Mynd.ai Inc (MYND) 2018 Q4 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for RYB Education Inc.'s Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded. I will turn the call over to your host, Ms. Serena Xue, Investor Relations Manager for the company. Please go ahead, Serena.

Thank you, Keith. 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 these and other risks and uncertainties is included in the company's annual reform -- 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 fourth quarter and full year earnings contains a reconciliation of the unaudited non-GAAP measures to the unaudited 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.

On today's call is Ms. Yanlai Shi, Co-Founder, Director and Chief Executive Officer of the company; and Ms. Ping Wei, Chief Financial Officer of the company.

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

(foreign language) In many respects, 2018 was a challenging year for our company and our industry, but our fourth quarter results demonstrate the early benefits of us staying focused on making enhancements to the security and safety of our children and our dedication for our core mission of providing high-quality, individualized and age-appropriate care and education.

(foreign language) Reflecting on 2018, our decisive investments in raising teachers' pay, further improving teachers' training, enhancing the security and safety of our facilities through setting up a comprehensive surveillance system, establishing safety inspection and monitoring systems and making our facilities more transparent by inviting parents in to participate in our daily operation all helped in regaining parents' trust and confidence in us, even though these initiatives did have some impact on our short-term margin.

(foreign language) Furthermore, quite a few new policies and regulations relating to kindergarten and private education in general were released in 2018. In alignment with this policy environment and our earlier decision to suspend the franchising of our kindergarten operations, we refined our operations' structure and related business units. These not only better reflect our company strategies for long-term success but also helped us stay fast positioned to work with related government authorities in support of policies that aim to ensure quality early childhood education remains affordable and accessible to families.

(foreign language) After these adjustments, we now focus our growth in 5 key areas: play-and-learn centers; directly operated kindergartens; kindergarten-related management services; earlier childcare and education for children 0 to 3 years old; and other new initiatives.

(foreign language) We ended 2018 with 1,096 franchise play-and-learn centers, or PLCs, in operation and another 234 pipeline franchise contracts yet to commence operation. Our focus for the year was to help our franchisees to improve their operations through training and more operational support. To enhance such support, we combined our business development team, mid-office franchisee operation team, supervision and support team and channel distribution team into one business unit so that full -- all functions can work seamlessly together to provide better support and service. The new BU is headed by a newly hired VP with a proven track record in running successful franchise operations, previously as our franchisee, and with his dedication and passion for education.

(foreign language) With the enhanced operational support and training capabilities, towards the end of the second quarter of 2018, we resumed accepting new applications for play-and-learn centers under a new revenue-sharing model subject to a minimum fixed fee. This new model was implemented for all new franchise contracts started after the beginning of July, and existing franchisees have the option to voluntarily convert to the new model. This new model has been well received by the market. By the end of 2018, dozens of existing franchisees have opted to switch to the new model and over 100 new contracts were signed in 2018.

(foreign language) We believe that the series of quality improvement initiatives, organizational changes and our new revenue-sharing model will ensure we deliver best-in-class and differentiated service across regions and help solidify our leading position in a play-and-learn center market. In addition, we expect this new model to increase our annual fee level in 2019 as we expect several sizable franchise facilities will be operating under this new model by the end of 2019.

(foreign language) An operations update for kindergarten. We ended the fourth quarter with 23,627 students as compared with 21,684 students as of December 31, 2017. Net revenues from directly operated kindergartens increased by 18% from the same period of 2017. We firmly believe in providing high-quality, differentiated, early childhood education in China and support government policies in making kindergarten education high-quality, affordable, accessible and safe. We took decisive steps, at times proactively, to adjust our kindergarten operations according to this regulatory requirement with greater social benefits.

(foreign language) As we enter 2019, we'll continue to make policy-related adjustments to some of our directly operated kindergartens. This could impact our near-term margins. However, we remain fully committed to investing in differentiated premium quality kindergarten services for our children as we believe such investments will pay off in the long term.

(foreign language) The early childhood education market in China is still large and growing. It's still highly fragmented and in a very early stage of development. We believe in the demand for quality content and services and look to further grow our businesses through providing asset-light kindergarten curriculum support, management support and other services.

(foreign language) We have suspended accepting new kindergarten franchise applications. However, we continue to enhance our support services and supervision for our existing franchisees to ensure the security of children under care and the quality of education. In addition, we started to offer our expertise in kindergarten education through a modified management services model. Under this model, we provide intel insight type of empowerment solutions to third-party kindergarten operators by offering the curriculum, curriculum-related training and products, quality, supervision and management advisory services without giving them the use of our brand name. Rather, we allow them to advertise the use of our solutions, courses and centers.

(foreign language) Furthering this growth model, in December, last year, we entered into a definitive agreement to acquire the controlling interest of Shanghai-based education services company, backed by a century-old leading U.S. education company that specializes in R&D and distribution as educational work solutions, devices and supplies and teacher training. The existing product and curriculum offerings synergize well with our years of experience, delivering services to our kindergarten franchisees. We also joined forces with a team of well-respected professors in the early childhood education industry from one of the renowned universities of education in China to further develop a series of specific and dedicated curricula that fully utilize the existing array of educational toys and tools. (foreign language) We expect this new growth initiative to develop well and, together with our franchise operations, contribute healthily to our overall revenue growth.

(foreign language) In late 2017, we started a pilot project to offer care and education services to children from 0 to 3 years old, extending our full-time care and education services for children starting from 3 years old to include children from infancy. This is an underserved market with huge demand, and it is speculated that making earlier care and education available to young parents could improve birth rates in China. There were few regulatory requirements in this area until very recently when government authorities in Shanghai, in addition to a few other provinces and cities in China, released regulations and detailed planning guidelines for this segment.

(foreign language) Recently, we advanced this pilot project by acquiring an early childhood care and education center in Shanghai to serve as our first showcase facility serving children in this 0- to 3-year old range. We'll leverage our operations in this facility to fine tune our curriculum, care and service standards, SOPs and systems as well as facility setup and maintenance standards. (foreign language) We expect this new initiative to affect our margin this year. However, we're confident that with the experience and expertise we've gained serving the kindergarten sector, we are well-positioned to expand in this hugely promising segment and unleash new growth potential for the coming years.

(foreign language) Subsequent to year-end in 2018, we entered into a definitive agreement to acquire approximately 70% of a leading Singapore-based private childhood education group for approximately RMB 125 million in cash. (foreign language) In addition to healthy financial performance and easily expandable model and a high-quality management team, this Singaporean company features a well-developed, comprehensive, bilingual English-Chinese curriculum based on the multiple intelligences theory with an inquiry-based learning approach. Such curriculum has already been adapted to the China market through the company’s presence in China.

(foreign language) These acquisitions will not only provide us with high-quality, mature, bilingual curriculum that can be easily added to our existing curriculum offering but will also provide us with a training ground for our existing faculties and principals as well as the opportunity for multi-brand expansion in China. We intend to use the acquired educational content and brands to further expand our presence in international kindergarten market while maintaining the company's healthy growth in Southeast Asia, in line with our multipronged growth strategy.

(foreign language) In addition to various acquisitions and collaborations we announced last year or discussed here, this acquisition further expands our brand and service offerings to a wider audience and strengthens our competitive position in the international kindergarten market. As such, while RYB is still a brand for our core kindergarten and PLC business lines, it no longer is an entirely suitable umbrella for the group company. This year, we intend to change our group company name to GEH Education, subject to future approval by company shareholders' meeting.

(foreign language) With that, I'll turn it over to Ms. Wei to provide details of our fourth quarter financial results and select highlights of our full year 2018 performance.

Thank you, Grace and Serena. Please refer to our press release for more complete discussions about our financial performance. I will only provide some highlights, so we can have more time for Q&A.

For Q4 of 2018, net revenues exceeded our expectations, and we returned to profitability in the fourth quarter on a non-GAAP basis. Our streamlined business operations, new initiatives and recent investments to diversify revenue streams and secure long-term success, as Grace mentioned earlier, have positioned us well as we enter 2019. But let me first start with the review of the fourth quarter and then move to full year results. Grace will provide the outlook for 2019 at the end.

Net revenues for fourth quarter of 2018 increased by 15.2% to $45 million from $39.1 million for the same quarter of 2017, as both services revenues and product sales revenue increased. For service revenues, the increase was primarily due to an increase in the number of students enrolled in our directly operated kindergartens and increased tuition fee due to a student mix shift. The increase was partially offset by the decrease in franchise services revenues related to the suspension of the kindergarten franchise program, a temporary suspension of our play-and-learn franchise expansion during the first half of 2018 as well as lower revenue generated from existing franchisees due to a one-off fee reduction for part of 2018. Product revenues increased primarily due to the delivery of products related to new courses offered to our franchisees and an increase in the amount of merchandise sold through our franchise network.

Cost of revenues for the fourth quarter of 2018 was $37.1 million, a 17.5% increase from $31.6 million for the same period of 2017. Cost of revenues for services for the fourth quarter was $33.6 million compared with $29.3 million for the same quarter of 2017. The increase was primarily due to a planned increase in staff compensation at our directly operated kindergarten and higher operating costs, such as rental and material consumptions, as the company continued to moderately expand its kindergarten facilities network. Cost of products revenue for the fourth quarter of 2018 was $3.5 million compared with $2.3 million for the same quarter of 2017. The increase was generally in line with the increase in products revenue.

Gross margin for the fourth quarter of 2018 was 17.6% compared with 19.1% for the same quarter last year, primarily due to decreased franchise fee revenues and the planned increase in staff compensation and operating costs at directly operated kindergartens.

Total operating expenses for the fourth quarter of 2018 were $8 million, comparable with $7.6 million for the same quarter of 2017. Excluding share-based compensating expenses, operating expenses were $6.8 million, an increase of 13.3% from $6 million for the fourth quarter of 2017.

Operating loss for the fourth quarter of 2018 was $0.1 million compared with $0.2 million for the same quarter last year. Adjusted operating income was $1.1 million for the fourth quarter of 2018 compared with $1.5 million for the same period last year.

Net income attributable to ordinary shareholders of RYB for the fourth quarter of 2018 was $0.6 million compared with $0.2 million for the same quarter of '17. Adjusted net income attributable to ordinary shareholders of RYB, which excludes the impact of $1.2 million of share-based compensating expense and $0.7 million decrease in redeemable noncontrolling interests for the fourth quarter of 2018, was $1.1 million compared with $1.9 million for the same quarter of 2017.

EBITDA for the fourth quarter of 2018 was $4.3 million compared with $2.3 million for the same period of 2017. Adjusted EBITDA for the fourth quarter of 2018 was $5.5 million compared with $3.9 million for the same quarter of 2017.

Cash used in operating activities was $9.5 million during the fourth quarter of 2018 compared with $15 million from operating activities during the fourth quarter of 2017. The decrease in cash outflow was primarily due to the payout of IPO-related disbursements and one-off refunds to contracted and potential franchisees in the same period of 2017.

For our full year 2018 results, please refer to our press release, which has distributed earlier today and is posted on the Internet and on our IR website.

I would like to point out that as of December 31, 2018, the company had total cash and cash equivalents of $104.1 million compared with $158.7 million as of December 31, 2017. The decrease in cash balance was primarily driven by acquisition-related payments of $41.5 million, capital expenditures of $11.5 million, $12.9 million of decrease, the advance payments from customers as we had a suspension of new franchise applications and some onetime refunds to pipeline franchisees. The decrease was partially offset by $11.9 million of cash earnings generated in the year, which basically is non-GAAP earning plus noncash expenses.

With that, I would like to turn the call back to Grace to discuss our business outlook. Grace, please?

(foreign language) Thank you, Ms. Wei. Looking to 2019, in alignment with the evolving regulatory environment, our objective is to strike a balance between growth and profitability as well as between focus and diversification.

(foreign language) In the play-and-learn center segment, we will continue to add new franchisees to our network while furthering enhancing our sales, marketing and operational support and services to our franchisees, helping them provide quality education to the families they serve and generate healthy financial returns. This will help further enhance the momentum of the play-and-learn center business development, paving way for sustained long-term success with increase in the number of students and families we serve and continuous improvement in customer satisfaction.

(foreign language) For the kindergarten segment, we remain committed to investing in differentiated premium quality kindergarten services for our children as we believe such investments will pay off in the long term. Simultaneously, we expect policy-related adjustments this year to some of our directly operated kindergartens to affect this year's margin. In addition, due to the evolving policy environment, we expect slower new facility additions during the year. We anticipate the slowdown in opening new kindergarten facilities to be short-lived as we firmly believe that the demand for high-quality differentiated kindergarten services remains huge.

(foreign language) Early childhood education is still in its nascence in China and growth opportunities abound. Leveraging our core strength in curriculum, content and research and development, teacher training and development and standardized systematic operations, we will invest in further expanding our education management services offerings and in our 0- to 3-year old care and education initiatives. We expect the former to generate meaningful revenue in 2019 with limited margin contribution, while for the latter, we expect it to be loss-making this year but turn profitable in 2020.

(foreign language) This year, we will also continue to attract and retain top talent, enhance our operational management abilities and further improve of IT -- our IT system to build a state-of-the-art early childhood education and services group. All of these initiatives will require additional investment. However, we'll also implement very prudent cost management policies this year. As such, we expect our G&A expenses to stay relatively stable for 2019.

(foreign language) As we solidify our position as leading educational platform operating in a new regulatory landscape in China, we believe our strategy of maintaining high-quality standard for curriculum and safety positions us well to meet the strong demand for premium education services and will pay off for our shareholder in the long term.

(foreign language) With this, I'll now discuss our revenue outlook for 2019. For the first quarter of 2019, the company expects net revenues to be between $33.0 million and $34.5 million, representing a year-over-year increase of approximately 15% to 20%. (foreign language) For the full year of 2019, we expect net revenues to be between $180.5 million and $191.5 million, representing a year-over-year increase of approximately 15% to 22%. (foreign language) This outlook is based on current market conditions and reflects the estimate of the market and operating conditions, customer demand and a stable U.S. dollar currency environment, which are all subject to change. Our outlook excludes revenue contribution from our pending Singapore acquisition.

(foreign language) Thank you for your attention. We'll now open the call to questions. Keith, please go ahead.

(Operator Instructions) And the first question comes from Sheng Zhong with Morgan Stanley.

(foreign language) So Grace mentioned the regulation impact in regulation last year. So want to ask if management can add more color about what the implementation status is now and what impact to company's operation in this year.

(foreign language) With the opinion and notice updates in last November and in this past January, there's been quite a lot of feedback from the society, in general, and from the industry. First of all, I don't think restrictive should be the right word to put on kindergarten-related policies. Our government wants to make kindergarten education high-quality, affordable, accessible and safe as our policymakers believe that kindergarten education should focus on social and familial values. During the plenary session of the NPC this year, Premier Keqiang Li mentioned that the government will support kindergarten operations, be it public operated -- publicly operated or privately operated, as long as they meet safety requirements. Furthermore, quite a few policies and regulations relating to the kindergartens were released last year, aiming at streamlining the healthy development of kindergarten services, which the company supports. (foreign language) These aforementioned policies are in the process of being implemented. We mentioned earlier in this call some potential impact on directly operated kindergartens. (foreign language) Under this regulatory landscape, our overall long-term strategic objective is a balanced growth approach between focus and diversification. (foreign language) Specifically, with directly-operated kindergartens, we'll continue our focus on quality, safety and differentiated and diversified services to meet the demand and need for high-quality, safe kindergarten services of multiple market segments. In addition, we work to provide curriculum, training, management and other services to fellow operators in this space, and we anticipate this part to contribute to the overall healthy growth of the company. (foreign language) At the same time, through acquisitions and collaboration domestically and abroad, we'll introduce more high-quality curriculum, course content, et cetera, to further enhance the quality of our teaching and services, which will help become a new growth driver. The Singapore acquisition is a clear example. (foreign language) Earlier care and education market, so 0- to 3-year old, is just starting. As regulations and guidelines become clearer, we anticipate that there will be huge demand for these services. We've started to invest in this new growth potential and expect to generate meaningful contribution in the coming years.

In terms of financial contributions, in 2018, as you see -- well, actually, you didn't see. In 2018, kindergarten actually contributed already less than 50% of our gross margin, and we actually expect that contribution to greatly decrease even more to around about 40% in 3 to 5 years' time. So you see the remaining 60% or the majority of our margins will be coming from products and services other than directly-operated kindergartens in a few years -- or in 3 to 5 years, I would say.

And the next question comes from Alex Xie with Credit Suisse.

So I'd like to ask management's expectations for the contribution from Singapore, the acquired Singapore education group, in terms of revenue and profit.

Okay. I'll take the question directly in English. Singapore is -- the Singapore company has a sizable operation with close to 20 kindergartens in Singapore and some presence in China, in addition to their educational services offerings in Singapore and in Southeast Asia. The -- based on the information we know, we expect them to contribute annualized revenue in the range of about SGD 30 million and then of EBITDA of about -- in the range of around SGD 5 million for 2018 on -- 2019 on annualized basis. Now we are still in the process of closing the transaction, so the actual revenue and margin contribution for 2019 will depend on when will the transaction close. And we will let you guys know when that happens. Simultaneously, the Singapore company has -- as [Shi Zhou] mentioned, has a healthy growth and sort of a prospect in Southeast Asia, in addition to providing us great synergistic value for China market and for RYB group overall. They are expecting to grow in about -- at about 10 percentage in top line over the next few years and even better growth at the EBITDA level. Thank you, Alex.

And the next question comes from Johnny Wong with Jefferies.

My question comes -- also regards to the policy. I suspect that the policies have affected a lot of companies that have bought up kindergartens in anticipation of trying to list them. Now do we see a lot of these companies with relatively cheap valuations coming to you for possible acquisitions? And what do we think about acquiring more of these kindergartens in China, if the valuations are low?

Johnny, that's a very good question. First of all, yes, there are cheap assets on the market, okay? We have been approached here and there by operators and, sometimes, venture capital keys with kindergarten portfolios of variable sizes, et cetera. But with the opinion that was issued in November 13, 2018, we do not think it's a good idea to sort of -- to do acquisitions of that kind of nature at this time. We'd rather focus on what we do the best, providing quality education to our kindergartens in current sort of portfolio and gradually add new kindergarten to our network organically. At the same time, as you noticed, we did the Singapore acquisition. It's possible for us to do other international kindergarten acquisitions as well as acquisitions of other type, other than direct-owned kindergartens in China. Now why those are also sort of attractive? We can actually use Singapore as an example. Last year, with the opinion, the -- before and after, we realized that valuation required for assets, sort of -- that includes kindergartens, came down even for international and the non-China players. So that, certainly, is an opportunity still for us. Now I think also, one information, Johnny, I understand there may be one new IPO in pipeline that could include kindergarten assets. It'll be very interesting to see whether that will pull through. It could be a very interesting policy, like direction indicator. But right now, the company will stay away from sizable kindergarten acquisitions.

And the next question comes from Jenny Tsai with BNP Paribas.

Can management share with us and let us know the government's policy within the 0- to 3-years early childhood services in next 3 to 5 years? And when do you expect this business to turn profitable? And lastly, how long does it take for a single center to turn around or be profitable?

(foreign language) I'll first introduce the policy and business environment, and Wei Ping will address the financial aspect. (foreign language) Infant and childcare is a concern related to millions of families, Premier Keqiang Li said at this year's NPC assembly. In view of the new social situation following the implementation of the 2-child policy, we should accelerate the development of various forms of infant and childcare services, support social forces in setting up infant-care services institutions and strengthen measures for ensuring children's safety. It can be said that the current policy environment is very favorable to the earlier care and education market, for 0- to 3-year old. At present, several provinces and cities, such as Shanghai, have introduced guidelines related to infant care. And I believe that policies in other places will be introduced in succession. (foreign language) We started our earlier childcare and education pilot project towards the end of 2017, and we plan to open 2 directly operated centers this year. In the future, we will offer different services for different market segments. We'll not only provide high-end and differentiated infant care services, combining health and fitness and education, we'll also provide a series of services, including health care and education system, curriculum, teacher training, supervision, standardized management system and IT infrastructure as well as decoration design for those facilities.

Okay. I will address the financial part. This year is a year of investment for our earlier care and education segment, so we expect to actually generate a margin -- sort of a gross -- at gross margin line a loss of close RMB 10 million. But by next year, we expect the whole earlier care and education business segment to at least break even. And for this particular model, due to the flexibility in enrollment and withdrawal, the earlier care and education business actually require very high education and service quality standards, which is actually exactly our unique advantage and expertise based on 20 years of experience providing quality education and services in kindergarten and play-and-learn services, okay? So in terms of a center model, we expect -- with that kind of characters of earlier childhood care and education centers, we expect a center will start to become profitable in less than 2 years in middle and high end, which typically will be faster than that of kindergartens. As earlier care and education center typically is much smaller in enrollment size compared to kindergarten, typically, with less than 100 children all together, so the revenue and profit level of a center typically will not be very high, which makes it highly suitable for small entrepreneurs. As a result, we actually firmly believe that with that kind of a business segment, the demand for curriculum content, teacher training, management standard and services as well as IT systems or in the sort of total infrastructure solutions will be huge, okay, as you know. So we actually are very, very hopeful of the future of this segment. Thank you, Jenny.

As there are no further questions, I would like to turn the call back over to the company for closing remarks.

Thank you. Thank you, Keith, and 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.

Thank you very much for your time, and we hope you have a wonderful day. Thank you, Keith.

This concludes the conference call. You may now disconnect your lines. Thank you very much.