First High-School Education Group Co., Ltd. (FHS) Q3 2022 Earnings Call Transcript

First High-School Education Group Co., Ltd. (FHS) Q3 2022 Earnings Conference Call November 2, 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 Third Quarter 2022 Unaudited Financial Results 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 do have any objections, you may disconnect at this time.

Now, I'd like to turn the floor over to Mr. Tommy Zhou, Chief Financial Officer of the company. Mr. Zhou, please go ahead.

Tommy Zhou

Yes, thank you, operator and greetings investors and friends. Welcome to the First High-School Education Group third quarter 2022 earnings conference call. My name is Tommy, the Chief Financial Officer, who will lead today's conference call. So we released our results earlier today prior to market open. The press release is available on the company's IR website at ir.diyi.top, as well as from 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 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 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 Renminbi.

With that again, thank you all for joining us. I will briefly spend the next 20 to 30 minutes updating the third quarter results. Nine months ended on September 30, 2022. For today's earning release, all of our financial data will be dated to September 30, 2022. But operating data such as number of enrollments and number of schools will be dated as of October 30 for a more precise and present understanding of our business.

The third quarter period, starting from July, ending in September, is commonly known as the quiet period in our business. It's quiet because there are no school activities conducted during the summer months of July and August, meaning two-third of the three months period, the company will have no revenue recognition, resulting from the payments, our revenue only grew modestly compared with September revenue recognition of last year. But the company did perform extensive preparation work for the school opening in September.

Our teachers’ recruitment and training is our number one priority. Secondly, we did many constructions and repairs of school properties. And third, we also did or completed our student recruitment campaigns. Just to give a bit of highlight into these preparations. So for the class of 2022, we recruited approximately 200 new teachers this year. These teachers are mostly consisting of new graduates or teachers with only one to three years of previous teaching experiences.

Our motto is to have our senior teachers watch over and apprenticeship these less experienced and young teachers so they can quickly adapt and grow into our model. We also did some major upgrades to two of our most well operated campus incoming. We renovated these boarding rooms for students to have better logging environment, which will also help in recruitment as well.

Despite the recruitment and renovation we were actually able to control our costs very effectively. Meaning we actually have a growth in profitability despite with very little revenue recognized. For the school year of 2022 we admitted 7,963 students into our campus. As of October 31, we have 27,777 students enrolled across 23 school programs across different regions in China. As mentioned during September's half year earnings release, our newly admitted students included more self-funded students rather than government funded students, reflecting our great education quality and strong brand recognition also means that more of our income will come directly from our customers rather than getting the income from the government.

Also out of the 7,963 newly admitted students 592 students were given various amounts of scholarship for their excellent grades coming into our high school which means this is setting new potentials for their excellent graduating grades and receiving the top offers from top universities, which in turn will also help our recruitment and brand recognition in the future.

While we just finished the 2022 school year recruitment, we've already started planning and preliminary work for the 2023 school year recruitment for next year. Our mission is to balance education quality and operating metrics to deliver the best interest for all stakeholders. Financially, as witnessed by the earnings lease, our profitability increased compared to last year of the same period.

As I've already mentioned in the past two earning release, the measures of, A, building a stricter and more scientific budget system; B, increasing horizontal comparison among school and business units. And C, tying compensation to performances in our staff are yielding positive results now and will continue to do so in the future. So last year, September marked the beginning of our major internal drive for efficiency, and one year later, I think the increased inefficiency is evident in our increase in profitability. And this is rewarding to win this.

Beginning of the 2022 school year, like I mentioned earlier, despite having more student to teach and serve, we actually reduced about 10% of our total overall headcount. So we have more teachers and less administrative staff. As a composition, this is done by consolidating administrative duties and non-teaching staffs. Currently, our student to teacher ratio, it's about 1:11. This is in my experience well below most of our competitors in the high school sector. This is done to make sure we want to balance financial results, but also excellent teaching quality.

We all know that, with the lower teacher to student ratio, usually it's actually delivered for a better teaching quality. So we want effectively controlling cost and also deliver a great teaching and service quality. So the measures we put in place are all scientifically designed to improve efficiency.

All measures aim to deliver equal or improved results with less resources spent, and it's never about just cutting cost. Another good news is our loan level, at a controlled level as evident by the earning release. Our combined borrowing long-term and short-term bank, and also a leasing company, it's about RMB112 million. This is reduced from over RMB179 million last year, June 30.

We are actually at a very comfortable level now and wish to keep roughly amount of leverage as of today because to make sure the company can grow, you need to have a degree of leverage. But also, as mentioned I think many times in the previous, there's talk of recession and the company want to be a bit on the safer side, to be a bit on the more efficient side, we want to make sure to grow responsibility – responsibly, not just wildly.

So I think that our reduced leverage is also good news for us. So, like I said in the beginning of my remark, the third quarter is more of a quiet preparation for the last quarter of the year. Both operationally and financially, we were able to witness the positive strategies and measures set in place. In addition to our high school operation, the company is also proactively developing new businesses in vocational schools and other educational auxiliary products. I will discuss and disclose more details once those business yield, actual operation and financial results. So I will not go too much in detail today.

That concludes the highlight remarks section. And now I will take some time to go through our line by line financial highlights for the third quarter of 2022. Again, please note that all numbers presented are in RMB unless otherwise stated. All percentage changes are on a year-over-year basis, unless otherwise specified. Detailed analysis is contained in our earning release which is already available on our IR website and Newswire Services.

For the third quarter, the nine months ended in September 30. Our continued operation total revenue were RMB274.2 million, an increase of 0.5% from RMB272.7 million. For the nine months ended September, revenue from customers were RMB238.3 million, a decrease of 1.6% from RMB242.1 million for the nine months ended last September. The decrease was primarily driven by decreased and delayed collection of teaching and auxiliary material fees.

Revenue from government cooperative agreements were RMB36 million, an increase of 17.3% from RMB30.7 million for the nine months ended September last year. The increase was primarily driven by the increased number of publicly sponsored students we serve. Cost of revenue were RMB149.5 million, a decrease of 14.7% from RMB175.4 million for the nine months in the last September.

The decrease was primarily due to the cost – effective cost controlled measures such as the stricter budget and the upper mentioned criteria. Gross profit was RMB124.7 million, an increase of RMB28.1 million from RMB97.3 million for the nine months ended last year, September 30. Gross margin was 45% compared with 35.7% of the same period last year.

The increase was primarily driven by more effective cost control, such as improved school operating efficiency, tighter utility usage limits, stricter budget control, and revised compensation structure for teacher and supporting staff. Net operating expenses were RMB52.7 million, a decrease of 7.6% from RMB57 million for the nine months ended September 30, 2021.

Selling and marketing expenses were RMB1.9 million, a decrease of 52.7% from RMB4 million last year. The decrease is because it's actually marginally smaller, it's only from RMB4 million to RMB2 million. It's not a big number, but it was primarily driven by just decrease of expenses to brand promotion and marketing.

General and administrative expenses were RMB51.7 million, a decrease of 6.6% from RMB55.4 million. The decrease was primarily due to overall improved cost control. Government grants were RMB0.9 million, a decrease of 60% from RMB2.4 million of last year. The decrease was primarily due to the government's tight fiscal budget, resulting delayed payment made by the government.

Income from operations was RMB72 million, increase of RMB78.6 million from RMB40 million of last year. Net income from our continuing operation were RMB61 million, an increase of 84% from RMB33.1 million of last year. Net loss from discontinuing operation was RMB10.1 million, an increase of 44% from RMB7 million last year.

Overall, the net income combined was RMB51.0 million, an increase of 95.3% from RMB26.1 million for the nine months ended September 30, 2021. Our non-GAAP adjusted net income is same as the net income and business outlook. For the entire fiscal year of 2022, the company does not change our outlook and expects a total revenue of continuing operation to be between RMB440 million to RMB460 million, representing a 10% to 15% increase on a year-over-year basis. The outlook reflects the company's current and preliminary review on the margin and operational conditions and the outlook ranges for the fiscal year 2022 reflects a number of assumptions that are subjected to change based on uncertainties.

The above is my financial highlights briefing for the third quarter. Both the CEO, Mr. John, myself wishes to thank everyone for your time in participating. Let's now open the call for questions. So operator, please go ahead and proceed to the Q&A part.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from Yueh Chen [ph] from HWF. Please go ahead with your questions.

Unidentified Analyst

[Foreign Language]

Tommy Zhou

Mr. Chen said, the company's operation metrics is comparatively increased compared to last year and that we should have more cash on hand compared with last year also. Does the company consider itself to increase the share buyback program? Now what is the management's thoughts on that?

First of all, Mr. John, the CEO is not with me today. He's actually on a business trip. So I will be answering for myself. So the board meetings of the company did discuss all efforts into raising our share price, right. That not only includes more buyback, but also maybe even perhaps Mr. John buying more for himself with his own money. And so definitely that is in discussion. But as of today, the board only approved for me to release the earning release today and did not approve for me to do any share buyback or answering that yet.

But what I can say is to have any share buyback the company to do it during the window period, which is beginning after – two days after your earning release and before the quarter ends. So, technically and legally speaking, we can only do it I think by Friday, I believe. I can check with the lawyer. It's at least one day, I believe two days. That said, I think I can answer another question maybe many investors is thinking about. Given all the previous efforts, right, I think our financial metrics are looking brighter than before.

I think we did some dividend payback. We did some share buyback, and yet there's very little evidence of our share reclining back to I guess, maybe even levels of half a year ago. If the unfortunate delisting do happen, we aim to list on the OTC market. The OTC market is actually divided into several tiers, right. The best being QX tier, the worst being the Pink tier. If that, we could not meet the New York Stock Exchange listing standard anymore. The company is, at least from my personal opinion, we do wish to continue to be listed on the OTC. And again, that is the waiting board approval. And I do address the board on that already.

Unidentified Analyst

Okay. Thank you. Thank you for the management for taking my question. Thank you.

Tommy Zhou

Thank you.

Operator

[Operator Instructions] At this time, it's showing no additional questions. I'd like to turn the floor back over to you for any closing remarks.

Tommy Zhou

Yes, I mean, I think like I said earlier, from the company's operating perspective, we are very confident on continuing this business, doing what we do best. However, from a environment, macro environment perspective, at least myself, I’m also affected and concerned by our market cap, but I want to always say that myself, Mr. John, and the whole board, we want to and we wish to maximize shareholder's interest.

So we like to thank everyone again for participating on today's call. Some investors already did reach out to me and perhaps we can host the Chinese session to answer more questions directly, and the company's management is willing to do that. So again, we appreciate everyone's interest in our company despite any hardship, we will work hard to continue do what we do best. And now hopefully, I look forward to reporting to all of you again next quarter on a progress. And thank you again, operator,

Operator

And thank you. At this time, we've concluded today's conference. We thank everyone for joining. Have a great day. You may now disconnect your lines.