Mynd.ai Inc (MYND) 2018 Q2 法說會逐字稿

Good day, and welcome to RYB Education's Second Quarter 2018 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the call over to Serena Xue, RYB's Investor Relations Manager. Please go ahead.

Thank you, operator. Please note the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities 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 views expressed today. Further information regarding this and other risks and uncertainties is included in the company's annual report on Form 20-F for the fiscal year ended December 31, 2017, and other filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law.

During today's call, management will also discuss certain unaudited non-GAAP financial measures for informational purposes only. The company's press release for the 2018 second quarter earnings contains a reconciliation of the unaudited non-GAAP measures to the unaudited mostly -- of most directly comparable GAAP measures. As a reminder, this conference is being recorded. A webcast replay of this conference call will be available on the company's corporate website at ir.rybbaby.com. Joining us today on the call is Ms. Ping Wei, Chief Financial Officer of the company.

I'll now turn the call over to Ms. Wei. Please go ahead.

Thank you, Serena, and thank you, everyone, for joining us today on our second quarter 2018 earnings conference call. We're pleased to report second quarter results with revenue growth in both our directly operated kindergartens and franchise businesses. Our net revenues for the quarter reached $47.5 million, a 25.6% increase from the second quarter of 2017 and surpassed the high end of our previous guidance range. Non-GAAP net income was USD 6.9 million for this quarter, a 55.7% increase from the same period last year.

The adoption of the new accounting treatment Topic 606 requires the recognition of initial franchise fees revenue over the service period, which is different from the prior treatment that recognized the franchise fee revenue upon confirmed initiation of franchise facility operation. Accordingly, the adoption of Topic 606 resulted in a sizable increase in franchise fee revenue recognized in this quarter.

Our strong revenue growth was also driven by the steady enrollment growth at our directly operated kindergartens, as the parents of our students reacted positively to our measures to enhance the security and safety of our children, our efforts to provide high-quality care and education to our children as well as our endeavors to improve the transparency of our facilities by inviting parents to participate in monitoring and improvement of our kindergarten operations.

In the second quarter, we continued to focus on execution of our operational strategy, mainly to continue to enhance teaching and service quality across our facilities, to continue to improve the security and safety for our children, to continue to strengthen the support for our franchise network and to build a solid foundation for future expansions.

The quality of our educational services, to a large extent, depends on the quality, commitment and a dedication of our teachers. In the second quarter, we continued to focus on improving the quality of our teachers through implementing more stringent recruiting and training standards and requirements.

In particular, this quarter, we conducted a system-wide teachers security and safety training to ensure all our teachers understand our enhanced security and safety standards and adopt our best practices on this subject.

We believe the best way to educate children is to collaborate with families and society in general to give children a comprehensive all-round education. We call this our educational golden triangle. We also believe transparency and collaboration are essential parts to our children's education.

During the second quarter, we finalized the design of our parents TA program and have highlighted the program in a few facilities. This program expands on our previous parents TA programs and going forward, will create a systematic and sustainable mechanism for parents to constantly participate in our children's kindergarten education.

During the quarter, we also continued to implement measures to enhance the security and safety of our children. We continue to implement the recommendations on security improvements given by the special task force comprised of our independent directors. These recommendations were treated seriously at both our directly operated and franchise facilities.

In the second quarter, we established a security and safety oversight committee, led by our newly appointed Chief Security Officer. This committee is comprised of key members of our senior and mid-level management team, including our CEO, myself and general managers of the operations service teams at our directly operated and franchise operations. The committee members meet regularly to review security and safety reports and records and to recommend improvement measures.

During the second quarter, we also set up a central surveillance room at our Beijing head office, which is staffed with full-time surveillance monitoring specialists. This real-time monitoring system enables us to discover possible issues and take a remedial action in time.

Moving on to an operations update for directly operated kindergartens. We ended the second quarter with 90 facilities and 23,526 students, representing an enrollment increase of about 15% from the second quarter of 2017. Average student payment for the quarter increased by about 2.8% to RMB 9,300, while net revenues from kindergarten services increased by 15.6% from the same period last year.

During the second quarter, we transferred the control of one loss-making facility to an unrelated third party, which resulted in a decrease in the enrollment of approximately 200 students. In addition, we acquired controlling interest in 4 facilities from a franchisee in Shandong as well as 1 facility in Beijing. These acquisitions contributed to a net increase of 1,142 students in the quarter.

In regard to franchise operations, during the second quarter, we reorganized both the play-and-learn center business and the franchise kindergarten business. We combined the business development teams, mid-office franchise operations, supervision and support teams and channel distribution and sales team into a same business unit, so that all functions can work together to provide seamless support and service to our franchisees.

This new BUs are headed by our 2 newly hired VPs. One has a proven track record of running successful franchisee operations and the other has extensive experience in kindergarten industry.

Last quarter, we made a strategic decision to pause the addition of new franchisees and focus on the consistency and quality of franchise service in the near term. This quarter, we provided more training programs and operational support to our existing franchisees. We also revisited our existing franchise model and made some changes. With these changes implemented toward the end of this quarter, we resumed accepting new franchise applications for play-and-learn centers.

For the operations of our franchised play-and-learn centers, we have developed a new revenue sharing model. Under this new model, while the initial franchise fee for new franchisees will stay relatively stable, the annual fee will be charged as a percentage of revenue of the new franchisees with a minimum level comparable to the annual fee under the old contract format.

This new model was implemented for all new franchise contracts starting in June of this year, and existing franchisees can also voluntarily convert to this model. Going forward, this new model is anticipated to increase our annual fee level once sizable franchise facilities under the new model start operations. Naturally, this also requires us to provide better support to our franchisees, particularly in supervision of operational quality, training, curriculum development and sales and marketing.

This new model has been well received by the market. To date, dozens of existing franchisees have switched to or have expressed a desire to switch to this new revenue model. And as of today, over 40 new franchisees have either signed contracts with us under this new model or have confirmed their intention to do so. We ended the second quarter with 217 (sic) [216] franchised kindergartens and 1,029 franchised play-and-learn centers in operation.

In addition, at the end of the second quarter, we had 182 kindergartens and 212 play-and-learn franchise contracts still in pipeline, with contracts in good standing and facilities not formally in operation yet.

We believe our quality improvement initiatives, organizational changes as well as our new revenue model will ensure we deliver best-in-class services across our entire educational network and help solidify our leadership position in the early childhood education market. The early childhood education market in China is large and still growing rapidly. In addition, it is highly fragmented and still in its very early development stage.

We aim to grow our service network through both organic growth and M&A. On the M&A side, in the second quarter, we successfully completed the 2 acquisitions that was announced on the last earnings call, 4 franchise facilities in Shandong and 1 facility in Beijing. This acquisitions contributed about USD 0.8 million to our net revenue for kindergarten services in the quarter. Our successful integration following this acquisitions has encouraged management to explore how to systematically acquire or make strategic investment in more franchise facilities in the future.

In line with our goal of acquiring premium and international kindergartens in top-tier cities, in June, we signed a definitive agreement to acquire the assets of an early childhood training company with 2 facilities in Shanghai. This training company focuses on providing high-end international English-based early childhood education and care services for children 2 to 6 years old and has gained local brand recognition for its proven training results.

This acquisition is strategically important for us as it provides a long, [sort of, active] presence in the Shanghai market, one of the prioritized cities in our expansion plan. It also provides us with an international curriculum tailored for the high-end international early childhood education market. We expect this acquisition to contribute positively to our operations going forward. We're excited to build on this initial foothold in Shanghai to meet the strong demand we see in that market.

Recently, we entered into a definitive agreement to acquire up to a 90% equity interest in a Beijing-based education company with educational assets in K-12 training and international kindergartens. This acquisition strengthened our position in the high-end international kindergarten market and provided us with a ready-to-use high-end international kindergarten brand. We intend to use the brands acquired through these acquisitions to further expand our presence in the high-end kindergarten market, in line with our multipronged growth strategy.

Moving on to our financials. Net revenues for the second quarter of 2018 increased by 25.6% to USD 47.5 million from $37.8 million for the same quarter of 2017. Service revenues for the second quarter of 2018 increased by 35.2% to $43.6 million from $32.3 million for the same quarter of 2017. The increase was partially due to the increase in the number of students enrolled at our directly operated kindergartens as enrollments at our existing facilities continued to grow and our newly acquired kindergartens also contributed to the increase. In addition, franchise services revenue increased significantly in the quarter.

This year, we adopted Topic 606, Revenue from Contracts with Customers, ASC 606, applying the modified retrospective method to franchise contracts not completed as of January 1, 2018. This new GAAP requires the recognition of initial franchise fees over the service period, rather than upon official start of franchise operation. This change contributed to the increase in franchise fee revenue for the quarter. We expect a large portion of the increase to be timing-related. Such increase was partially offset by lower revenue from existing franchisees, as a one-off fee reduction and free or discounted products and services offered to them at the beginning of this year continued.

Product revenues for the second quarter of 2018 decreased by 30.2% to USD 3.9 million from $5.6 million for the same quarter of 2017. The decrease was primarily due to a decrease in the amount of merchandise sold through the company's franchise network as we continued to pause the expansion of our franchise operation for most of this quarter.

Cost of revenues for the second quarter of 2018 was USD 31.6 million, an 11% increase from $28.5 million for the second quarter of 2017. Cost of revenues for the services for the second quarter of 2018 was USD 29.4 million compared with $25.6 million for the same quarter of 2017. The increase was primarily due to an increase in staff compensation at the company's directly operated kindergartens and higher operating costs as we continued to expand our kindergarten facilities. Cost of revenues for products for the second quarter of 2018 was $2.2 million compared with $2.9 million for the second quarter of 2017. The reduction was in line with the decrease in revenue.

Gross profit for the second quarter of 2018 increased by 69.9% to $15.9 million compared with $9.4 million for the same quarter of 2017.

Gross margin for the second quarter of 2018 was 33.5% compared with 24.7% for the same quarter last year. The increase in gross margin was primarily due to the recognition of franchise fee revenue, which was partially offset by the increase in staff compensation and operating costs at our directly operated kindergarten facilities.

Total operating expenses for the second quarter of 2018 was $8.4 million, a 139.3% increase from $3.5 million for the same quarter of 2017. Excluding share-based compensation expenses, operating expenses were $6.2 million in the second quarter, an increase of 85% from the second quarter of 2017.

Selling expenses for the second quarter remained flat at USD 0.4 million compared with $0.4 million for the same quarter of 2017.

General and administrative expenses, or G&A, for the second quarter of 2018 were USD $8 million, a 156.2% increase from $3.1 million for the second quarter of 2017. Excluding share-based compensation expenses, G&A expenses were $5.8 million for the second quarter, a 96.4% increase from $3 million for the second quarter of 2017. The increase in G&A expenses, excluding share-based compensation expenses, was primarily due to increases in payroll costs as we continued to recruit top talents to strengthen our team.

Professional service fees also increased significantly in the quarter due to heightened M&A activities and legal fees occurred. The share-based compensation expenses included in the G&A expense were USD 2.2 million for the quarter.

Operating income for the second quarter of 2018 was USD 7.5 million compared with $5.8 million for the same quarter last year.

Adjusted operating income was USD 9.7 million for the second quarter of 2018 compared with $6 million for the same quarter of 2017.

Net income attributable to ordinary shareholders of RYB for the second quarter of 2018 was $4.7 million compared with $4.3 million for the same quarter of 2017. Adjusted net income attributable to ordinary shareholders of RYB, which excludes the impact of $2.2 million of share-based compensation expenses for the second quarter of 2018, was USD 6.9 million compared with $4.5 million for the same quarter of 2017.

Basic and diluted net income per American Depositary Share, or ADS, attributable to ordinary shareholders of RYB for the second quarter of 2018 were $0.16 and $0.15, respectively, compared with $0.18 and $0.17, respectively, for the same quarter of 2017. Each ADS represents one Class A ordinary share.

Adjusted basic and diluted net income per ADS attributable to ordinary shareholders of RYB for the second quarter of 2018 were USD 0.24 and USD 0.22, respectively, compared with $0.19 and $0.18, respectively, for the same quarter of 2017.

EBITDA for the second quarter of 2018 was USD 10.1 million compared with $7.3 million for the same quarter of 2017. Adjusted EBITDA for the second quarter of 2018 was $12.3 million compared with $7.4 million for the same quarter last year.

As of June 30, 2018, the company had total cash, cash equivalents and term deposits of USD 143 million compared with $158.7 million as of December 31, 2017. The decrease in cash balance in the quarter was primarily driven by operating cash outflow, CapEx of $2.4 million and acquisition payments of $2.3 million in the quarter.

Net cash outflows from operating activities were USD 10.6 million during the second quarter of 2018 compared with $4.9 million of net cash inflow from operating activities during the second quarter of 2017. The cash outflow in the quarter was primarily driven by a decrease in prepayment from customers as we continued to pause the addition of new franchisees for most of the quarter and the decrease in deferred revenue due to the timing of tuition fee payments at the directly operated kindergarten facilities. The decrease was partially offset by the operating profit generated in the quarter.

And now moving to our results for the first 6 months of 2018.

Net revenues for the first 6 months of 2018 were USD 76.2 million compared with $64.3 million for the first 6 months of 2017. Services revenues for the first 6 months of 2018 were USD 69.6 million compared with $56.2 million for the same period last year. The increase was primarily due to an increase in the number of students enrolled at our directly operated kindergartens. Franchise services revenue also contributed to the increase of initial franchise fee revenue over the service period as the company adopted Topic 606, applying the modified retrospective method to franchise contracts not completed as of January 1, 2018.

This impact was partially offset by lower revenue generated from existing franchise operations, as a one-off fee reduction and free or discounted products and services offered to them at the beginning of this year continued.

Products revenue for the first 6 months of 2018 were $6.6 million compared with $8.1 million for the same period in 2017. The decrease was primarily due to a decrease in the amount of merchandise sold through the company's existing franchise network as we paused the expansion of our franchise operations for most of the period.

Cost of revenues for the first 6 months of 2018 was $59.7 million compared with $51.2 million (sic) [$51.3 million] for the first 6 months of 2017. Cost of revenues for the services for the 6 months of 2018 were $56.1 million compared with $47 million for the same period in 2017. The increase was primarily due to an increase in staff compensation at the company's directly operated kindergartens and higher operating costs as we continued to expand our kindergarten facilities network.

Cost of revenues for products for the first 6 months of 2018 was USD 3.6 million compared with $4.3 million for the same period last year. The reduction was in line with decreasing revenue. Gross profit for the first 6 months of 2018 was $16.5 million compared with $13 million for the first 6 months of 2017.

Gross margin for the first 6 months of 2018 was 21.7% compared with 20.3% for the same period last year.

Total operating expenses for the first 6 months of 2018 were USD 14.2 million compared with $6.3 million for the same period last year. Excluding share-based compensation expenses, operating expenses were $10.2 million for the first 6 months of 2018.

Selling expenses remained flat for the first 6 months of 2018 at USD 0.7 million compared with $0.7 million for the same period last year.

G&A expenses for the first 6 months of 2018 were USD 13.5 million compared with $5.6 million for the same period last year. Excluding share-based compensation expenses, G&A expenses were $9.6 million for the first 6 months of 2018, a 77.2% increase from $5.4 million for the same period of 2017.

The increase in G&A expense, excluding share-based compensation expense was primarily due to increases in cash compensation cost and professional service fees.

Operating income for the first 6 months of 2018 was USD 2.4 million compared with $6.7 million for the same period last year. Adjusted operating income for the 6 months of 2018 was USD 6.3 million compared with $6.9 million for the same period last year.

Net income attributable to ordinary shareholders of RYB for the first 6 months of 2018 was USD 2 million compared with $5.3 million for the same period last year. Adjusted net income attributable to ordinary shareholders of RYB, which excludes the impact of share-based compensation expenses, was $6 million for the first 6 months of 2018 compared with $5.5 million for the same period last year.

Basic and diluted net income per ADS attributable to ordinary shareholders of RYB for the first 6 months of 2018 were USD 0.07 and USD 0.06, respectively, compared with $0.23 and $0.21, respectively, for the same period last year. Each ADS represents one Class A ordinary share.

Adjusted basic and diluted net income per ADS attributable to ordinary shareholders of RYB for the first 6 months of 2018 was $0.20 and $0.19, respectively, compared with $0.24 and $0.22, respectively, for the same period last year.

EBITDA for the first 6 months of 2018 was USD 7.3 million compared with $9.6 million for the same period last year. Adjusted EBITDA for the first 6 months of 2018 was $11.2 million compared with $9.8 million for the same period last year.

With that, I would like to turn to our business outlook.

For the third quarter of 2018, the company expects net revenues to be between USD 37 million and USD 40 million, representing a year-over-year increase of approximately 0% to 10%. This takes into consideration the volatility in exchange rate between the USD and RMB.

For the full year of 2018, we updated net revenue guidance to be between USD 160 million and USD 170 million compared to the company's previous guidance given on May 18, 2018 -- or May 15, 2018, of $154.9 million to $166.1 million range. The updated guidance reflects the expected revenue contributions of the businesses that we acquired this year.

This outlook is based on our current market conditions and reflects the company management's estimate of the market and operating conditions and customer demand, all of which are subject to change.

We believe our strategy of selective growth, while maintaining high standards for curriculum and safety, positions us well to meet the strong demand for premium education services in China and deliver strong returns for our shareholders. Thank you for your attention.

We'll now open the call to questions. Operator, please go ahead.

(Operator Instructions) The first question comes from Alex Xie with Crédit Suisse.

I have 2 questions. The first question is, can management provide some comments about recent regulation trends in the K-12 education industry and how will the strengthening regulation affect the future growth of RYB? And my second question is about high-end kindergarten strategy of RYB. What's your plan to develop more high-end kindergartens? And how are you going to execute these strategies?

Okay, great question, Alex, and thanks for attending our conference call. First question about regulation in K-12 industry, well, as lot of you are aware, the most recent regulations and the government's sort of guidelines that was published were: one, implementation rules to the law to promote private education, the proposed draft, which was submitted for approval very recently; and the second one being the sort of State Council's comments about -- or the article about the rules to sort of further regulate and further manage the expansion of after-school training industries. Those, I guess, are the 2 main laws that were most recently discussed. With us, in fact, the second one, the State Council's sort of article about further regulating after-school training market. Simultaneously, there is also a directive on how to further manage the kindergarten space in China. Unfortunately, actual article has not come out yet, but the guideline is actually clear, very clear. So I will actually start here then walk backwards on the previous 2 regulation and the impact to us. The guideline on kindergarten sector based on the same State Council meeting can be summarized with 4 words: first one being availability; second one being affordability; third being safety; and the fourth being quality. Those are actually the exact words of the State Council based on the media reports to date, okay? This actually has nothing -- there's nothing new in this 4 words because around the beginning of this year or actually even earlier, they already indicated: one, with the availability, the mandate is actually valid from last year. Within the next 3, 4 years, this government wishes to raise the admission rate of age-appropriate children into kindergarten to 85%, which -- actually, that number currently stood, I believe, based on the most recent data I've seen towards end of 2017, at about 75%. And that particular number is very positive for kindergarten industry because as you see, after the relaxation of one child policy in 2015, number of kids born in 2016 actually went up, even 2017 number compared to 2016 lower, but compared to 2015, still much higher. And that bodes well for kindergarten industry in general because that basically says the industry is still an undersupplied industry. The second word, affordability, refers to the previous announced government mandate, that is to have around 80% of all kindergartens, both public and private operated, to be inclusive or affordable kindergartens, which basically put a cap on the price point a kindergarten can touch to sort of keep customers. Now this one affects us to a degree, but not at this moment. We don't believe it's going to be significantly and we have our strategies to manage this impact. From RYB perspective, the positioning of RYB kindergartens and early childhood education services is premium quality, premium pricing. So we aim to primarily operate in the remaining 20% of the kindergarten services market primarily, which is a very market-driven pricing point and with differentiated value proposition to the parents and to the market. And the third word security safety -- safety and the fourth quality, in fact, is exactly the operational focus for RYB this year. So that's the 4 words referred to by the same meeting that came up with the new regulation regarding further strengthening the sort of regulation of after-school training market. Now that particular article has some impact on us as well. In my personal view, neutral to slightly positive. Neutral in that it's on training sector, and we don't offer K-12 training in general. Slightly positive is that, that rule particularly says the training companies are not allowed to give kids knowledge training that will be ahead of the curriculum designed for the age. Now in the Chinese training market, there is a particular part that's actually preparing children for grade 1 or primary school education. A lot of those are actually knowledge based. And this regulation actually prohibits -- there's another sort of rule out there as well regarding kindergarten education that specifically say, they will disallow kindergartens and training companies to provide -- to give kids grade 1 level or a even higher level of knowledge base [than they're] learning. In the past, some of the aged 5 to 6 years old or senior class of our kindergartens actually moved to preschool training companies to finish the final half year to a year's preschool education to get more intense knowledge-based training. And the regulator -- this environment -- this regulation change will sort of curb parents' enthusiasm here, okay? Now the implementation rule to promote -- implementation rules to the law of -- to promote private education is the final piece of law or regulation that affects the whole industry, including us. Among the rules, a few things may have impacted the industry, and I need to sort of also explain the potential impact on us as well. One is according to the proposed rule, basically educational groups are not allowed to acquire not-for-profit educational institutions. That's the first one that may have impact on us. Second one is educational companies, especially the listcos, et cetera, if they try to transfer profit from not-for-profit schools via related-party transactions, such related-party transaction will be put under very careful scrutiny by Ministry of Education and other government agencies. And the third one that may have impact on us is, group companies are not allowed to provide franchise services to -- or sort of manage not-for-profit education companies via franchise arrangements. Now I'll explain the potential impact to us one by one. First of all, I would like to remind everybody about RYB's own operation. While in the past some of our kindergartens may have been registered as not asking for reasonable returns and some registered as asking for reasonable returns, under the old law, we paid 25% income tax on all our kindergarten operations. So technically, we're running -- we're being levied income tax, and we're running as a for-profit organization with the old, relatively vague law to promote [private] education. The implementation under the new law to reregister our kindergartens are still either haven't even started or in the very early stage. So we intend to register all our kindergarten facilities as for-profit institutions because we don't have much to lose really with that registration and that makes our sort of organization much cleaner from the operations perspective. Now question is, will we be allowed? We do not know. There is uncertainty. When will we know? Well, as you're all aware, the transition period based on what we've heard could be a few years and for some, even as long as 3 to 5 years. We will naturally work with the government agencies very closely to achieve our goal while providing quality services, the first one. The second one is basically related-party transactions. We -- kindergarten by nature has relatively low operating margins, and we provide quite a bit of centralized curriculum, IT system, management training, et cetera support to our franchise -- to our operations. So we don't think we have big exposure there. On the M&A and franchise of not-for-profit, our M&A strategy, while it has, like, high-end M&A strategy acquiring high-end facility -- high-end brands to strengthen our position in the premium kindergarten services sector and acquiring similar operations or acquiring sort of facility or premium locations, we actually had a clear sort of internal operational indication that we will not acquire, or we will stay away from high-risk facilities, which means facilities that are very likely to be defined as not-for-profit operations. From franchise operations perspective as well, one is with kindergarten, as you guys know, we've virtually paused the further expansion of any franchise operation for kindergartens. And we are in the process of remodeling our nondirect-owned kindergarten services model. Currently, the idea is, first of all, only at [holding] franchise side, we -- our target market is the high end or premium quality, premium service, i.e. the 20% of the kindergarten service market. For that part, we aim to offer more controlled management outsourcing, rather than the traditional franchise. Nevertheless, that should not be affected by this new proposed rule. On the other hand, our Hong Shan Enable model, which was basically content, curriculum, support and service as well as IT system, management solutions, quality, surveillance and supervision services, those are not franchise service. Those are more advisory and management consulting services in nature. So we don't think those will be affected much by the new laws. I think it's a long answer to a short question that you asked. I hope that answers your question. Now moving on to your second question about the high-end KG strategy, okay. So the 2 acquisitions we did in the quarter, one in Shanghai, one in Beijing, provided a good brand, actually with good local recognition and brand and goodwill. And we intend to use those brands together with the previous high-end brands we already have to expand our high end, like in kindergarten operations throughout China. And those high end, I'm actually referring to for Tier 1 cities are monthly tuition fee rate of RMB 10,000 or even higher. So this market segment is very lucrative, good margins, clearly differentiated value proposition from mid and lower end of the kindergarten services. So we have very much the intention to expand as fast as we can on this particular segment. Now touching a bit more on this. RYB, we previously mentioned our brand, so-called bifurcation strategy. We actually -- traditionally, we have RYB international kindergartens, which is the high end of even our service offerings, which in Tier 1 cities charge anywhere from RMB 6,000, RMB 7,000 up to RMB 10,000 per month of tuition fee and then RMB (sic) [RYB] bilingual premium kindergartens in Tier 1 cities that basically indicate a per month tuition fee of about RMB 3,000 to about RMB 5,000, RMB 6,000. And then the affordable kindergartens, our RYB kindergartens we offer in China as well. Going forward, with new acquisitions, we added a layer of -- on top of the RYB international kindergarten, which is pure international, international, very, very global, international kind of curriculum solutions, global sort of perspective, et cetera, at price point about RMB 10,000 per month. I hope that answers your question, Alex?

Yes. And I just have one follow-up. So what's your view on the competitive landscape of high-end kindergarten market in Tier 1 cities?

Well, actually, it's a very interesting question as well. It should be a simple answer, but actually one is, at this moment, there is scarcity on the high-end offerings. With the 80% rule being rolled out and some of the government facilities currently offering high-end services to the market being converted into inclusive kindergartens, we actually think there will be a lot of opportunities to offer to further expand and further add availability to the market. In general, it's still not a competition market. It's still an underserved market. So I wouldn't worry about competition at this moment. I think from my perspective, competition is more on the acquisition side rather than on like organic growth side.

The next question comes from Sheng Zhong with Morgan Stanley.

I have 2 short questions here. One is about the -- still about the inclusive kindergarten, (foreign language) because that you shared that currently we are still not quite sure about the timing, but can you share a little bit about how many kindergartens now, your 90 kindergartens, how many of them are already the inclusive kindergarten? And do you have a rough idea about the potential ones to be included in the inclusive kindergarten? And what the kind of financial impact would be? Second one is, as we change the franchise model into the revenue sharing one, can you share a little bit more color on how we charge the percentage of revenue and what do you think the difference with previous model on the franchisee fee to RYB?

Very good questions, Sheng, and thanks for attending our conference call. And it's good to hear from you. First question, in regard to inclusive kindergartens, we disclosed previously in our annual report as well the number of facilities that's in government facilities. We have, in total, high 20 facilities that actually are leased from government, primarily from Ministry of Education related than agencies or construction bureaus of the local sort of municipalities, of which, right now, mid-teen numbers are already inclusive kindergartens. And second half of this year, we will actually have 2 convert into inclusive kindergarten already starting September of this year. One more, we actually divested very recently. So 3 of the facilities, 2 of them will be converted to inclusive this year and one we give it back to the government. That one previously was not making money. And with that local policy, we think we'll lose even more. So we said, you guys can -- maybe, you guys can do a better job in running this facility, so they took it back. Okay. Now so potential ones, I will say we still have over 10 facilities that potentially could be converted into inclusive kindergarten. Now financial impact. The 2 facilities that will be converted into inclusive kindergarten this year, overall impact to us is actually pretty small for this year. Reason being, one of the facilities is actually a fairly sizable one, okay? Now let me explain what will happen once a facility is being -- is converted into inclusive kindergarten. As you know, with RYB premium bilingual kindergartens, we typically have a class -- number of students per class at about 25. When the kids reach 5 years, the senior class, we could accommodate up to 30 kids per class, okay? But if we convert our facility into inclusive, then, according to government regulations in Beijing, we're allowed to have 35 kids per class, with still 10% room to bloat up, which says basically we could have up to 38, 39 kids per class. So you can see the number of kids increase. And the 2 facilities we offer we're converting into inclusive kindergarten, previously were charging a fee around RMB 3,000 to RMB 5,000 per month. Now with the conversions, we actually added -- we'll add quite a few kids to the facilities per class as well as overall. Now another side, we will not be charged much rent, okay? And thirdly, the -- when we run premium bilingual kindergarten, we have [feature] class teachers. We have English teachers. On some cases, we actually even have, like, sort of, expat teachers, who are native English speakers. With the inclusive operation, we can reduce a lot of sort of teachers and replace the teachers qualification and pay profile to the more -- to the kind that's more in line with the service we offer in inclusive services, okay? Finally, even with inclusive kindergarten, we offer both regular kindergarten service and after-school extended-hour services, both also sort of attribute -- will contribute to actual revenues from those facilities. Overall, with the current midrange for sort of the facilities we convert, financial impact is relatively small for now. Now we do have high-end kindergartens that potentially could have the risk of being converted into inclusive kindergarten facilities. The strategy we have on that one actually is, we actually already started looking and have -- is in like sort of close to final stage of securing commercial facilities nearby. So what will happen is, for those facilities, it will be split into 2 facilities going forward once we're required to run inclusive service on the government facility. We will have an elite high-end international kindergarten offering very differentiated curriculum with a similar fee as compared to before, and we will run inclusive kindergarten on the original location. Overall, we do expect with these 2 facilities, a lower margin, but in terms of actual earnings, it will be comparable or slightly higher. So that will be the impact. Now moving onto second question, as we are actually running really out of time. Franchise model revenue sharing. Okay. The new play-and-learn center franchise revenue sharing model basically calls for 6% to 8% of revenue sharing currently with a minimum annual fee that's comparable to the prior contract level. So that basically means a new franchise facility can easily -- under new contract can easily generate an annual fee that's at least 50% to 100% even higher than the previous level. So we do expect this to contribute quite meaningfully to our revenue and revenue growth for 2019. But since we only started adding those new contracts this year and it takes time to set up, the impact to this year will be pretty minimal. I hope that answers all your questions, Sheng?

Yes.

The next question comes from Mark Petra (sic) [Mark Butler] with Petra Investment Managers (sic) [Perpetua Investment Managers].

This is Mark Butler from Perpetua Investment Managers. My question is relating to share buybacks. There don't seem to have been any during the quarter. Can you give an indication as to what the intention has been, whether the business -- whether the company still anticipates repurchasing shares?

Yes, thank you, Mark. With the share buyback, my board gave me a clear mandate and framework as to when and under what conditions should I -- should we buy. To date, we actually have not hit the sort of the parameters that's given by us -- by the board to buy back. So, so far, we actually have not used cash in our share buyback program. In fact, the program is active for 1 year, okay?

Okay. I would now like to turn the call back over to Serena Xue for any closing remarks.

Thank you. Thank you all once again for joining us today. If you have any further questions, please do not hesitate to contact us at ir@rybbaby.com or TPG Investor Relations at ryb@tpg-ir.com. Thank you very much for your time, and we hope you have a wonderful day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.