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Hello, ladies and gentlemen, thank you for standing by for the RYB Education, Inc.'s Third Quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. After management's prepared remarks there will be a question-and-answer session. Today’s conference call is being recorded. I will now like turn the conference over to your host, Serena, Investor Relations Manager for the Company. Please go ahead, Serena.
Thank you, Anida, and hello to everybody on today's call. With me today are Ms. Yanlai Shi, our Co-Founder, Director and Chief Executive Officer; and Mr. Hao Gu, our Chief Financial Officer. Our earnings press release was issued earlier today through newswire services and is also posted on our Investor Relations website, ir.rybbaby.com. On our website, you will also find a webcast replay of today's call. Please note that 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 report on Form 20-F for the fiscal year ended December 31, 2019, 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 this call today, management will also discuss certain unaudited non-GAAP financial measures for informational purposes only. The company's third quarter 2020 earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. Now I'll turn the call to Ms. Shi for her to take us through a review of the third quarter and provide updates on the business.
[Foreign Language] Thank you to all of you who have joined us today. I'll begin by reviewing our business and operating results for the third quarter of 2020. Then our Chief Financial Officer, Chris, will take over and follow with a more detailed review of the financial. Following the effective control of COVID-19, our directly operated kindergartens in China have started Phase 3 openings in the second quarter. At the end of the third quarter of 2020, we reopened 96 directly operated kindergartens, which were temporarily closed previously due to the COVID-19 pandemic, and saw a close to 90% back-to-school rate to our kindergartens. In Singapore all of our directly operated facilities have resumed operation. For our directly operated kindergartens that have resumed normal operations at the end of the previous quarter. Our facilities continue to operate with COVID-19 protocols in place to protect the health and safety of students, families, as well as staff members. For the facilities that have only recently reopened, we've kept open and timely communication with parents, and vigilantly carried out COVID-19 protocols with a focus on enhanced cleaning and strict hygienic practices. We closely follow guidelines issued by local education bureaus and cooperate with joint inspections by related government agencies to ensure a safe and efficient return to kindergartens. As mentioned in the earnings call last quarter, the company is taking an online plus offline approach as we focus on the reenrollment and ramp up of already reopened facilities. For example, we have online promotional activities with weekly onsite tours at individual kindergartens. As conditions permit in some facilities that was converted to operate as inclusive kindergartens, we can increase the class size after the conversion to allow more children in the community to enroll, and hence increase our total enrollment as well. Leveraging the proactive preparation for reopening and our continued efforts in reenrollment by the end of the third quarter this year, there were a total of 33,760 students enrolled in our directly operated facilities in China and Singapore, an increase of around 9% from 31,023 students at the end of the prior quarter. In addition, we conducted a facility specific parent satisfaction survey in September. Based on collected feedback, the Center Office of kindergarten management team provided individualized and targeted feedback to each facility in order to assist their continued pursuit of improving service quality. Many franchise play-and-learn centers reopened in the third quarter across the country after the previous period of temporary facility closure. Thanks to the effective control of COVID-19. By the end of September approximately 90% of the franchise PLCs has resumed operation. Our franchise team continues to provide supervisory and operational support to our franchisees and regular teacher training both online and in-person have resumed. Our R&D team also has been working very hard to upgrade existing and develop new play-and-learn center curriculum offerings and extend available products for sale including teaching aids and classroom toys. Take tutor online course for example, our curriculum development team has completed 64 course hours of video recording as of end September. And we expect to complete the remaining course hours in December. Once completed, tutor will not only be an interesting video-based course for home parenting, but also suitable for classroom interaction in our franchise play-and-learn centers. Lastly in this third quarter, we continued to work our way towards our integrated online-merge-offline business model. Our team continued their work in the development, testing and promotion of operations management systems for different types of early education facilities. After directly operated kindergartens resumed normal operation, the facility specific official account and service platform for each kindergarten continue to serve as an important link between home and kindergarten and with quick response and regular communication parents feel more assured having their children back to kindergarten. We believe that this systems and tools are important in helping kindergartens and other early education facilities alike to improve operating efficiency and optimize the experience of children and their parents. In the first nine months of 2020, the COVID-19 pandemic costs substantial disruptions to the company's operations due to the challenges presented by COVID-19. The company's facilities were temporarily closed for most of the first half of this year. In response to the pandemic, we have taken prompt and proactive measures to ensure business sustainability and financial flexibility. Thanks to the effective control of the virus and an accelerated recovery. By the end of September, most directly operated facilities had reopened successfully with more students enrolled than the previous quarter. The company will continue to ramp its facilities in operation carry out in-school health protocols and stringent cost control measures to strengthen our balance sheet and liquidity position. We stay committed to improving our integrated zero to six year old early childhood education products and services. I look forward to delivering better in the coming quarters. With that, I'll turn it over to our CFO, Chris to provide highlights of third quarter financial results.
Thank you, Grace and Serena. I will now go through our third quarter financial results. Please also refer to our earnings press release posted on our Investor Relations website for a complete discussion of our financial performance for the past quarter. We are very pleased with our business recovery in the quarter as the company as of the beginning of September resumed operations at most of our directly operated and franchise facilities. In the third quarter, thanks to our success in reopening facilities and efforts we made to restore our core business operations. Our top line recovered by more than 150% from the previous quarter. In addition, our SG&A expenses decreased by 26.8% compared with the same quarter last year, as we continue to adopt the stringent cost control measures. Cash balance also improved by US$11.4 million from the end of the second quarter which gave us additional financial flexibility and a solid foundation for operations. Going forward, we will stay focused and continue to optimize the standardized operation of our kindergartens and play-and-learn centers, provide more systematic and standardized support to local operations, and improve operational performance and efficiency of our facilities. Now moving on to third quarter financials, net revenue for the third quarter of 2020 were US$32.6 million, compared with US$43.7 million for the same quarter of 2019. Services’ revenues for the third quarter this year were US$29.8 million compared with US$39.5 million for the same quarter of 2019. The decrease was primarily caused by decreased the tuition fee due to the COVID-19 impact. While over 60% of our directly operated facilities in China have gradually resumed operations since late May, we had another over 30%, which we opened in September. The decrease in service revenues was partially offset by increase of tuition fee revenues of the Singapore operations contributed by an increase in student enrollment, and a few newly - opened facilities in Singapore. Franchise service revenues also decreased due to the slowdown of play-and-learn center network expansion and lower revenues generated from existing franchisees as their recovery from operation suspension was gradual in the third quarter after reopenings in late May this year. Product revenues for the third quarter of 2020 were US$2.8 million, compared with US$4.2 million for the same quarter last year. The decrease was primarily due to a decrease in the amount of merchandise sold through the company's franchise network as their recovery from operation suspension was also gradual in the third quarter. Cost of revenues for the third quarter this year was US$30.5 million, which is a 24.8% decrease from US$40.6 million for the same quarter in 2019. Cost of revenues for services for the third quarter of 2020 was US$29.2 million, compared with US$38.5 million for the same quarter last year. The decrease was primarily due to decrease in staff compensation, direct cost and rental cost at the company's directly operated facilities and staff compensation of the company's franchise business units. Cost of products revenues for the third quarter this year was US$1.4 million, representing a 33.3% decrease compared with US$2.1 million for the same quarter of 2019. Gross profit for the third quarter this year was US$2 million, compared with US$3.1 million for the same quarter in 2019. Total operating expenses for the third quarter this year were US$5.5 million, compared with US$7.6 million for the same quarter last year. Excluding share-based compensation expenses, operating expenses were US$4.9 million, which is a decrease of 27.3% from US$6.8 million for the same quarter last year. Selling expenses for the third quarter this year were [US$500,000K] compared with [US$800,000K] for the same quarter in 2019. General and administrative expenses for the third quarter this year were US$5 million, compared with US$6.7 million for the same quarter in 2019. Excluding share-based compensation, G&A expenses were US$4.4 million for the third quarter, representing a 25.5% decrease from US$5.9 million for the same quarter last year. The decrease in G&A expenses, excluding share-based compensations, was also primarily due to the strict cost control measures that we carried out in the company headquarters, in particular in staff compensation, professional fees, travel and other operational expenses. The share-based compensation expenses included in our G&A expenses were US$0.6 million for the quarter. Operating loss for the third quarter of this year was US$3.5 million, compared with US$4.4 million of operational loss for the same quarter last year. Adjusted operating loss was US$2.9 million for the third quarter, compared with a loss of US$3.7 million for the same quarter last year. Net loss attributable to ordinary shareholders for the third quarter this year was US$7.1 million, compared with a US$3.3 million for the same quarter in 2019. Adjusted net loss attributable to shareholders which excluded the impact of US$0.6 million of share-based compensation expense for the third quarter this year, was US$6.5 million, compared to a US$2.5 million for the same quarter last year. Basic and diluted net loss per American depositary share attributable to shareholders for this quarter - were both US$0.26 compared with US$0.12 in both terms for last year. Adjusted basic and diluted net loss per ADS attributable to ordinary shareholders of RYB for the third quarter of this year were both US$0.23 compared with US$0.09 in both terms respectively for the same quarter last year. EBITDA for the third quarter of this year was a positive US$0.5 million, compared with a loss of US$1.3 million for the same period last year. Adjusted EBITDA for the third quarter this year was a positive US$1.1 million, compared with a loss of US$0.5 million for the same quarter last year. Now in terms of business outlook, as most of our facilities have been reopened as of the date of this press release, we currently expect our business to continue to recover from the pandemic during the fourth quarter. For the fourth quarter of 2020, the company's management currently expects net revenues to be in the range of US$42 million to US$43 million. The above outlook is based on the current market conditions and reflects the company's management's current and preliminary estimates of - market and operating conditions as well as customer demand, all of which are still subject to change. And that concludes our prepared presentation. We will now open the call to questions. Anida, please go ahead. Thank you.
[Operator Instructions] The first question today comes from Elsie Sheng with Morgan Stanley. Please go ahead.
Thank you, management. My first question is about new student recruitment of [your-self] operated kindergartners. You mentioned that over 90% of your original students has returned to kindergartens. I'm wondering, do you have any detail to share about the efficiency of your new student recruitment is there still any impact from the COVID? And what is the result of - as you mentioned, the online-offline-merged recruits during the recruitment metrics. And my second question is about - do you have any outlook for the coming year in terms of the growth and also margin and your strategy? Thank you.
So enrollment or rather reenrollment is on a rolling basis, as our directly operated kindergartens reopened after the prior period of temporary facility closure. Before the reopening of kindergartens in Beijing in early September, individual facilities and kindergarten management team together made a lot of efforts in preparing for reopening and kept an open communication with parents. So some of the efforts include for example, during the temporary closure period, an ongoing focus was always on maintaining a good level off enrollment and after facilities have resumed operation, new students continue to be admitted on a rolling basis, and site renovation of some directly operated kindergartens have enabled a larger overall capacity for more classes. So for the directly operated facilities in Beijing for example, we help online parent tutor catch up sessions and virtual one-on-one parent teaching. Started from June 1, we made a countdown in five steps to the reopening and shared with children and parents video recordings and snippets of quality pre-pandemic kindergarten life to bring back good memories and get them ready for their return to the facilities. For the kindergartens located outside of Beijing, they started a Phase 3 opening gradually from the end of the second quarter or around May or June-ish. And by September, they were quite ready to welcome the full September batch of students returned to school. Before the September semester, some online courses charging a small fee were made available in some areas, along with courses related to enrollment preparation, which received good feedback and contributed to a good enrollment in September. So under normal circumstances, there are mainly two peaks of admission or enrollment one in March and another in September each year. This year due to the challenges brought by the pandemic, we in response temporarily closed our facilities. And as a result, the March batch of students were not enrolled. Most of those students chose to enroll in September when facilities reopened, which contributed to the number of students enrolled this September.
Yes, and also on top of that Elsie I can also add a few student enrollment data sets. The total number of students enrolled as of end of September, at our directly operated facilities were 27,912 students. And this is actually almost 11% increase from the end of September enrolled students last year. And also if we also exclude the facilities that opened that are newly opened over the past four quarters and we do apple-to-apple comparison. The total number of students at the end of September this year was 24,700. And this also, you know, we had a meaningful 12% increase from the sorry apologies. So the end of September students this year was 27,711 students. And this basically represents a 12% increase from the 24,700 students by the end of September last year. So as Grace mentioned, in March this year, our facilities were essentially - suspended or closed because of the pandemic. So for that new semester, the new students that we would have enrolled, we were able to still enroll them in the new September semester this year. So this actually also contributed to the total number of students that I just mentioned. And also at the end of November, this year, the total number of students who had registered with a fee, but not yet started attendance at our directly operated facilities was 1,625 students. And this number actually reflects the result of our early enrollment efforts and contributes to the increased enrollment in the future.
So for the second question in 2021, we’ll continue to focus on the company's core business operations and the following aspects of our kindergarten and plan our center business. So for the directly operated kindergartens, we stay committed to providing high quality education and service to students and families. And at the same time maintain a good enrollment at our inclusive kindergartens. Secondly, we'll continue to work on the revamping of some premium offering in our national kindergartens. At the moment, there are still some core profit premium and international kindergartens in operations that are still in a run-up period and can enroll more students. And in addition, we look forward to introducing the kindergarten courses with online features enabled and developed by our in-house R&D teams to other kindergarten operators. In terms of our play-and-learn center business, we’ll continue to provide improved supervisory and training services to the franchisees and strengthen our bond with them by providing support in marketing, sales, administration and home education. On the other hand, we believe an upgraded system and product offerings will help us reach out to more planners and our operators in the early education market. With a solid system and good support, there will be plenty of opportunities for us to extend and serve third-party operators. The company remains its operational focus on its core business and kindergartens and play-and-learn centers and we’ll continue its efforts in an integrated online-merge-offline business model. We'll also prudently control our costs and spending to support current operations and deliver better results.
And Elsie on your questions about the margins outlook for our business next year, I think as Chris mentioned, we will continue to focus on core business of kindergartens and the play-and-learn centers. For kindergartens, with conversion of some of our facilities to inclusive facilities, we do see a reduction in our tuition fee. But I think to a large extent, this will be balanced out or mitigated by a significant increase in the class size and number of students enrolled after the facility conversion. And I think for next year, another focus for our directly operated kindergarten is also for us to, you know continue to ramp up the utilization rate of students enrolled at some of our full profit and high end international branded facilities. And I think with this ramp up, we hope to maintain or increase slightly increase the profit margins for our directly operated kindergarten business. And I think for play-and-learn centers in terms of franchise model and the sales of merchandise, the margins are quite stable, and we anticipate the margins will remain largely unchanged. So the main challenge or task for us next year is really to increase the sales by continue to sign up new contracts and expanding our franchise network. And I think if you look at the overall margins or margin targets for us next year, we also hope that by adopting stringent cost control measures at our headquarters level, as well as you know B2B we try to be more prudent in making strategic investments. Because some of the early stage investment that we made earlier also incurred losses for us. So, being more prudent on making additional strategic investments will also hopefully help us improve the overall margin for our growth next year.
The next question comes from [Sam Han with Sage Capital]. Please go ahead.
Could you please introduce any impacts on foreign teacher supply due to the pandemic? Thank you.
So, due to the restrictions in and the frequent adjustments to the, immigration and border control policies as a result of COVID-19 global pandemic. The company has experienced some impact on maintaining foreign teachers in certain kindergartens in China and during the period of temporary facility closure previously some facilities arranged online sessions to conduct virtual learning which helped to maintain enrollment. So we're adjusting our recruitment practices accordingly by leveraging internal flexibility for example, for facilities that are recently converted to inclusive kindergartens, we're able to transfer out foreign teachers there to support high end and for profit facilities. In addition, online teaching interactions and also shortened foreign teachers sessions during the day are some of the other measures addressing the issue. Our talent management team continues to work on the recruitment through various channels. Although the labor costs of foreign teachers may rise as a result under these current circumstances, it is of great help to the enrollment as some of the premium and international kindergartens.
The next question comes from [indiscernible]. Please go ahead.
It's impressive to see the business back on track. But I also noticed in September, there was a drop of the proposed preschool education law posted online to solicit public opinion. Can management comments on the likely impact on your business? Thank you.
With the help of internal and external legal teams, we were briefed on the possible impact of the proposed laws and regulations in the draft. Carefully studied it’s generally in line with what the company has previously expected. Currently, the company's service offerings and business operations are diversified in kindergartens, play-and-learn centers, franchise business, other service offerings and our operations in Singapore. The proposed preschool education law may only affect our operation in directly operated kindergarten in China. For the directly operated kindergarten business, the company will make appropriate adjustments in - accordance with regulations in the future to ensure the legal compliance of operations. At the moment, there is no clear timetable for the official promulgation of the preschool education law as being marked. We’ll promptly communicate with the investor community once the company has further information. Thank you.
This concludes our question-and-answer session. I would now like to turn the conference back over to the company for any closing remark.
Thank you, Anida. And thanks, everybody for joining us on the call today. If you have any further questions, please do not hesitate to contact us at ir@rybbaby.com.We hope you have a great day.
This conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.