ATA Creativity Global (AACG) 2020 Q4 法說會逐字稿

Greetings, and welcome to ATA Creativity Global's Fourth Quarter and Full Year 2020 Financial Results Conference Call. (Operator Instructions) Please note, this conference is being recorded. I would now like to turn the conference over to your host, Carolyne Sohn 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 Creative Global's or ACG's results for the fourth quarter and year ended December 31, 2020, 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 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, expect, future, plan, outlook and will, and include, among other things, statements regarding ACG's future growth and results of operations; ACG's plans for mergers and acquisitions generally; ACG's ability to operate efficiently and maintain continued financial strength under unusual circumstances; ACG's growth strategy, anticipated growth prospects and subsequent business activities; market demand for ACG's portfolio training programs and other education services; the impact of the COVID-19 outbreak on ACG and its operations; and ACG's plan and anticipated benefits of the measures implemented in response to the COVID-19 outbreak.

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 the risks 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 disclaiming language, I would also like to refer you to Slide 2 of the conference call presentation for further information.

All U.S. dollar amounts in this conference call relating to financial results for fourth quarter and year ended December 31, 2020, are converted from RMB using exchange rate of RMB 6.525 to USD 1, the noon buying rate as of December 31, 2020. All historical conversions are accurate as of the time reported, unless otherwise noted. The company reports its financial results under U.S. GAAP and RMB, and all percentages 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 3. In addition, we are more than happy to take investor questions during today's Q&A session or via e-mail to the company.

On today's call, the company's CFO, Ms. Amy Tung, will provide a brief overview of operating and financial highlights for the fourth quarter and full year 2020. And then President, Mr. Jun Zhang, will conclude the remarks with a discussion of the company's outlook as well as its long-term growth strategy before opening the floor for questions.

With that, I'll turn the call over to ACG's CFO, Ms. Amy Tung. Please go ahead, Amy.

Thank you, Carolyne, and welcome, everyone. Good evening to those in America. We appreciate everyone's time.

In 2020, the global COVID-19 pandemic presented a series of challenges to people and businesses at a level that nobody could have predicted. The virus has had tragic consequences for so many. At ATA Creativity Global, we were very fortunate to have been in a position to navigate the changes created by the critical public health situation in China in the first half 2020 having closed on our acquisition of Huanqiuyimeng in early August of 2019.

Our 2 companies had substantially assimilated by early 2020 when the significance of the pandemic was becoming increasingly apparent. This played a key role in our successful transitioning of coursework to the online platform. We also worked to upgrade technology systems that support the daily operations of the combined company and leveraged our leadership in finance, management and analysis. We are proud that the team here at ACG demonstrated the strength and resilience under these unprecedented circumstances.

Putting the well-being of our students and staff first by transitioning all important coursework to online delivery in early February. And I would -- also like to applaud students as well as the teachers and staff supporting them for their perseverance and dedication to the continued pursuit of their creative education.

The public health situation in China improved as we headed toward the middle of the year, and nearly all of our training centers were able to resume traditional in-person delivery of coursework by late second quarter. We did see that some students continued to pursue their coursework online even when traditional delivery became available again. And we are pleased to continue offering online options for coursework, generally more introductory and lecture-style in nature, which lent itself to this delivery method and offered students increased flexibility.

We have worked through enrollment deferrals and more significant impact to our international educational tourists and study abroad offering due to travel restrictions as a result of the pandemic by developing certain domestic art-themed travel programs and online bootcamp alternatives partnering with well-known overseas art schools and institutions. These programs that were newly developed during the 2020 year are part of our research-based learning business, formerly known as the educational travel business.

We are pleased that our students have been able to continue their studies with a certain level of normalcy at ACG, especially during the busy quarter fourth quarter term when many of them are working to complete their portfolios ahead of education deadlines.

For the fourth quarter of 2020, credit hours delivered for our portfolio training programs decreased from the prior year period as with the preceding 2020 period. This was primarily a reflection of the continuing COVID-19 environment. However, there was a 2.8% sequential increase from the number of portfolio training credit hours delivered and reported in quarter 3. We provide a year-over-year quarterly breakdown of these credit hours and additional operating metrics on the next slide.

Student enrollment for the period was 1,122, out of which 636 were enrolled in the portfolio training program. The portfolio training program consists of time-based programs and project-based programs, and we provide a breakout of the credit hours delivered during the period compared to the prior year comparable period in our presentation.

Revenue is recognized proportionately per credit hour delivered. However, as the total credit hours of project-based programs are not predetermined, the progress of a project-based program, which is measured by credit hours delivered compared against the total credit hours expected to be delivered is reevaluated at each quarterly and annual financial reporting date. As I mentioned earlier, the fourth quarter tends to be the period in which we delivered the most credit hours as many students are working to complete their portfolios ahead of year-end application deadlines. And while we did see a year-over-year decrease in credit hours delivered, we are pleased to have achieved sequential increase in this metric since quarter 1 2020 when we began to see the initial effect of the COVID-19 pandemic take hold. With that, let's move to financials for the quarter.

I wanted to remind everyone that for the results shown for this period, we have applied acquisition accounting and made purchase price allocation adjustments, PPA, to various assets acquired and liabilities assumed from the Huanqiuyimeng acquisition. As a result, certain line items will include adjustments from amortization of the difference between the carrying value in Huanqiuyimeng's book and the fair value assessed from the PPA process applied to the Huanqiuyimeng acquisition. I will highlight where we saw some impact on our financials due to this PPA adjustment for the fourth quarter and full year 2020.

Total net revenues for the fourth quarter of 2020 increased 12.4% to CNY 60.8 million from CNY 54.1 million in the fourth quarter of 2019. Net revenues for this quarter include the PPA adjustment decrease of CNY 6 million.

Gross margin was 48.5% during the 2020 fourth quarter, a significant increase from 38.6% in the prior year period. Excluding the PPA adjustment in net revenues, gross margin for the 2020 fourth quarter would have been 53.1%.

Net loss attributable to the ACG improved to CNY 24.8 million for the period compared to a net loss of CNY 70.9 million in the prior year period. This was primarily the result of a CNY 30 million decrease in loss from operations and CNY 20.7 million decrease in impairment loss of long-term investments.

Moving to financial highlights for full year 2020. It is important to note that results for 2020 include a full year's worth of contributions from Huanqiuyimeng, while 2019 includes only about 5 months of contributions. Total net revenues for the annual period were CNY 162.2 million compared to CNY 97.8 million in the prior year. Total net revenues for the period includes a PPA adjustment decrease of CNY 24 million.

Gross margin improved to 39.2% for 2020 compared to 36.7% in the prior year. Excluding the PPA adjustments in net revenues, gross margin for 2020 would have been 47.1%. This was a direct result of our internal cost restructuring and expense savings initiatives to increase overall operational efficiencies to offset the impact of the COVID-19 pandemic has had on our business.

And net loss attributable to ACG was in CNY 92.2 million in 2020 compared to net loss of CNY 122.3 million in the prior year. This improvement was primarily driven by a CNY 10.3 million decrease in loss from continuing operations and CNY 25.1 million decrease in long-term investment impairment and provision charges from the prior year.

Finally, we continue to be in a solid financial position with USD 17.3 million in cash and cash equivalents on the balance sheet. Working capital deficits was USD 23.6 million and total shareholders' equity was USD 30.5 million at December 31, 2020 compared to working capital deficit of USD 11.7 million and shareholders' equity of USD 43.9 million, respectively, at December 31, 2019.

Last May, our Board of Directors authorized the repurchase of up to USD 1 million of the company's issued and outstanding ADS from time to time in open market and through privately negotiated transactions. As part of this share repurchase plan, the company repurchased 450,337 ADS at an average stock price of USD 1.2631 during the course of the year. The plan expired on December 31, 2020.

With that, I would now like to turn it over to Jun who will expand upon our outlook, growth strategy and current initiatives before opening it up for Q&A. Kevin unfortunately had an urgent matter to attend to and was unable to join us today. Jun will make his remarks in Mandarin which will be followed by an English translation. Jun, please go ahead.

Thank you, Amy.

(foreign language)

[Interpreted] Thank you, Amy. I think most everyone is glad to put 2020 behind us despite the valuable lessons we have learned. I am proud of the way everyone at ACG came together to overcome the challenges we faced, and I believe our company is now stronger for it.

We utilize technology platforms that we can now leverage as a delivery method for various courses and majors, which will allow us to not only reach a wider student population, but also enables us to take advantages of our teaching resources, making highly sought after teachers available to students in our geographic areas who might not otherwise have had the opportunity to learn from these instructors.

We now have a more convenient and accessible support system for students, and are also developing an internal system to more closely monitor sales leads. While ACG is known for the personal attention of its programs, we believe this can also translate to online programs if executed properly. As the public health situation in China remains stable, the combination of being able to continue our traditional in-person delivery of coursework and serving students we may not have been able to serve previously via distance learning will help drive enrollment growth in future periods.

The work we did in 2020 has positioned ACG well to capitalize on our growth opportunities in 2021. We were pleased to see enrollments remain stable during the fourth quarter with portfolio training credit hours increasing slightly as many students worked to complete their portfolios. Some students have already begun to see the results of their hard work as acceptance letters from some institutions have started to go out, but the majority will be in the middle part of the year. With the public health situation in China effectively contained, we continue to offer in-person delivery of coursework with an option to complete some courses online, and we are working to build out our online offerings.

As an alternative to international travel, we offer domestic educational tours this past year. One of which took place in Sichuan that provided students with the wonderful opportunity to explore and experience nature. We also offered online bootcamps and internship opportunities. We continue to explore the potential of new offerings and are proud to have found opportunities to increase our growth prospects in the extremely unusual year of 2020.

We believe the groundwork we have laid in 2020 will afford us many opportunities for future growth, especially as the effects of COVID-19 subside with more and more countries looking to vaccinate their citizens and eventually reach herd immunity. It remains to be seen how worldwide travel will be impacted this summer, but we are planning accordingly and are looking to accommodate the high demand for and interest in studying abroad, depending on whether partner institutions plan to hold their usual summer programs or a variation of them. ACG remains nimble and quick to adapt, and we are planning ahead to accommodate varying scenarios.

As noted earlier, we are preparing to launch a new internal system for lead management and development, which will allow the sales team to access centralized information. We believe this will bolster overall sales efforts from all channels, and allow us to take even greater advantage of our newer online and mobile marketing initiatives.

If we learned anything from 2020, it was that technology is the absolute way of the future. In that regard, we are dedicated to investing resources to continue utilizing the best technologies and advancing our platform as newer capabilities become available. This will continue to be an important element in our growth initiatives even after the pandemic is behind us. There is certainly value in meeting and interacting face-to-face, especially as a student. But increasingly, we are seeing that a lot of interaction is just as effective and personable online in today's world of video classrooms and meetings. Regardless of mode, our goal is to ensure that students have the necessary access to the resources and support they need when it comes to pursuing their creative education.

To conclude, ACG is optimistic about the opportunities ahead. We are hopeful to be able to put the global pandemic behind us and that the world will begin to open up again soon. We remain in a solid financial position even more so with the increased operating efficiencies gained over the course of 2020 and into 2021.

I'd like to thank our students and employees as well as our associates, families and friends for their ongoing support. Everyone, please stay safe and healthy.

With that, operator, let's open it up for questions.

(Operator Instructions) There seems to be no questions at this time. I would like to pass the floor back over to management for any 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 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 teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]