Puxin Limited American Depositary Shares, each representing two Ordinary Shares

Good day and welcome to the Pushin Limited second quarter 2020 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Nadia Wang, Senior Investor Relations Manager. Please go ahead.

Thank you, Anita. Hello, everyone. Welcome to PUSIN's second quarter 2020 earnings conference call. This is Chelsea Wang, Senior Investor Relations Manager at PUSIN Limited. We appreciate your time and ongoing interest in PUSIN. Our financial results were released earlier today and are available on the company's IR website at ir.pxjy.com. On the call today, we have Mr. Yunlong Sha, the company's founder, chairman, and chief executive officer, and Mr. Peng Wang, the company's chief financial officer. Yunlong will give a brief introduction of the company's business operations and highlights, followed by Peng, who will go through the financials and guidance. They will both be available to answer your questions during the Q&A session that follows. Please be reminded that this call may contain forward-looking statements made under the safe harbor provisions of the Private Security Identification Reform Act of 1995. These statements are based on management's current expectations and current operating conditions, and relate to events that involve unknown risks, uncertainties, and other factors. All of which are difficult to predict, and many of which are beyond the committee's control, which may cause the committee's actual results, performance, or achievements to differ materially from those in the forward-looking statements. A number of information regarding this risk, uncertainties, and other factors are included in our public findings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except by required law. With that, I will now turn the call over to Mr. Schatz. Mr. Hsiao will give his remarks in Chinese, and Jesse Jin from ICA, our investor relations advisor at Forum, will translate for him in English. Mr. Hsiao, please go ahead.

Hello, ladies and gentlemen. Welcome to the phone conference of Puxin Education 2020, the second quarter financial report. Thank you. 2020 年第二季度新冠疫情波动 Puxin Education insists on ensuring that students' physical and mental health are low, ensuring that students' confirmed cases are zero. In the second quarter of Puxin Education, this week, the number of students enrolled increased by 18.1%, reaching 85.7 million people. Puxin won the high recognition of students and parents with excellent educational quality. Although it was hit by the COVID-19, Puxin's second quarter net income can achieve more than 600 million yuan. The net profit is more than 35 million yuan. Compared with the loss of 1.9 billion yuan in the same period last year, then Puxin achieved a relatively high profit growth. Under the Nangai's approach, EBITDA's profit is more than RMB80 million. In the same period last year, this figure was a loss of RMB26 million. At the same time, in terms of operating cost control, we achieved amazing results. By adjusting the marketing strategy, we effectively reduced the risk In this regard, compared with the same period last year, it fell 12.4% and 30.3% respectively. In this regard, we continued to use the K12 business as the core development goal. The business achieved a net income of 4.2 billion RMB in the second quarter, In the past few years, we have made continuous efforts to improve the profit of the study business. EBITDA's profit was lost 90 million last year. This year, the second quarter of the same period has received nearly 4 million yuan in profits. In the field of education and business, we have made long-term progress through our continuous efforts and investment in the past. This year's second quarter net income of nearly 24 million yuan, which is more than six times the growth of the same period last year. The epidemic has made people think Thank you very much. After the organic integration, the supply chain acquisition has achieved further growth, promoting the organic internal growth of Puxin Education. Puxin's business profits in 2015 and 2016, most of which were acquired by K-12 schools, have been achieved with the support of PBS system operation. In the future, Puxin will continue to use PPS firmly and implement its own effect. From the overall education industry, the second quarter of this year is gradually beginning to recover, but the epidemic is not over yet. Puxin will not give up. Looking forward to the third quarter, we will continue to focus on K12 business and OM strategy with a new spirit. Ladies and gentlemen, good evening and good morning to you all.

Thank you for joining pushing limited second quarter 2020 earnings conference call. Together, the teaching staff and students have overcome the challenges brought by the COVID-19 pandemic over the past few months. Under the guidance of the Ministry of Education and the National Health Commission, local governments have coordinated with schools and universities to resume classes, and we are glad to see the entire education industry is finally back on track. Again, We appreciate the contribution of government departments, all sectors of the community, as well as the staff at Puxin. Thank you for providing your continuous social, mental, and educational support. In the second quarter of 2020, though there were a few bounce-back occurrences of COVID-19 in some areas of China, Puxin continued to place the mental and physical health of our students and teaching staff to our first priority. We have had zero COVID-19 case and will work our best to keep this record going forward. Pushing has made steady progress in the second quarter. Student enrollments increased by 18.1% year over year to 857,000. Pushing once again won the recognition of students and parents with our excellent teaching quality. Despite the impact of the COVID-19 pandemic, Net revenues in the second quarter exceeded RMB 600 million. Net income was above RMB 35 million compared to a net loss of RMB 190 million in the second quarter of 2019. Huxin also continued to show profitability in non-GAAP measures. Non-GAAP EBITDA was over RMB 80 million compared to negative RMB 26 million. We also made progress in cost control. By refining our marketing and sales strategy, non-GAAP selling expenses decreased by 12.4% year-over-year. In addition, non-GAAP administrative expenses dropped by 30.3% year-over-year. In the second quarter of 2020, K-12, the core business segment of Puxin, achieved net revenues of RMB 420 million, an increase of 14% year-over-year due to the impact of the pandemic in overseas markets. Net revenues of study abroad services decreased by 39.9%. However, its profitability was improved during the second quarter of 2020. EBITDA was approximately RMB 4 million compared to negative RMB 19 million in the same period of 2019. As for pushing online school, benefited from previous strategic investments, has made impressive progress. Net revenues were approximately RMB 24 million, an increase of more than six times year-over-year. The COVID-19 pandemic gave us a unique opportunity to reflect on our business. In terms of Pusheen's organic growth plus M&A zero-engine strategy, we found Pusheen's business system effective for improving the operational and financial performance of the acquired schools Positive achievements can be seen in carryover income, non-GAAP income, and student enrollment. These have proved that the acquisition and integration approach is truly driving the organic internal growth of Fuxing. For example, the non-GAAP income of the majority of K-12 schools acquired in 2015 and 2016 became positive after adopting Fuxing business system. These results have reaffirmed the strategic role of PBS and its capability to optimize capital structure. Overall, the education industry has recovered substantially since the second quarter of this year. However, we will never second all our efforts. Looking into the third quarter of 2020, we will continue our focus on the K-12 business segment and the online merge of finance strategy. We expect that Pusheen Online School may continue to achieve a rapid growth. We believe Pusheen will gradually become a premium brand with strong profitability. Now I will hand the call over to Mr. Wang, our CFO, who will walk you through our financial details.

Thank you, Mr. Shah. Hello, ladies and gentlemen. Please bear in mind that all amounts quoted here will be in RMB and all percentage increases will be on a year-over-year basis unless otherwise stated. It is also referred to as an earnings release for detailed information of comparative financial performance on a year-over-year basis. Starting with financial results for the second quarter of 2020, net revenues were RMB $601.1 million a decrease of 5% from the second quarter of 2019. This decrease was primarily due to the adverse impact of the COVID-19 pandemic on demand for study abroad tutoring services. Net revenues of K-12 tutoring services increased by 14% year over year to $419.7 million. In the second quarter of 2020, the student enrollments of K-12 tutoring services, including group class, personalized tutoring, full-time tutoring services, reached 598,369. Net revenue of 29 schools significantly increased to 24 million, from 3 million in the same period in 2019. Student enrollments of 49 schools were $249,452 in the second quarter of 2020. Net revenues of study abroad tutoring services decreased by 39.9% year over year to $157.4 million. This was primarily due to a sharp drop in student enrollments from 15,696 to 8,853 in the second quarter of 2020, affected by the global spread of the COVID-19 pandemic in major countries of the world. Cost of revenue slightly decreased by 0.4% year over year to 331.4 million, primarily due to a decrease in stock cost which reflected the decreased demand for study board services attributable to the COVID-19 pandemic. Cost revenues, excluding share-based compensation expenses, decreased by 0.3% year-over-year to $330.8 million. Gross profit was $269.7 million, a decrease of 10.1% year-over-year. Gross margin was 44.9% compared to 47.4% for the same period in 2019. Total operating expenses decreased by 37% year-over-year to 295.5 million. Selling expenses decreased by 13.1% year-over-year to 210.1 million. Selling expenses, excluding share-based compensation expenses, decreased by 12.4% to $207 million. This was primarily due to a decrease in sales staff's performance-based compensation, a triple of two decrease in demand for our service services caused by the COVID-19 pandemic, as well as our cost control measures to improve operation efficiency. General administrative expenses decreased by 62.4% year-over-year to $85.3 million. General administrative expenses, including share-based compensation expenses, decreased by 30.3% year-over-year to $82.4 million. The decreases were primarily due to our cost and term errors to improve operation efficiency. Total share-based competitive expenses allocated to related course revenues operating expenses decreased by 94.1% year-over-year to 6.8 million. The decrease was primarily due to a decrease in the number of options vested in the second part of 2020 compared to the same period of 2019. Operating loss was 25.8 million, a decrease of 84.7% year-over-year. Operating margin was negative 4.3% in the second quarter of 2020 compared to negative 26.7% for the same period in 2019. Operating income of K-12 tutoring services was 19.3 million compared to operating loss of $64.5 million in the second quarter of 2019, while operating margin improved to 4.6 points from negative 14.8% in the second quarter of 2019. Adjusted operating loss was $19.1 million, a decrease of 64.3% year over year. Adjusted operating margin was negative 3.2% compared to negative 8.4% in the same period of the prior year. Net income attributed to Pushing Limited was $36.6 million compared to net loss attributed to Pushing Limited of RMB $194.6 million during the second quarter of 2019. Basic and dilute net income per ADS attributable to Pushing Limited were 0.42 and 0.42 compared to basic dilute net loss per ADS attributable to Pushing Limited of 2.28 and 2.28 during the same period 2019. Adjust net income attributable to Pushing Limited was 45.2 million compared to adjusted net loss attributable to Pusheen Limited of $660.7 million during the second quarter of 2019. Adjusted basic and diluted net income per ADS attributable to Pusheen Limited was $0.52 and $0.51, compared to adjusted basic and diluted net loss per ADS attributed to Pusheen Limited of 0.71 and 0.71 during the same period, 2019. EBITDA was 71.8 million compared to negative 159.8 million in the second quarter of 2019. EBITDA of K-12 Futuring Services was 109.1 million compared to negative 50.3 million in the second quarter of 2019. EBITDA margin was 12% in the second quarter of 2020 compared to negative 25.2% in the same period in 2019. Adjusted EBITDA was 80.4 million compared to negative 25.8 million in the second quarter of 2019. Adjusted EBITDA margin was 13.4%. compared to negative 4.1% in the same period, 2019. For the financial results for the six months ended June 30, 2020, net revenues were $1,352.4 million, an increase of 8.3% year-over-year. This increase was primarily due to the continued growth momentum of student enrollments. Net revenues for K-12 tutoring services increased by 26.3% year-over-year to $943 million. In the first half of 2020, the total student enrollments of K-12 tutoring services, including group classes, personalized tutoring, and full-time tutoring services, reached $1,165,074. Net revenue of Puget Soundline schools significantly increased to 47 million. Students' enrollments of Puget Soundline schools were 607,066 for the first six months of 2020. Net revenues of study abroad tutoring services decreased by 27.1% year over year to 368.4 million. Study abroad consulting and tutoring services have 22,809 student enrollments in the first half of 2020, compared to 32,366 in the same period of 2019. This was primarily due to the global spread of the COVID-19 pandemic in many countries of the world. Cost revenues increased by 9.5% year-over-year to $731.6 million. Cost revenues, including share-based compensation expenses, increased by 9.7% year-over-year to $930.4 million. Gross profits was $620.8 million, an increase of 7% year-over-year. Gross margin was 45.9% compared to 46.5% for the same period 2019. Total operating expenses decreased by 27.4% year-over-year to $642.9 million. Selling expenses decreased by 5.1% year-over-year to $440.7 million. Selling expenses excluding share-based compensation expenses decreased by 4.1% year-over-year to $433.5 million. General administrative expenses decreased by 52% year-over-year to $202.3 million. General administrative expenses excluding share-based compensation expenses decreased by 13.5% year-over-year to 195.5% a million. The decreases were primarily due to our cost control measures to improve our operation efficiency under the COVID-19 pandemic. Total share-based compensation expenses allocated to related costs, revenues, and operating expenses decreased by 92.8% year-over-year to 15.2 million. The decrease was primarily due to a decrease of number of options in the first six months of 2020 compared to the same period in 2019. Operating loss decreased by 92.7% year-over-year to 22.2 million. Operating margin was next to 1.6% in the first first six months of 2020 compared to the next 24.4 percent for the same period in 2019. Operating income of paid top tutoring services was 86.0 million compared to operating loss of 80.4 million in the same period since 2019, while operating margin improved to 9.1 from not negative 10.8 percent. Adjusted operating loss decreased by 92.7% year-over-year to 7 million. Adjusted operating margin was negative 0.5% compared to negative 7.6% in the same period of 2019. Next loss attributed to Pushing Limited was 6.9 million, a decrease of 98.5% year-over-year. Basic dilute net loss per ADS attributed to pushing limited was 0.08 compared to basic dilute net loss per ADS attributed to pushing limited of 5.28 during the same period 2019. Adjusted net income attributed to pushing limited was 70.6 million compared to adjusted net loss attributed to pushing limited. of 134.4 million during the same period of 2019. Adjusted basic diluted net income per 8 years, a triple portion limited for 0.81 and 0.79 compared to adjusted basic dilute net loss per 8 years, a triple portion limited of 1.60 and 1.60 during the same period of 2019. EBITDA was $67.9 million compared to negative $351.7 million for the first six months of 2019. EBITDA of K-12 tutoring services was $170.3 million compared to negative $112.1 million in the same period of 2019. EBITDA margin was 5% in the first six months of 2020 compared to negative 28.2% in the same period 2019. Adjusted EBITDA was 145.4 million compared to negative 42.7 million in the same period of 2019. Adjusted EBITDA margin was 10.8% compared to negative 3.4%. in the same period of 2019. Next, we'll move on to the balance sheet. As of June 30, 2020, the company has an agreed amount of cash, the cash equivalents, and the current portion of restricted cash of $569.6 million compared to $606.3 million as of December 31, 2019. The current portion of restricted cash consists of primaries deposits with the Chinese commercial banks as collateral for other bank borrowings within one year term. Finally, for guidance, the third quarter ended September 30, 2020, based on the information available as of the date of this press release. The company expects net net revenues to be between RMB $816.8 million and $863.6 million, which represents a decrease of 18% to 13% year-over-year. This forecast reflects the company's current and preliminary view of the market and operational conditions, which are subject to change. This concludes our prepared remarks. I will now turn the call over to the operator and open the call up for Q&A. Operator, we are ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, Please immediately repeat your question in English. At this time, we'll pause momentarily to assemble our roster. The first question today comes from Sophia Zane with Citi. Please go ahead.

Hello, Mr. Sha and Mr. Wang. I'm Sophie, a researcher at the central company. Thank you very much for accepting my question. I have three questions in total. First of all, from the current situation, how is our current business going? I would also like to ask you to introduce the current promotion of our OMO strategy and the plan of the shopping mall in the second half of this year. I will also translate my own question. So thanks, management, for taking my question. My first question is, how has our offline segment been recovered in terms of retention and recruitment of students for our summer courses? And my second question is, so could you please provide some updates on the implementation of our OML strategy and also some color on our M&A plans for the second half? Thank you.

Okay. Thank you for your question. For the first question of the reopening of offline learning centers, we are happy to say over 90% of current offline learning centers have been reopened step by step, though as we have to get the permission from the local educational committees and those pandemic fighting authorities. Unfortunately, we have two major cities which are still under the impact of the COVID-19 pandemic, which are Beijing and Dalian. As you may have known, Dalian, we have two case of health bodies operating there, which makes Dalian the largest single city of K-12 operation for Puxin. Due to the outbreak of the pandemic by the end of June, the offline learning centers in Dalian have been closed, and all the program classes have to be transferred to online. Yes, we did have some negative impact due to the second round of outbreak of the COVID-19 pandemic, especially in Beijing and Dalian. For Dalian, the impact is mainly on the shoulder of K-12 business. In Beijing, the burden is mainly on the study abroad business. Yes, we did have some negative impact, especially in Beijing and Dalian, but we're still optimistic about the rebounding of the business in all of our offline learning centers. As to the OMO strategy, we've been implementing the OMO strategy during the pandemic period. We had several pilot programs in our Tier 2 cities. like Taiyuan, like Chengdu, which are quite optimistic for the first pilot programs. But in terms of revenue, it only contributes a very small part of the revenue, so OEMO strategy is one of the priorities of a business, but it still needs time to play a significant part of a business. As to the third question about this, the M&A We did not make any acquisition during the first half of this year, also due to the outbreak of COVID-19. But we've been working hard to get back on track with our MS strategy. Again, we will stick to our acquisition and integration strategy. And with the outbreak of the COVID-19, we can say more targets are available due to the pandemic. And we will work hard to get back on track. Thank you.

Again, if you have a question, please press star, then 1. Since there appears to be no further question, I would like to turn the conference back over to Nadia Wang for any closing remarks.

Thank you, Anita. In closing, on behalf of the entire management team of PUSIN, we'd like to thank you again for your participation of today's call. If you have any further questions in the future, please feel free to contact us at irfpxjy.com or pusin at icaa.com. Thank you all.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.