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Edited Transcript of NEW.N earnings conference call or presentation 26-Nov-18 1:00pm GMT

Q3 2018 Puxin Ltd Earnings Call

Jan 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Puxin Ltd earnings conference call or presentation Monday, November 26, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Arnell

* Peng Wang

Puxin Limited - CFO

* Yunlong Sha

Puxin Limited - Founder, Chairman & CEO

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Conference Call Participants

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* Yu Zhang

China International Capital Corporation Limited, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Puxin Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I will now like to turn the conference over to Christian Arnell. Mr. Arnell, please go ahead.

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Christian Arnell, [2]

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Thank you. Hello, everyone, and thank you for joining Puxin's Third Quarter 2018 Earnings Conference Call. The company's results were released earlier today, and are available on the company's IR website at ir.pxjy.com, and through PR Newswire services.

On the call today are Mr. Yunlong Sha, the company's Founder, Chairman and Chief Executive Officer; and Mr. Peng Wang, the 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.

Before we begin, I'd like to 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 statement as a result of new information, future events or otherwise, except as required under law.

With that, I will now turn the call over to Yunlong. Yunlong will go through his prepared remarks in Chinese. I will translate for him in English. 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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Christian Arnell, [4]

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Hello, everyone, and welcome to our third quarter earnings conference call. We delivered another quarter of solid operational and financial growth as we continue to leverage our integration expertise to consolidate China's after-school education market and further empower our schools.

Net revenues during the quarter increased 60% to approximately RMB 670 million as our net loss narrowed on a year-over-year basis.

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

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(foreign language)

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Christian Arnell, [6]

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Top line growth was driven by an organic increase in student enrollments, which increased 49% to over 540,000 during the quarter and in part by revenue from Global Education, which reached a historical high during the quarter, its third consecutive quarter of positive revenue growth following its acquisition in August last year. At the same time, our bottom line loss narrowed as a result of our careful control over operating expenses.

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

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(foreign language)

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Christian Arnell, [8]

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The regulatory environment continues to shift around us, creating some uncertainty, but we have weathered similar situations before. We have already begun adjusting our strategies in response and are confident that we have the experience and incorporate flexibility to continue adapting. Throughout the past 9 months, the government has steadily issued a series of new regulations governing the after-school education market. The regulations strengthened regulatory supervision, heightened compliance standards and standardized operations. We support the government's new policies and believe that enhanced regulation will create a stronger and more sustainable market environment over the long term.

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

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(foreign language)

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Christian Arnell, [10]

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Despite making no new acquisitions during the quarter, our strong financial and operational results were driven by organic growth, which demonstrates just how effective we are rapidly integrating, restructuring and building a sustainable platform for long-term growth for acquired schools. This also shows just how effective our Puxin Business System is, which we use to help us analyze the school's growth potential and formulate plans to improve their performance. Leveraging PBS, we improved operational efficiency, resourced utilization efficiency as well as teaching quality. Both, our utilization and retention rates, increased significantly during the quarter, as a result.

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

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(foreign language)

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Christian Arnell, [12]

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We also continued to invest in expanding our online service offerings and product mix to diversify revenue streams and create new growth drivers. We launched a number of online products during the quarter, including Puxin Youke, a blended online and off-line learning system; SuperKid, an online English-learning platform; and HQCLASS.cn, a study-abroad training website. Staff associated with our online platforms now consists of nearly 300 people. I'm confident these investments will generate value for us going forward and drive future growth.

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

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(foreign language)

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Christian Arnell, [14]

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I am pleased with the solid growth we achieved this quarter. I'm confident in our strategy and believe that we are well positioned to benefit from a well-regulated market, leveraging our extensive experience in completing acquisitions and rapidly improving operations and management of acquired schools. We will continue to focus on increasing our market share and generating long-term sustainable value for our shareholders.

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Yunlong Sha, Puxin Limited - Founder, Chairman & CEO [15]

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(foreign language)

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Christian Arnell, [16]

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We announced a share repurchase program this morning where senior management, including myself and Peng, will purchase a maximum of USD 10 million over the next 6 months with our own personal funds. This share purchase is another vote of confidence in our long-term business prospect.

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Yunlong Sha, Puxin Limited - Founder, Chairman & CEO [17]

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(foreign language)

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Christian Arnell, [18]

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With that, I would like to now turn the call over to Peng, who will go over the financials. Thank you.

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Peng Wang, Puxin Limited - CFO [19]

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

So to start. Net revenues increased by 60.1% to CNY 669.7 million from CNY 418.4 million in the third quarter of 2017. This increase was primarily driven by increase in student enrollments. Student enrollments increased by 48.8% from approximately 366,000 in third quarter of 2017 to 444,000 (sic) [544,253] in the same period 2018. Our retention rate increased by 9.4 percentage points from 58.8% to 68.2% in the quarter.

Cost of revenues increased by 44.7% to CNY 374.6 million from CNY 258.8 million for the same period in 2017, primarily due to an increase in rental costs, teacher compensation. Non-GAAP cost of revenues, which excludes share-based compensation expenses, increased by 44.1% to CNY 372.5 million from CNY 258.4 million in the third quarter of fiscal year 2017.

Gross profit was CNY 295.1 million, an increase of 84.9% from CNY 159.6 million during the same period in 2017. Gross margin was 44.1% compared with 38.1% for the same period in 2017.

Total operating expenses increased by 47.8% to CNY 356.1 million from CNY 240.9 million in the third quarter of 2017.

Selling expenses increased by 68.7% to CNY 237.3 million from CNY 140.7 million in the third quarter of 2017. The increase was primarily due to increase in brand promotional expenses and selling and marketing staff compensation.

General and administrative expenses increased by 18.5% to CNY 118.8 million from CNY 100.3 million during the same period of 2017. Total share-based compensation expenses allocated to related operating costs and expenses increased by 44.9% to CNY 19.3 million from CNY 13.3 million in the same period of 2017. The increase was mainly due to new grants of options to employees in 2018.

Operating loss decreased by 25% to CNY 61.1 million from CNY 81.4 million in the third quarter of 2017. Operating margin was negative 9.1% in the third quarter of 2018 compared with negative 19.1% (sic) [19.5%] for the same period in 2017.

Net loss attributable to Puxin Limited decreased by 53% to CNY 50.2 million from CNY 107 million during the same quarter of 2017. Basic and diluted net loss per ADS attributable to Puxin Limited was CNY 0.62 compared with basic and diluted net loss per ADS attributable to Puxin Limited of CNY 2.14 during the same period last year. Non-GAAP net loss attributable to Puxin Limited was CNY 51 million compared with CNY 70.9 million during the same period of last year. Non-GAAP basic and diluted net loss per ADS attributable to Puxin Limited were CNY 0.62 compared with CNY 1.42 during the same period of last year.

As of September 30, 2018, the company had a total cash and cash equivalents of CNY 684.2 million compared with CNY 164.7 million as of December 31, 2017.

Starting this quarter, we'll begin providing net revenue guidance on a quarterly basis. For the fourth quarter of 2018, we expect net revenue to be between CNY 513 million to CNY 535 million, which represents an increase of 20% to 25% year-over-year. These forecasts reflect the company's current and preliminary views on the market and operational conditions, which are subject to change.

This concludes our prepared remarks. I will now turn the call to the operator and open 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) The first question today comes from Yu Zhang and Natalie Wu with CICC.

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Yu Zhang, China International Capital Corporation Limited, Research Division - Analyst [2]

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This is Yu Zhang on behalf of Natalie. We have 2 questions. The first one is on your Q4 guidance. I'm wondering what's implied year-over-year growth rate of your business, excluding ZMN and Global Education given we know this 2 businesses was fully consolidated in the Q4 from last year? And second question is on your margin outlook for 2019. I wonder also if management could share some color on the -- on your profitability of your K-12 segment, that'll be great.

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Peng Wang, Puxin Limited - CFO [3]

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Sure. Yes, excluding -- okay. Thank you for your question. Your first question is about the year-over-year growth excluding Global Education, right?

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Yu Zhang, China International Capital Corporation Limited, Research Division - Analyst [4]

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Yes.

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Peng Wang, Puxin Limited - CFO [5]

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Okay. So for the -- as you may well know, we made no acquisition during the fourth quarter of 2017. Also, yes, that same is also true for the first and second quarter of this year. So for the Q4 guidance, it's almost 100% same-store growth, it means, pure organic growth because we have no new acquisition last year, and we -- as you can tell from the PowerPoint we put on the IR website, we cut down the learning centers with the current macro and micro economy, the substances, the environment. So this is almost 100% organic growth. That's for your first question. For the second question, the margin outlook for next year, as you may have noticed in the third quarter -- in this quarter, the third quarter of 2018, if we exclude Global Education and ZMN, the 2 newly required and loss-making institutions we bought last year, the -- all the other business, those K-12 schools in 2015 -- bought in 2015, 2016, 2017, all together, they are making profits, so with more efforts on increasing the top line of Global Education and ZMN and also cutting loss. Meanwhile, we are expecting positive profits in 2019. As to the margin for the group, we are not delivering or giving such long-term guidance for these margins right now, but we can say for -- or we are pretty sure that Puxin Group, as a whole, will make profits in 2019. Thank you.

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Operator [6]

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(Operator Instructions) The next question comes from [Charlotte Lai] with Citi.

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Unidentified Analyst, [7]

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My question is about the M&A strategy. Can you share with us if you have any progress in M&A strategies recently? And how do you expect the regulation uncertainties can pass off, so that you can pick up your growth strategy again?

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Peng Wang, Puxin Limited - CFO [8]

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Yes. As for your question for the M&A and -- M&A strategy and also the impact brought by those recent regulations. Well, first of all, we will stick to our strategy, I mean, we will focus on growing with 2 engines. On the left hand, we have M&A. We will -- we are in the process of M&A, but as you know, the -- with the newly launched regulations and the recent policies, we are more cautious with the negotiation process. So yes, it's a little bit slower compared with last year before we kick off the IPO process. But the targets in the pipeline, they are relatively bigger, and we have a better profitability compared with those targets in 2015 and 2016. So typically, it would take more time to close the deal compared with those relatively smaller and loss-making deals. So first of all, we'll stick to the strategy with more acquisitions, which will probably be closed in the first quarter of 2019 and with those acquired schools or institutions, we'll leverage our PBS system to realize organic growth after taking control of those schools. As to your second question, the impact of the new regulations. First of all, to be honest, these new regulations or these policies, they slowed the process with -- of our M&A because both those founders or stakeholders and Puxin, we need more time to adapt to the new regulations or these policies. It takes some time. And -- but, yes, these regulations, we believe, it's not -- it will not last for long time. So we are looking at those target pipeline to be closed in the first quarter or the early second quarter of 2019. Thank you.

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Operator [9]

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(Operator Instructions) Since there appears to be no further questions, this concludes our question-and-answer session. I would now like to turn the conference back over to Christian Arnell for any closing remarks.

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Christian Arnell, [10]

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Thank you, operator. And on closing and on behalf of the entire management team, we'd like to thank you, again, for your participation in today's call.

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Peng Wang, Puxin Limited - CFO [11]

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Okay. Thank you.

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Christian Arnell, [12]

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Okay. We actually -- Mr. Peng would like to make one closing remark as well.

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Peng Wang, Puxin Limited - CFO [13]

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Yes. As I've been approached and then asked about the guidance or the performance of Global Education and ZMN because they are the 2 largest acquisitions we ever made, and they were loss-making at the time of acquisition, yes. So with the guidance for the -- for Global Education and ZMN, I'd like to highlight 2 things for your reference. First, even those 2 regulations were made in the third quarter of last year, so relatively new acquisitions, and they were kind of bleeding at the time of acquisition, we successfully turn around their business. For the top line -- in terms of the top line growth, we have turned around those 2 companies to achieve the highest top line growth in the industry, I mean, double digits. This is -- yes, this is quite an achievement given the situation of those 2 institutions at the time of acquisition. And we'll -- yes, we have invested heavily with the improvement of teaching quality, the technology and platform, for example, we invested about CNY 20 million with Global Education alone for their online program, which we believe will be another driver for the top line growth of Global Education in 2019. So we do not only cut expenses and loss and cost, we also invest heavily for the future. So for top line growth, we have realized 2-digit growth this year by the end of the third quarter, and we are looking at a sustainable growth in 2019. And with the bottom line, Global Education and the ZMN, those 2 institutions, we believe, by the end of 2019, the 2 big institutions will -- could -- we are looking at a breakeven by the end of 2019. So we will work on the growth, and we also work on the cost and expense control, but we will work with those 2 institutions with -- on sustainable and healthy basis. Yes, that's the thing that I'd like to highlight, again. Thank you.

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Christian Arnell, [14]

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Thank you, Peng. And that concludes today's call. Thank you very much for joining. If you have any further questions or comments -- oh, sorry, operator, it appears that we have one more question in queue right now.

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Operator [15]

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The next question comes from [Mike Bi] with [Haitong].

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Unidentified Analyst, [16]

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Okay. So my question is, briefly, on the -- still on the 2 assets, the ZMN and the Global Education. So is it possible to share with us the month's -- the quarter-on-quarter trajectory of the 2 assets? Because we understand that from the first quarter towards the second quarter, the 2 assets actually are improving pretty well, especially from the top line growth as well as the sales expenses. So is it possible to share with us a bit of a color on how the 2 assets performing in the third quarter and also the outlook of next year?

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Peng Wang, Puxin Limited - CFO [17]

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Okay. Well, thank you, [Mike]. As to the apple-for-apple growth for Global Education and ZMN, in the third quarter this year, the 2 companies, they realized a 10% growth, that's apple-for-apple growth, and -- yes, which I mentioned before, this is double-digit growth. And as to the guidance for -- your question about the guidance for the fourth quarter for next year?

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Unidentified Analyst, [18]

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No, no. My question is both on the -- regarding the second and the third quarter on the margins, especially the gross margin as well as operating profits, the profitability that's our key focus?

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Peng Wang, Puxin Limited - CFO [19]

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Okay. So your question about this profitability -- the gross margin of Global Education, right?

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Unidentified Analyst, [20]

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As well as the operating profit because -- we -- because in the previous quarters, we understand that 2 assets were making a little bit losses, which is a drag to the group earnings. So we want to see the trends that they are turning around and also -- yes, that's what I mean.

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Peng Wang, Puxin Limited - CFO [21]

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Okay. As to the margin of Global Education and ZMN, in the third quarter of this year, these 2 companies are still making loss, but they are making less loss compared with the third quarter last year. And if we look at the guidance for the 2 companies, Global Education is growing at more than 15% and ZMN is growing at more than 10% in terms of top line. With control over the costs and expenses associated with this top line growth, we are looking at breakeven for these 2 companies together.

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Unidentified Analyst, [22]

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In which quarter? This year -- in the fourth quarter or the 2019?

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Peng Wang, Puxin Limited - CFO [23]

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In 2019.

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Operator [24]

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(Operator Instructions) Since there appears to be no further questions, I would like to turn the conference back over to Christian Arnell.

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Christian Arnell, [25]

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Thank you. Apologies for that before. On behalf of the entire management team, we'd like to thank you for joining today's call. If you have any questions or comments, please don't hesitate to reach out to any of us. We'd be happy to help. This concludes the call. Thank you very much. Have a good night and a good day.

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Operator [26]

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