year earning release, our newly admitted students included more self-funded students rather than government-funded students. Reflecting our great education quality and strong brand recognition also means that more of our income will come directly from our customers rather than getting the income from the government. Also, out of the 7,963 newly admitted students, 592 students were given various amounts of scholarship for their excellent grades coming into our high school, which means this is setting new potentials for their excellent graduating grades and receiving the top offers from top universities. which in turn will also help our recruitment and brand recognition in the future. While we just finished the 2022 school year recruitment, we've already started planning and preliminary work for the 2023 school year recruitment for next year. Our mission is to balance education quality and operating metrics to deliver the best interest for all stakeholders. Financially, as witnessed by the earnings release, our profitability increased compared to last year of the same period. As I've already mentioned in the past two earnings release, the measures of A, building a stricter and more scientific budget system, B, increasing horizontal comparison among school and business units, and C, tying compensation to performances in our staff are yielding positive results now and will continue to do so in the future. So last year, September, marked the beginning of our major internal drive for efficiency. And one year later, I think the increase in efficiency is evident in our increase in profitability. And this is rewarding to witness. Beginning of the 2022 school year, like I mentioned earlier, despite having more students to teach and serve, we actually reduced about 10% of our total overall headcount. So we have more teachers and less administrative staff as a composition. This is done by consolidating administrative duties and non-teaching staffs. Currently, our student-to-teacher ratio is about 1 to 11. This is, in my experience, well below most of our competitors in the high school sector. This is done to make sure we want to balance financial results but also excellent teaching quality. We all know that. you know, with lower teacher to student ratio, usually it's actually delivered for a better teaching quality. So we want to effectively controlling cost and also deliver a great teaching and service quality. So the measures we put in place are all scientifically designed to improve efficiency. All measures aim to deliver equal or improved results with less resources spent, and it's never about just cutting cost. Another good news is our loan level are at a controlled level. As evident by the earning relief, our combined borrowing, long-term and short-term, bank and also a leasing company, it's about 112 RMB, 112 million RMB. This is reduced from over 179 million RMB last year, June 30th. We are actually at a very comfortable level now and wish to keep roughly amount of leverage as of today. Because to make sure the company can grow, you need to have a degree of leverage. But also, as mentioned, I think, many times in the previous There's talk of recession and the company want to be a bit on the safer side, to be a bit on the more efficient side. We want to make sure to grow responsibility, right? Responsibly, not just wildly. So I think that our reduced leverage is also good news for us. So like I said in the beginning of my remark, the third quarter is more of a quiet preparation for the last quarter of the year. Both operationally and financially, we were able to witness the positive strategies and measures set in place. In addition to our high school operation, the company is also proactively developing new businesses in vocational schools and other educational auxiliary products. We will discuss and disclose more details once those business yield actual operation and financial results. So I will not go too much in detail today. That concludes the highlight remark section. And now I will take some time to go through our line by line financial highlights for the third quarter of 2022. Again, please know that all numbers presented are in RMB unless otherwise stated, All percentage changes are on a year-over-year basis unless otherwise specified. Detailed analysis is contained in our earnings release, which is already available on our IR website and Newswire services. For the third quarter, the nine months ended in September 30th. Our continued operation, total revenue were $274.2 million. an increase of 0.5% from 272.7 million for the nine months ended September. Revenue from customers were 238.3 million, a decrease of 1.6% from RMB 242.1 million for the nine months ended last September. The decrease was primarily driven by decreased and delayed collection of teaching and auxiliary material fees. Revenue from government cooperative agreements were 36 million RMB, an increase of 17.3% from RMB 30.7 million for the nine months into September last year. The increase was primarily driven by the increased number of publicly sponsored students we serve. Cost of revenue were $149.5 million, a decrease of 14.7% from $175.4 million for the nine months in the last September. The decrease was primarily due to the effective cost control measures, such as the stricter budget and the upper mentioned criteria. Gross profit was $124.7 million, An increase of 28.1 from 97.3 million for the nine months in the last year, September 30th. Our gross margin was 45% compared with 35.7% of the same period last year. The increase was primarily driven by more effective cost control. such as improved school operating efficiency, tighter utility usage limits, stricter budget control, and revised compensation structure for teacher and supporting staff. Net operating expenses were $52.7 million, a decrease of 7.6% from $57 million for the nine months in the September 30th, 2021. Selling and marketing expenses were 1.9 million, a decrease of 52.7% from 4 million last year. The decrease is because it's actually marginally smaller. It's only from 4 million to 2 million. It's not a big number, but it was primarily driven by just decrease of expenses in brand promotion and marketing. General and administrative expenses were 51.7 million, a decrease of 6.6% from 55.4 million, The decrease was primarily due to overall improved cost control. Government grants were 0.9 million RMB, a decrease of 60% from 2.4 million of last year. The decrease was primarily due to the government's tight fiscal budget resulting in delayed payment made by the government. Income from operations was 72 million RMB, an increase of 78.6 from $40 million of last year. Net income from our continuing operation were $61 million, an increase of 84% from $33.1 million of last year. Net loss from discontinued operation was $10.1 million, an increase of 44% from $7 million last year. Overall, the net income combined was $51.0 million, an increase of 95.3% from $26.1 million for the nine months into September 30, 2021. Our non-GAAP adjusted net income is the same as our net income. And business outlook. For the entire fiscal year of 2022, the company does not change our outlook, and expects a total revenue of continuing operation to be between $440 million to $460 million, representing a 10% to 15% increase on a year-over-year basis. The outlook reflects the company's current and preliminary view on the market and operational conditions, and the outlook ranges for the fiscal year 2022 reflects a number of assumptions that are subjected to change based on uncertainties. Yeah, the above is my financial highlights briefing for the third quarter. Both the CEO, Mr. John, and myself wish to thank everyone for your time in participating. Let's now open the call for questions. So, operator, please go ahead and proceed to the Q&A part.

Ladies and gentlemen, at this time, if you would like to ask a question, please press star and then 1. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the numbers to ensure the best sound quality. To remove yourself, you may press star and two. Once again, that is star and then one to join the question queue. Our first question today comes from Buwei Shen from HWF. Please go ahead with your question.

Hello, Guan Yicheng. Can you hear me?

Yes.

Hello, Tommy. Hello, President Zhang. I have a question here. I see that the company's stock price is relatively low. And I think the cash on the account is much wider than last year. Because if the company returns the stock now, it may be difficult for all our shareholders. So Mr. Shen said the company's operation metrics is

comparatively increased compared to last year and that we should have more cash on hand compared with last year also. Does the company consider itself to increase the share buyback program? What is the management's thoughts on that? First of all, Mr. John, the CEO, is not with me today. He's actually on a business trip. So I will be answering for myself. So the board meetings of the company did discuss all efforts into raising our share price. That not only includes more PIBAC, but also maybe even perhaps Mr. Zhang buying more for himself with his own money. So definitely that is in discussion. But as of Today, the board only approved for me to release the earning release today and did not approve for me to do any share buyback or answering that yet. But what I can say is to have any share buyback, the company to do it during the window period, which is beginning after two days after your earning release and before the quarter ends. So technically and legally speaking, we can only do it I think by Friday, I believe. I can check with the lawyer. It's at least one day, I believe two days. That said, I think I can answer another question maybe many investors is thinking about. Given all the previous efforts, I think our financial metrics are looking brighter than before. I think we did some dividend payback. We did some you know, share buyback, and yet there's very little evidence of our share reclining back to, I guess, maybe even levels of half a year ago. If the unfortunate delisting do happen, we aim to list on the OTC market. The OTC market is actually divided into several tiers, right? The best being QX tier, the worst being the pink tier. That, you know, we could not meet the New York Stock Exchange listing standard anymore. The company is, at least from my personal opinion, we do wish to continue to be listed on the OTC. And again, that is awaiting board approval, and I do address the board on that already.

Okay, thank you. Thank you for all the management to take in my questions. Thank you. Thank you.

Once again, if you would like to ask a question, please press star and one. And, sir, at this time, and showing no additional questions, I'd like to turn the floor back over to you for any closing remarks.

Yeah, I mean, I think, like I said earlier, from the company's operating perspective, we are very confident on continuing this business, doing what we do best. However, from a macro environment perspective, at least myself, I am also affected and concerned by our market cap. But I want to always say that myself, Mr. John, and the whole board, we want to and we wish to maximize shareholders' interest So we'd like to thank everyone again for participating on today's call. Some investors already did reach out to me, and perhaps we can host a Chinese session to answer more questions directly, and the company's management is willing to do that. So again, we appreciate everyone's interest in our company. Despite any hardship, we will work hard to continue to do what we do best And hopefully I look forward to reporting to all of you again next quarter on our progress. And thank you again, operator.

And thank you. At this time, we've concluded today's conference. We thank everyone for joining. Have a great day. You may now disconnect your lines.