First High-School Education Group Co., Ltd. (FHS) Management on Q1 2022 Results - Earnings Call Transcript

First High-School Education Group Co., Ltd. (FHS) Q1 2022 Earnings Conference Call May 18, 2022 8:00 AM ET

Company Participants

Tommy Zhou - Chief Financial Officer

Conference Call Participants

Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to the First High-School Education Group First Quarter 2022 Earnings Conference Call. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, we are recording today’s call. If you have any objections, you may disconnect at this time.

Now, I will turn the conference over to Mr. Tommy Zhou, Chief Financial Officer of the company. Mr. Zhou, please go ahead.

Tommy Zhou

Thank you, operator and greetings, investors and friends. Again, welcome to the first High-School Education Group first quarter 2022 earnings conference call. I am Tommy Zhou, the Chief Financial Officer, who will lead today's conference call.

So we released our results yesterday prior to market open and the full press release is available on the company's IR website at https:/ir.diyi.top as well as Newswire services. A replay of this call will also be available in a few hours on our IR website.

Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the US 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 expectations expressed today.

Further information regarding these and other risks and uncertainties is included in the company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Also, please note that unless otherwise stated, all figures mentioned during the conference call are in Chinese RMB.

With that, thank you all again for joining us. I will briefly spend the next 30 minutes to update our first quarter 2022 results.

So, May 2022 had been a busy month for the company. Not only have we finished our 2021 annual filing, we also completed our 2022 first quarter results consolidation. Historically, we did not report quarterly as international listed companies in United States were only obligated to do an annual report and half year report. But from now on, the company will report quarterly to provide for everyone a better insight into our operation.

The entire team in the company worked tirelessly because we want to show all the investors and friends that despite unexpected regulatory changes, the company and its team have adapted and is now on trend to produce great results for this year and the future years.

For 2022 first quarter, the company achieved revenues of RMB89.3 million, a 14.2% increase compared to last year of the same period. More exciting is that we did achieve a net income of RMB19.5 million, which is 264% increase compared to last year same period.

And allow me to explain the positives – the positive trend that we're setting forward into three different key items. So item number one, we achieved marginal increased net income results, mainly due to our ability to adapt in a changing environment. Prior to a series of regulatory changes introduced in 2021, I believe all education company, large and small, had mainly one strategy, which is to expand and to expand fast.

So initially, for the first half of 2021, that was mainly the case for us also. We too wanted to expand and wanted to have more school open before each year's September season, before school starts. But I think for us, a bit quicker than most, when the regulatory changes did publish throughout the year actually several times, but mainly around July and August of last year.

We did not hesitate in any disbelief, we simply adopted to the changing regulatory environment, especially since last year's third quarter, we assertively shifted our strategy from a purely outward focused to more inward focused. We wanted to make sure that before we go out to expand into new territory, we have a solid foundation first that all of our existing schools will be operating in near-perfect conditions before we expand into new areas. So I think that our ability to adapt is a key to the thriving changing environment. And visibly from this quarter's result, we were able to set that trend.

Moving forward, again, I think regulatory environment is constantly changing. No one knows what will be released, but the ability to adapt is extremely important going forward.

Item number two, I think our revenue increased notably 14% compared to last year of the same quarter, which is always a healthy indicator of a growing business, but it was actually our improvement in operating efficiencies, especially cost saving measures that contributed mostly to the significant increase by 264% in net income.

We want to make sure that every dollar we have is well spent, so since last year, third quarter, we did a rigorous redesign of the budget system and our compensation system as well. All for the reason to better allocate resources and to better align spending and results for our budget system. So we've updated entirely. We still use the same system, but we implemented each module much better.

Now we can forecast the cash flow a month to two months prior to the actual expenditure. This is done by both analyzing historical data and also by reporting from the department of school who wish to use the cash, right by actually able to forecast the cash flow ahead of time. This allows us not only to have a better cash management, but also to foresee if those costs are actually necessary.

Now-a-days, almost any spending or at least one month in ahead. So we have plenty of time to make sure it is absolutely -- nothing goes to waste. So moreover, we also increased horizontal comparisons between each school and set metrics to determine anomalies, for example, we now have a target team to identify that school, which might be running below average efficiency and tailored solutions specifically for them.

If we have normally a school, which the teacher ratio between 1:15, and we have schools that are, say, 1:10 or 1:9 teachers ratio, right? We have solutions for that to tailor to the school either to reduce headcount or increase some, kind of, student recruitment. Again, metrics, it's a wide range between utility cost, to teacher's compensation, to staffing cost, to ratios. So we want to do more horizontal comparisons to make sure all schools are running at equal or greater efficiencies.

And similarly, to staff compensation, we now included a much larger portion of performance based pay to precisely align data-backed results with the compensation we pay out. Teachers are paid accordingly to the hours that they gave out lectures. The questions that they laid out for the students rather than a more uniform pay. So about improvements inefficiencies were visible in both our annual and quarterly reports.

If we just take a look at some examples, right? If we look at our 2021 half year results, the cost of revenue was RMB170 million, right? And then the entire year was RMB251 million, which means we spent 70% of our cost of revenues during the first half of the year, only 30% during the second half, right? Usually, if you do your accrual accounting right, it should be a 50/50 split. But for us, we actually spent 70% of it during the first half of the year of 2021, only 30% of it in the latter half just to show how rigorous we did to save money.

And the results were even more apparent in our general and administrative expense, right? For half year, it was RMB60 million, for the entire year was RMB74 million, right? So in the second half, we spent about one-fifth of what we did spend in the first half of the year. Again, all these trend is showing that we try to save a lot of money, during last year's second half and that continued into this quarter as well. So for the first quarter of 2022, despite we increased revenue by 14%, our number of students increased only roughly 3%, but still number of schools increased, we have much more self-operated school in 2022. But our cost of revenue actually stayed the same. So we have all these factors that increased, but our costs did not increase. Therefore, that was able to increase our profitability quite significantly.

Again, I just want to stress for the point that for the second half of 2021 and continuing into 2022, we were able to drastically improve on our cost efficiencies. We also believe that these improvements will continue to happen throughout 2022. It's not a one-time. And all the budget we design, the compensation we design I spoke about, it will be even better as we have more tools to implement these.

Another note for the fiscal year 2021 annual report, it is important to update that our audited financial results were actually improved compared to our previously announced unaudited results. Our audited net income was RMB52.7 million, which is about 32% higher than the previously announced unaudited net income of RMB39.9 million.

This was caused mainly because our auditor was able to correct some cost of revenue-related offset in working papers for the improved results. The company and the accounting teams were actually more conservative in some of the offsets.

Lastly, I think item three, you cannot win a battle by just saving money, right? You have to go on the attack, you have to increase revenue. So, in addition to the ability to adapt faster than most companies in a changing environment as well as perfected operating know-how, I think we did and we will introduce new business and further drive growth.

So, the third point I want to say is that this year, this upcoming September in 2022, we will have two complete new school opening, and on top of that, we will have increased number of liberal education classes, such as fine arts, media studies, dance, and music majors, as well as vocational classes.

Currently, we have a pretty accurate estimate that 850 students are expected to enroll into these newly established programs and measures this upcoming September. It will provide us with new factor of growth. Some of the tuition and related recruitments are already -- I can't say signed, but it's already pretty much confirmed. So, we're very happy about that.

Also a bit detail on the two new schools. I do not want to say specific names and location yet since some authorizations are still in process, but I can say that one campus is completely finished from the building to the renovation to all the equipment, they're completely new.

And actually a small number of students is already in the school since last year September before it was managed by us. So, the school is completely ready to go and is located in one of China's four municipality cities, the one of the four biggest cities in China. So, we're very excited for the new growth into that market and the student body that we can serve there.

The second new school is much close to our headquarter. It's still under construction. We expect all preparation to be done before June 30th, and we are working very closely with local partners and authorities to have a successful recruiting year.

In addition to the self-operated school, we also signed with a central China-based private school in May to provide our management service. School management service is very similar to hotel management service, where the owners owns the property and hires the majority of staff, and then we ask the management service provider, we send top management employees to set the standard for operation, set the standard for education.

Of the current owner and us spoke a lot and he deeply trust us and believe in our ability to operate schools. And we mutually are dedicated to provide our best know-how to make sure the school is running in the best shape possible. So -- and the good news is the majority of the management fees have already been paid to us. So this is a very asset-light business. We send about 80 employees, generating several millions RMB of income. And we are very happy for this opportunity as it also further expand our strong brand name reputation.

As a combination of what happened already and what will happen as recruiting season is about to begin. I think the company is extremely excited on a positive trend forward. Again, I just want to stress that we are delighted for the commencing growth of our net income compared to last year's same quarter.

And next, maybe 10 to 15 minutes, I will go through our line-by-line financial highlights for its first quarter 2022. And again, please note that all numbers are presented in RMB unless otherwise stated, all percentages changes are on a year-over-year basis unless otherwise specified. Detailed analysis is contained in our earnings release, which is, like I said, available on the IR website.

So, total revenues was RMB89.3 million, an increase of 14.2% from RMB78.2 million in the first quarter of 2021. The increase was primarily driven by greater student enrollment due to the increased number of students enrolled in our schools.

Revenues from customers were RMB76.9 million, an increase of 13.3% from RMB67.8 million in the first quarter of 2021. The increase was primarily driven by greater student enrollment.

Revenue from government cooperative agreements was RMB12.5 million, an increase of 20.1% from RMB10.4 million in the first quarter last year, primarily due to increased number of publicly-sponsored students we served.

Cost of revenues was RMB57.3 million, a decrease of 3.3% from RMB59.3 million in the first quarter of 2021. The decrease was primarily due to the improved control of campus-related costs and more efficient compensation structure for teachers and staffs.

Gross profit was RMB32.1 million, an increase of 69% from RMB19 million in the first quarter of 2021. Gross margin was 35.9%, compared with 24.2% in the first quarter of 2021. The increased gross margin was primarily due to the improved cost measures, resulted from improved school operating efficiencies such as reduced repairs, tighter utility usage, stricter budget control and also a revised compensation structure for teachers and supporting staff for an overall more efficient system, time pay to performances.

Net operating expense, were RMB 9.7 million, an increase of 21.5% from RMB 8 million in the first quarter of 2021. To break them down, selling and marketing expense was about RMB 1 million – RMB0.1 million, sorry – a decrease of 60% from RMB0.3 million in the first quarter of 2021, mainly because most of the marketing has not happened yet for the first quarter, usually happens between the second quarter to the third quarter.

General and administrative expense, were RMB9.9 million, an increase of 12.9% from RMB8.7 million in the first quarter of 2021. The increase was primarily due to the increased professional service costs related to complying with our reporting obligations under security law after we become a public company since March last year.

Government grants was RMB0.3 million, a decrease of 72% from RMB1.1 million, majority because of the government grants were paid to the discontinuing operation of middle schools. I just want to add that, net operating expense were relatively small, right? The net total is only RMB9.7 million versus the cost of revenue, right, is nearly RMB60 million. So despite the small increase, our majority decrease in cost of revenue contributed to the higher profit margin.

Income from operation was RMB22.4 million, an increase of 103.4% from RMB11 million in the first quarter of 2021. Net income from continuing operation was RMB21.1 million, an increase of125% from RMB9.4 million in the first quarter of 2021.

Net loss from discontinued operations was RMB1.5 million, compared with a net loss of RMB4 million in the first quarter of 2021. And our net income is RMB19.6 million, an increase of 264% from the RMB5.4 million in the first quarter, as most investor friends know that last year, half year, we only did about RMB11 million adjusted net income.

So I think having the trend that we set forward today is definitely a very positive trend. And again, adjusted net income is the same thing as net income was RMB19.6 million, an increase of 264% from the RMB5.4 million in the first quarter of 2021. There was no adjustment.

For business outlook, for the fiscal year 2022 is the same as we did for our annual report, the company expects total revenue of operating operation, a continuing operation to be between RMB480 million to RMB520 million, representing an increase of 15% to 24% on a year-over-year basis. This outlook reflects the company's current and preliminary view on the market and operational conditions, and the outlook ranges for the fiscal 2022 reflects a number of assumptions that are subject to change based on uncertainties.

Above is my financial highlight briefing, both Mr. Zhang and myself, we should thank everyone for your time in participating. We do plan to host another small group Chinese conference call, sometimes in the next two days. So feel free to reach me and we can organize.

In the Chinese call, our CEO, Mr. Zhang will communicate directly to Chinese to help everyone explain anything that they wish to inquire. We understood, English is not the first language for most of our investors, and we wish to host in the Chinese call as well.

So, with that being said, let's open the call for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Seeing as there are no questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Tommy Zhou for any closing remarks.

Tommy Zhou

Yes. Thank you, operator. Again, we thank everyone for participating today and everyone for their support. We appreciate everyone's interest in our company and greatly look forward to reporting to everyone again next quarter on our progress. Thank you, operator.

Operator

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