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Edited Transcript of NEW.N earnings conference call or presentation 18-Nov-19 1:00pm GMT

Q3 2019 Puxin Ltd Earnings Call

Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Puxin Ltd earnings conference call or presentation Monday, November 18, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Peng Wang

Puxin Limited - CFO

* Yunlong Sha

Puxin Limited - Founder, Chairman & CEO

* Claire Yung

ICA - Investor Relations

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Conference Call Participants

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* Mark Li

Citigroup Inc, Research Division - Director

* Xiaodan Zhang

CICC - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Puxin Limited Third Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Claire. Please go ahead.

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Claire Yung, ICA - Investor Relations [2]

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Thank you, operator. Hello, everyone, and thank you for joining Puxin's Third Quarter 2019 Earnings Conference Call. The company's results were released earlier today and are available on the company's IR website at ir.pxjy.com.

On the call today are Mr. Yunlong Sha, the company's Founder, Chairman and Chief Executive Officer; and Mr. Peng Wang, the Chief Financial Officer. Yunlong will give a brief overview of the company's business operations and highlights followed by Peng, who will go through the financials and guidance. They will both be available to answer your questions during the Q&A session that follows.

I will remind you that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under the law.

With that, I will now turn the call over to Mr. Sha. Mr. Sha will give his remarks in Chinese. I will translate for him in English. Mr. Sha, please go ahead.

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Yunlong Sha, Puxin Limited - Founder, Chairman & CEO [3]

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(foreign language)

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Claire Yung, ICA - Investor Relations [4]

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[Interpreted] Hello, ladies and gentlemen, welcome to Puxin Limited earnings conference call for the third quarter of 2019.

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Yunlong Sha, Puxin Limited - Founder, Chairman & CEO [5]

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(foreign language)

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Claire Yung, ICA - Investor Relations [6]

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[Interpreted] In the third quarter of 2019, Puxin Limited has achieved overall profitability for the first time. Net income reached RMB 33.742 million compared to a net loss of RMB 50.219 million. Gross profit margin was 50.3%, which has shown a steady increase, potentially making us on track for continued profitability in the future.

First, net revenues grew 48.7% year-over-year to RMB 996 million, beating previous expectations. We have continued implementing our acquisition and integration growth strategies and successfully acquired 8 schools. In addition, increasing student enrollments continues to be a key driver for our success. In the third quarter, Puxin's student enrollments increased by 60.2%, reaching a total number of 871,896 enrollments.

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Yunlong Sha, Puxin Limited - Founder, Chairman & CEO [7]

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(foreign language)

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Claire Yung, ICA - Investor Relations [8]

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[Interpreted] As we take a closer look at our business, the K-12 service line performed exceptionally well. Net revenues increased by 86.4% year-over-year. This will be attributed to both our acquisition and integration strategies, where we have emphasized the acquisition of K-12-focused schools as well as excellent organic growth of our existing portfolio.

On organic growth, our quarterly highlights affirm the improved operational efficiency as Puxin Business System continues to extend into lower-tier cities. For example, our retention rate reached 70.3% and has exceeded 70% for 3 consecutive quarters. Such exceptional retention rates have solidified Puxin's position as a top-tier education service provider.

In particular, the operating profit of K-12 service lines, excluding financial impact from online school and headquarter, increased by 667.1% year-over-year to over RMB 90 million as we continue to scale up.

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Yunlong Sha, Puxin Limited - Founder, Chairman & CEO [9]

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(foreign language)

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Claire Yung, ICA - Investor Relations [10]

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[Interpreted] We are also happy to announce Puxin's study-abroad business turned profitable for the first time this quarter since the acquisition of Global Education and ZMN Education in the third quarter of 2017. This was another testament to our acquisition and integration strategies. The strategy proved its effectiveness in study-abroad business and led to positive results after 8 quarters.

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Yunlong Sha, Puxin Limited - Founder, Chairman & CEO [11]

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(foreign language)

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Claire Yung, ICA - Investor Relations [12]

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[Interpreted] As you saw, Puxin has secured consecutive and rapid revenue growth turn profitable in the third quarter of 2019. We are very optimistic about future as we implement our acquisition and integration strategies and continue to build on solid organic growth.

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Yunlong Sha, Puxin Limited - Founder, Chairman & CEO [13]

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(foreign language)

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Claire Yung, ICA - Investor Relations [14]

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[Interpreted] With that, I would now like to turn the call over to Peng, who will go over the financials.

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Peng Wang, Puxin Limited - CFO [15]

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Thank you, Mr. Sha. Hello, ladies and gentlemen. Please be reminded that all amounts quoted here will be RMB, and all percentage increases will be on a year-over-year basis unless otherwise stated. Please also refer to the earnings release for detailed information of our comparative financial performance on a year-over-year basis.

To start, net revenues were CNY 996 million, an increase of 48.7% from the third quarter of 2018. This increase was primarily driven by increase in student enrollments. Student enrollments increased 60.2% to 872,000 from 544,000 during the same period of 2018.

Cost of revenues was CNY 494.6 million, an increase of 32% from the same period of 2018, primarily due to an increase in teaching staff compensation. Cost of revenues, excluding share-based compensation expenses, was CNY 493.6 million, an increase of 32.5% from the third quarter of 2018.

Gross profit was CNY 501.5 million, an increase of 70% from the same period of 2018. Gross margin was 50.3% compared to 44.1% from the same period in 2018. Total operating expenses were CNY 445 -- CNY 459.9 million, an increased to CNY 29.1 million -- 29.1% from the third quarter of 2018.

Selling expenses were CNY 304.8 million, an increase of 28.5% from the third quarter of 2018. Selling expenses, excluding share-based compensation expenses, was CNY 299.9 million, an increase of 31.8% from the third quarter of 2018. The increases were primarily due to increase in marketing expense and marketing staff compensation.

General and administrative expenses were CNY 155.1 million, an increase of 30.5% from the same period last year. General and administrative expenses, excluding share-based compensation expenses, were CNY 150.3 million, an increase of 35% from the third quarter of 2018. The increases were primarily due to increases in staff compensation and daily operating expense.

Total share-based compensation expenses allocated to related operating cost expenses decreased to CNY 10.7 million from CNY 19.3 million of the same period in 2018, primarily due to less grants of options to employees in 2019.

Operating income was CNY 41.5 million compared to an operating loss of CNY 61.1 million in the third quarter of 2018. Operating margin was 4.2% compared to negative 9.1% for the same period in 2018.

Adjusted operating income was CNY 52.2 million compared to an adjusted operating loss of CNY 41.8 million in third quarter of 2018. Adjusted operating margin was 5.2% compared to negative 6.2% for the same period of the last -- the prior year.

Net income attributable to Puxin Limited was CNY 33.7 million compared to net loss attributable to Puxin Limited of CNY 50.2 million during the third quarter of 2018.

Basic and diluted net income per ADS attributable to Puxin Limited was CNY 0.38 compared to basic and diluted net loss of CNY 0.62 during the same period of 2018.

Adjusted net come -- net income attributable to Puxin Limited was CNY 43.5 million compared to adjusted net loss attributable to Puxin Limited of RMB 51.0 million during the same period of 2018.

Adjusted basic net income per ADS attributable to Puxin Limited was CNY 0.50 compared to adjusted basic net loss of CNY 0.62 during the same period of 2018. Adjusted diluted net come -- net income per ADS attributable to Puxin Limited was CNY 0.49 compared to adjusted net loss of CNY 0.62 during the same period of 2018.

EBITDA was CNY 70.8 million compared to negative CNY 19.5 million in the third quarter of 2018. EBITDA margin was 7.1% compared to negative 2.9% for the same period of 2018.

Adjusted EBITDA was CNY 80.6 million compared to negative CNY 20.3 million in the third quarter of 2018. Adjusted EBITDA margin was 8.1% compared to negative 3% during the same period of the prior year.

Next, we'll move on to the balance sheet. As of September 30, 2019, we have total cash and cash equivalents of CNY 322 million compared to CNY 778 million as of December 31, 2018. The decreases were primarily due to acquisitions of K-12 schools.

Finally, for guidance. For the fourth quarter of 2019, we expect net revenue to be between CNY 770.6 million and CNY 797.2 million, which represents an increase of 45% to 50% year-over-year. This forecast reflects the company's current and preliminary views on the market and operational conditions, which are subject to change.

This concludes our prepared remarks. We'll now turn the calls over to the operator and open the call up for Q&A. Operator, we are ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mark Li with Citi.

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Mark Li, Citigroup Inc, Research Division - Director [2]

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Management, congratulations on the results. May I ask what is our target for 2020 in terms of the revenue growth for both the K-12 and the study-abroad? And also any margin color? And what would be our focus for M&A?

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Peng Wang, Puxin Limited - CFO [3]

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Thank you, Mark, for the questions. As to the 2020, we are looking at a high double-digit growth in terms of a top growth -- top line growth, and out of which, the main driver will be the K-12 segment. And as you may well know, the study-abroad line -- the study-aboard segment is growing a little bit slower than the K-12. So for 2020, we are -- in general, we are looking at a high double-digit growth driven by the K-12, both from the acquisition and the organic growth all together.

So as to the margin, as shown in this earnings release, the overall gross margin for Puxin has risen to over 50%, but as a reminder of -- as a reference, we are looking at the opportunity of expansion in the high-tier cities across China. So for -- in terms of organic growth, we are looking at a higher gross margin rate. But in order to balance the top line and bottom line, we are going to expand our learning centers in the higher-tier cities. So gross margin is not the top priority of Puxin. Instead, we are looking at a balanced growth with the top line expansion and also the bottom line. Thank you.

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Mark Li, Citigroup Inc, Research Division - Director [4]

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May I follow up. So for the organic growth expansion or M&A, like any region, particularly, we would focus more on?

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Peng Wang, Puxin Limited - CFO [5]

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Okay. Thank you. In terms of organic growth, we are looking at a 30%-plus organic growth rate, mainly driven by the same-store growth, as shown by the second and third quarter results of 2019. Again, we are also looking at the opportunities in -- of the feasible expansion in the higher-tier cities of China. So of the other growth of 2020, we are expecting a growth driven by -- mainly driven by the organic growth, accompanied by expansion -- physical expansion of learning centers in the high-tier cities.

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Operator [6]

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Our next question comes from Xiaodan Zhang with CICC.

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Xiaodan Zhang, CICC - Analyst [7]

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(foreign language) So let me briefly translate my questions. So my first question is regarding the study-abroad business. So what's the trend of the profitability right now? Are we still targeting at increased profitability of the study-abroad segments? And my second question is regarding the K-12 segments. So what's the general mergers and acquisition environment of this segment? And what's the level of valuation right now is for this segment?

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Peng Wang, Puxin Limited - CFO [8]

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Okay. Thank you for your 2 questions. First, in terms of the growth for study-aboard segment, first of all, I'd like to highlight that our study-abroad segment is growing at the very top of -- in the industry as shown by the results in the third quarter of this year. Our study-abroad segment has grown -- for Global Education, as an example, has grown over 30% in the past in quarters, with a great reduction in the operating loss of the business. So we are looking at a next -- a 20% increase in the fourth quarter of this year, which still ranks us at the high end of the industry.

As to the landscape there, the M&A, firstly, driven by the regulatory movement, more and more stakeholders of the state -- of the small- and mid-sized office -- school tutoring companies, they are more ready to cooperate with Puxin. And secondly, the valuation is relatively -- the consideration or valuation is relatively higher because as Puxin is growing bigger and bigger and Puxin be the -- the bottom line Puxin is becoming stronger and stronger, we are looking at relatively bigger and relatively more profitable targets in the pipeline. So yes, I think, consideration we are looking at is relatively higher compared with those targets in the pipelines prior to the IPO. But -- yes, again, we are not rushing for those deals. So we are trying our best to get the reasonable deal. Thank you.

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Operator [9]

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This concludes our question-and-answer session. I would like to turn the conference back over to Claire for any closing remarks.

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Claire Yung, ICA - Investor Relations [10]

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Thank you, operator. In closing, on behalf of the entire management team, we'd like to thank you again for your participation in today's call. If you have any further inquiries in the future, please feel free to contact us. Thank you.

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Operator [11]

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