RYB Education, Inc.
Q2 2018 Earnings Call Transcript

Published: 28 Aug 2018

[Operator:]

Good day and welcome to RYB Education’s Second Quarter 2018 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the call over to Serena Xue, RYB’s Investor Relations Manager. Please go ahead.

[Serena Xue:]

Thank you, operator. Please note 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 this and other risks and uncertainties is included in the company's annual report on Form 20-F for the fiscal year ended December 31, 2017 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 today’s call, management will also discuss certain unaudited non-GAAP financial measures for informational purposes only. The company’s press release for the 2018 second quarter earnings contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. As a reminder, this conference is being recorded. A webcast replay of this conference call will be available on the company’s corporate website at ir.rybbaby.com. Joining us today on the call is Ms. Ping Wei, Chief Financial Officer of the company. I will now turn the call over to Ms. Wei. Please go ahead.

[Ping Wei:]

Thank you, Serena, and thank you everyone for joining us today on our second quarter 2018 earnings conference call. We are pleased to report second quarter results with revenue growth in both our directly operated kindergarten and franchise businesses. Our net revenues for the quarter reached $47.5 million, a 25.6% increase from the second quarter of 2017 and surpassed the high-end of our previous guidance range. Non-GAAP net income was $6.9 million for this quarter, a 55.7% increase from the same period last year. The adoption of the new accounting treatment Topic 606 requires the recognition of initial franchise fees revenue over the service period, which is different from the prior treatment that recognized a franchise fee revenue upon confirmed initiation of franchise facility operation. Accordingly, the adoption of Topic 606 resulted in a sizeable increase in franchise fee revenue recognized in this quarter. Our strong revenue growth was also driven by the steady enrollment growth at our directly operated kindergartens as the parents of our students reacted positively to our measures to enhance the security and safety of our children, our efforts to provide high-quality care and education to our children, as well as our endeavors to improve the transparency of our facilities by inviting parents to participate in monitoring an improvement of our kindergarten operations. In the second quarter, we continue to focus on execution of our operational strategy, mainly to continue to enhance teaching and service quality across our facilities, to continue to improve the security and safety for our children, to continue to strengthen the support for our franchise network, and to build a solid foundation for future expansion. The quality of our educational services to a large extent depends on the quality, commitment, and a dedication of our teachers. In the second quarter, we continue to focus on improving the quality of our teachers through implementing more stringent recruiting and training standards and requirements. In particular, this quarter we conducted a systemwide teachers security and safety training to ensure all our teachers understand our enhanced security and safety standards and adopt our best practices on this subject. We believe the very best way to educate children is to collaborate with families and society in general to give children a comprehensive all-round education. We call this our educational Golden Triangle. We also believe transparency and collaboration are essential parts to our children's education. During the second quarter, we finalized the design of our parent’s TA [ph] program and have piloted the program in a few facilities. This program expands on our previous parent’s TA programs and going forward will create a systematic and sustainable mechanism for parents to constantly participate in our children's kindergarten education. During the quarter, we also continue to implement measures to enhance the security and safety of our children. We continue to implement the recommendations of security improvements given by the special task force comprised of our Independent Directors. These recommendations were treated seriously at both our directly operated and franchise facilities. In the second quarter, we established a security and safety oversight committee led by our newly appointed Chief Security Officer. This committee is comprised of key members of our senior and mid-level management team, including our CEO, myself, and general managers of the operations service teams at our directly operated and franchise operations. The committee members meet regularly to review security and safety report and records and to recommend improvement measures. During the second quarter, we also set up a central surveillance room at our Beijing Head Office, which is staffed with full-time surveillance monitoring specialists. The severe time monitoring system enables us to discover possible issues and take remedial actions in time. Moving on to an operations update for directly operated kindergartens, we ended the second quarter with 90 facilities and 23,526 students, representing an enrolment increase of about 15% from the second quarter of 2017. Average student payment for the quarter increased by about 2.8% to RMB 9,300, while net revenues from kindergarten services increased by 15.6% from the same areas [ph] last year. During the second quarter, we transferred the control of our long loss-making facility to an unrelated third party, which resulted in a decrease in enrolment of approximately 200 students. In addition, we acquired controlling interests in four facilities from a franchisee in Shandong, as well as one facility in Beijing. These acquisitions contributed to a net increase of 1,142 students in the quarter. In regards to franchise operations, during the second quarter, we reorganized both the play-and-learn centers business and the franchise kindergarten business. We combined the business development teams, mid-office franchise operations, supervision and support teams, and channel distribution and sales team into a same business unit, so that all functions can work together to provide seamless support and service to our franchisees. This new BU’s [ph] are headed by our two newly hired VP's. One has a proven track record of running successful franchise operations, and the other has extensive experience in kindergarten industry. Last quarter, we made a strategic decision to pause the addition of new franchisees and focus on the consistency and quality of franchise service in the near-term. This quarter, we provided more training programs and operational support to our existing franchisees. We also revisited our existing franchise model and made some changes. With these changes implemented towards the end of this quarter, we resumed accepting new franchise applications for play-and-learn centers. For the operations of our franchise play-and-learn centers, we have developed a new revenue sharing model. Under this new model, while the initial franchise fee for new franchisees will stay relatively stable, the annual fee will be charged as a percentage of revenue of the new franchisees with the minimum level comparable to the annual fee under the old contract format. This new model was implemented for all new franchise contracts starting in June of this year, and existing franchisees can also voluntarily convert to this model. Going forward, this new model is anticipated to increase our annual fee level, once sizeable franchise facilities under the new model start operations. Naturally, this also requires us to provide better support to our franchisees, particularly in supervision of operational quality, training, curriculum development, and sales and marketing. This new model has been well received by the market. To date, dozens of existing franchisees have switched to or have expressed desire to switch to this new revenue model, and as of today over 40 new franchisees have either signed contracts with us under this new model or have confirmed their intention to do so. We ended the second quarter with 217 franchise kindergartens and 1,029 franchise play-and-learn centers operation. In addition, at the end of the second quarter, we had 182 kindergarten and 212 [ph] play-and-learn franchise contracts still in price line with contracts in [indiscernible] and facilities not formally in operations yet. We believe, our quality improvement initiatives, organizational changes, as well as our new revenue model will ensure we deliver best-in-class services across our entire educational network and help solidifying our leadership position in the early childhood education market. The early childhood education market in China is large and still growing rapidly. In addition, it is highly fragmented and still in its very early development stage. We aim to grow our service network through both organic growth and M&A. On the M&A side, in the second quarter, we successfully completed the two acquisitions that was announced on the last earnings call. Four franchise facilities in Shandong and one facility in Beijing. These acquisitions contributed about to US$0.8 million to our net revenue for kindergarten services in the quarter. Our successful integration following these acquisitions has encouraged management to explore how to systematically acquire or make strategic investment in more franchise facilities in the future. In line with our goal of acquiring premium and international kindergartens in top tier cities, in June, we signed a definitive agreement to acquire the assets of an early childhood training company with two facilities in Shanghai. This training company focuses on providing high-end international English-based early childhood education and care services for children 2 years to 6 years old and has gained local brand recognition for its proven training results. This acquisition is strategically important for us as it provides a long thought after presence in the Shanghai market, one of the prioritized cities in our expansion plan. It also provides us with an international curriculum tailored for the high-end international early transit education market. We expect this acquisition to contribute positively to our operations going forward. We are excited to build on this initial foothold in Shanghai to meet the strong demand we see in that market. Recently, we entered into a definitive agreement to acquire up to 90% equity interest in Beijing-based education company with educational assets in K-12 training and international kindergartens. This acquisition strengthened our position in the high-end international kindergarten market and provided us with the ready to use high-end international kindergarten brand. We intend to use the brands acquired through these acquisitions to further expand our presence in the high-end kindergarten market in-line with our multi-prolonged growth strategy. Moving on to our financials. Net revenue revenues for the second quarter of 2018 increased by 25.6% to US$47.5 million from US$37.8 million for the same quarter of 2017. Service revenues for the second quarter of 2018 increased by 35.2% to $43.6 million from $32.3 million for the same quarter of 2017. The increase was partially due to the increase in the number of students enrolled at our directly operated kindergarten as enrolment – as our existing facilities continued to grow and our newly acquired kindergartens also contributed to the increase. In addition, franchise services revenue increased significantly in the quarter. This year, we adopted Topic 606, revenue from contracts with customers ASC 606, applying the modified retrospective method to franchise contracts not completed as of January 1, 2018. This new GAAP requires the recognition of initial franchise fee over the service period rather than upon [ph] official start of franchise operations. This change contributed to the increase in franchise fee revenues for the quarter. We expect a large portion of the increase to be timing related. Such increase was partially offset by lower revenue from existing franchisees as a one-off fee reduction and free or discounted products and services offered to them at the beginning of this year continued. Product revenues for the second quarter of 2018 decreased by 30.2% to US$3.9 million from US$5.6 million for the same quarter of 2017. The decrease was primarily due to a decrease in the amount of merchandise sold through the company's franchise network, as we continue to pause the expansion of our franchise operation for most of this quarter. Cost of revenues for the second quarter of 2018 was US$31.6 million, an 11% increase from 28.5 million for the second quarter of 2017. Cost of revenues for the services for the second quarter of 2018 was US$29.4 million, compared with $25.6 million for the same quarter of 2017. The increase was primarily due to an increase in staff compensation at the company's directly operated kindergarten and higher operating cost as we continue to expand our kindergarten facilities. Cost of revenues for product for the second quarter of 2018 was 2.2 million, compared with 2.9 million for the second quarter of 2017. The reduction was in-line with the decrease in revenue. Gross profit for the second quarter of 2018 increased by 69.9% to 15.9 million, compared with 9.4 million for the same quarter of 2017. Gross margin for the second quarter of 2018 was 33.5%, compared with 24.7% for the same quarter last year. The increase in gross margin was primarily due to the recognition of franchise fee revenue, which was partially offset by the increasing staff compensation and operating costs at our directly operated kindergarten facilities. Total operating expenses for the second quarter of 2018 was $8.4 million, a 139.3% increase from 3.5 million for the same quarter of 2017. Excluding share-based compensation expenses, operating expenses were 6.2 million in the second quarter, an increase of 85% from the second quarter of 2017. Selling expenses for the quarter remained flat at US$0.4 million, compared with 0.4 million for the same quarter of 2017. General and administrative expenses or G&A for the second quarter of 2018 were US$8 million, or 156.2% increase from 3.1 million for the second quarter of 2017. Excluding share-based compensation expenses, G&A expenses were 5.8 million for the second quarter, a 96.4% increase from 3 million for the second quarter of 2017. The increase in G&A expenses, excluding share-based compensation expenses was primarily due to increases in payroll cost as we continue to recruit top talents to strengthen our team. Professional service fees also increased significantly in the quarter, due to heightened M&A activities and legal fees occurred. The share-based compensation expenses, included in the G&A expense were US$2.2 million for the quarter. Operating income for the second quarter of 2018 was US$7.5 million, compared with 5.8 million for the same quarter last year. Adjusted operating income was US$9.7 million for the second quarter of 2018, compared with 6 million for the same quarter of 2017. Net income attributable to ordinary shareholders of RYB for the second quarter of 2018 was 4.7 million, compared with 4.3 million for the same quarter of 2017. Adjusted net income attributable to ordinary shareholders of RYB, which excludes the impact of 2.2 million of share-based compensation expenses for the second quarter of 2018 was US$6.9 million, compared with 4.5 million for the same quarter of 2017. Basic and diluted net income per American depositary share or ADS attributable to ordinary shareholders of RYB for the second quarter of 2018 was $0.16 and $0.15 respectively, compared with $0.18 and $0.17 respectively for the same quarter of 2017. Each ADS represents one Class A ordinary share. Adjusted basic and diluted net income per ADS attributable to ordinary shareholders of RYB for the second quarter of 2018 were US$0.24 and US$0.22 respectively, compared with $0.19 and $0.18 respectively for the same quarter of 2017. EBITDA for the second quarter of 2018 was US$10.1 million, compared with $7.3 million for the same quarter of 2017. Adjusted EBITDA for the second quarter of 2018 was 12.3 million, compared with 7.4 million for the same quarter last year. As of June 30, 2018, the company had total cash, cash equivalents, and term deposits of US$143 million, compared with $158.7 million as of December 31, 2017. The decrease in cash balance in the quarter was primarily driven by operating cash outflow, CapEx of 2.4 million, and acquisition payments of 2.3 million in the quarter. Net cash outflows from operating activities were US$10.6 million during the second quarter of 2018, compared with 4.9 million of net cash inflow from operating activities during the second quarter of 2017. The cash outflow in the quarter was primarily driven by a decrease in prepayment from customers, as we continue to close the addition of new franchisees for most of the quarter and that the decreasing differed revenue due to the timing of tuition fee payments at the record operating kindergarten facilities. The decrease was partially offset by the operating profit generated in the quarter. And now moving to our results for the first six months of 2018. Net revenues for the first six months of 2018 were US$76.2 million, compared with 64.3 million for the first six months of 2017. Services revenues for the first six months of 2018 were US$69.6 million, compared with 56.2 million for the same period last year. The increase was primarily due to an increase in the number of students enrolled at our directly operated kindergartens. Franchise services revenue also contributed to the increase of initial franchise fee revenue over the service period as the company adopted Topic 606, applying the modified retrospective method to franchise contracts not completed as of January 1, 2018. This impact was partially offset by lower revenue generated from existing franchise operations as a one-off fee reduction and free or discounted products and services offered to them at the beginning of this year continued. Product revenue for the first six months of 2018 was 6.6 million, compared with 8.1 million for the same period in 2017. The decrease was primarily due to a decrease in the amount of merchandise sold through the company's existing franchise network as we paused the expansion of our franchise operation for most of the period. Cost of revenues for the first six months of 2018 was 59.7 million, compared with 51.2 million for the first six months of 2017. Cost of revenues for the services for the six months of 2018 was 56.1 million, compared with 47 million for the same period in 2017. The increase was primarily due to an increase in staff compensation at the company's directly operated kindergartens and higher operating cost as we continue to expand our kindergarten facilities network. Cost of revenues for products for the first six months of 2018 was US$3.6 million, compared with $4.3 million for the same period last year. The reduction was in-line with increase in revenue. Gross profit for the first six months of 2018 was 16.5 million, compared with 13 million for the first six months of 2017. Gross margin for the first six months of 2018 was 21.7%, compared with 20.3% for the same period last year. Total operating expenses for the first six months of 2018 were US$14.2 million, compared with 6.3 million for the same period last year. Excluding share-based compensation expenses, operating expenses were $10.2 million for the first six months of 2018. Selling expenses remained flat for the first six months of 2018 at US$0.7 million, compared with 0.7 million for the same period last year. G&A expenses for the first six months of 2018 were US$13.5 million, compared with 5.6 million for the same period last year. Excluding share-based compensation expenses, G&A expenses were 9.6 million for the first six months of 2018, a 77.2% increase from 5.4 [ph] million for the same period of 2017. The increase in G&A expense, excluding share-based compensation expense was primarily due to increases in cash compensation cost and professional service fees. Operating income for the first six months of 2018 was US$2.4 million, compared with 6.7 million for the same period last year. Adjusted operating income for the six months of 2018 was US$6.3 million, compared with 6.9 million for the same period last year. Net income attributable to ordinary shareholders of RYB for the first six months of 2018 was US$2 million, compared with 5.3 million for the same period last year. Adjusted net income attributable to ordinary shareholders of RYB, which excludes the impact of share-based compensation expenses was $6 million for the first six months of 2018, compared with 5.5 million for the same period last year. Basic and diluted net income per ADS attributable to ordinary shareholders of RYB for the first six months of 2018 was $0.07 and $0.06 [US dollars] respectively, compared with $0.23 and $0.21 respectively for the same period last year. Each ADS represents one Class A ordinary share. Adjusted basic and diluted net income per ADS attributable to ordinary shareholders of RYB for the first six months of 2018 was $0.20 and $0.19 respectively, compared with $0.24 and $0.22 respectively for the same period last year. EBITDA for the first six months of 2018 was US$7.3 million, compared with 9.6 million for the same period last year. Adjusted EBITDA for the first six months of 2018 was 11.2 million, compared with 9.8 million for the same period last year. With that, I would like to turn to our business outlook. For the third quarter of 2018, the company expects net revenues to be between US$37 million and US$40 million, representing a year-over-year increase of approximately 0% to 10%. This takes into consideration the volatility in exchange rate between the US dollar and RMB. For the full-year of 2018, we updated net revenue guidance to be between US$160 million and US$170 million, compared to the company's previous guidance given on May 15, 2018 of 154.9 million to 166.1 million range. The updated guidance reflects the expected revenue contributions of the businesses that were acquired this year. This outlook is based on our current market conditions and reflects the company's management estimate of the market and operating conditions and customer demands, all of which are subject to change. We believe our strategy of selective growth, while maintaining high standards for [indiscernible] and safety positions us well to meet the strong demand for premium education services in China and deliver strong return for our shareholders. Thank you for your attention. We will now open the call to questions. Operator, please go ahead.

[Operator:]

Thank you. [Operator Instructions] The first question comes from Alex [indiscernible] with Credit Suisse. Please go ahead.

[Unidentified Analyst:]

Hi. Thank you, management, and congratulations for the strong results. I have two questions. The first question is, can management provide some comments about recent regulations trends in the K-12 education industry and how will the strengthening regulation effect the future growth of RYB? And my second question is about high-end kindergarten strategy of RYB, what’s your plan to develop more high-end kindergartens and how are you going to execute these strategies? Thank you.

[Ping Wei:]

Okay. Great question Alex, and thanks for attending our conference call. First question about regulation in K-12 industry, well, as a lot of you are aware the most recent regulations and government guidelines that was published were wrong implementation rules to the law to promote private education, the proposed draft, which was submitted for approval very recently, and the second one being the State Counsels that comments about or the article about rules to sort of, further sort of regulate and further manage the sort of expansion of after-school training industries. Those I guess are the two main laws that was at most recently discussed with us. In fact, the second one the State Council said in a, sort of article about further regulating after-school training market, simultaneously there is also a directive on how to further sort of manage the kindergarten space in China. Unfortunately, actual article has not come out yet, but the guideline it actually is very clear. So, I will actually start here and then walk backwards on the previous two regulation that impacted us. The guideline on kindergarten sector based on the same State Council meeting can be summarized with four words. First one being, availability; second one being, affordability; third being, safety; and the fourth being quality. Those are actually the exact words of the State Council based on the media reports today. Okay. This actually as nothing – there is nothing new in these four words because around the beginning of this year or actually even earlier, they already indicated one, with the availability the mandate is actually, that was from last year within the next 3, 4 years this government wishes to raise the admission rate of age appropriate children into kindergarten to 85%, which actually – that number currently stood I believe based on the most recent data I’ve seen towards end of 2017 at about 75%. And that particular number is very positive for kindergarten industry because as you see after the relaxation of one child policy in 2015 number of kids born in 2016 actually went up, even 2017 number, compared to 2016 lower, but compared to 2015 still much higher. And that bodes well for kindergarten industry in general because that basically says, the industry is still an under-supplied industry. The second word, affordability, refers to the previous announced and government mandate that is, to have around 80% of all kindergartens both public and private operated to be inclusive or affordable kindergartens, which basically put a cap on the price point a kindergarten can charge to sort of customers. Now, this one affects us to a degree, but not at this moment we do not believe it is going to be significantly and we have our strategies to manage this impact. From RYB perspective, the positioning of RYB kindergarten and kindergarten and early-childhood education services is premium quality premium pricing. So, we aimed to primarily operate in the remaining 20% of the kindergarten services market, primarily, which is a very market-driven pricing point and with difference aided value proposition to the parent and to the market. And the third word, security and safety, and the fourth quality in fact is exactly the operational focus for RYB this year. So, that’s the – so four words referred to by the same meaning that came up with the new regulation regarding further strengthening the sort of the regulation of after-school training market. That particular article has some impact on us as well. In my personal view, mutual to slightly positive, mutual [indiscernible] it is on training sector and we don't offer K-12 training in general. Slightly positive is that that rule particularly says that training companies are not allowed to sort of give kids knowledge training that will be ahead of the curriculum designed for the age. Now, in the Chinese training market there is a particular thought that is actually preparing children for Grade 1 or primary school education. A lot of those are actually knowledge based and this regulation actually prohibits – there is another sort of rule out there regarding kindergarten education that specifically says they were disallowed kindergartens and training companies to provide sort of to give kids grade one level or even higher level of knowledge-based learning. In the past, some of the age 5 to 6 years old or senior concept of kindergarten actually move to preschool training companies to finish the final half year to a year's preschool education to get knowledge – more intense knowledge-based training, and this regulation change will sort of club [ph] parent’s enthusiasm here. Okay. Now, the implementation rule to promote – implementation rules to the law of – to promote private education is the final piece of law or regulation that affects the whole industry, including us. Among the rules, a few things may have impacted the industry and I need to sort of also explain the potential impact on us as well. One is, according to the proposed rule, basically educational group, I am not allowed to acquire and not for profit educational institution. That’s the first one that may have impact on us. Second one is, educational companies, especially the [indiscernible] et cetera, if they try to transfer a profit from not for-profit schools via related party transactions, such related party transaction will be put under very careful scrutiny by Ministry of Education and other government agencies. And the third one that may have impact on us is on growing companies are not allowed to provide franchise services to – or sort of manage not for-profit education companies via franchise arrangements. Now, I’ll explain the potential impact to us one-by-one. First of all, I would like to remind everybody about RYB’s own operation. You know, while in the past some of our kindergartens may have been registered as not asking for reasonable returns and some registered as asking for reasonable returns under the old law, we paid 25% income tax on all our kindergarten operations. So, technically, we are running – we are being levied income tax and we're running as a full profit organization, you know with old relative [indiscernible] law to promote education. The implementation under the new law to re-register our kindergartens are still either haven’t even started or in the very early stage. So, we intend to register all our kindergarten facilities as full profit institutions because we don’t have much to lose really with that registration and that makes our sort of organization much cleaner from the operation perspective. Now, question is, will we be allowed? We don't know, there is uncertainty. When will we know? Well, as you all are aware the transition period is based on what we’ve heard could be a few years for some even as long as 3 to 5 years, we will naturally work with the government agencies very closely to achieve our goal, while providing quality services. The first one. Second one is, basically related party transactions, you know, we kindergarten by nature has relatively low operating margins and we provide quite a bit of centralized curriculum, IT system, management training et cetera, support to our franchise – to our operations. So, we sort of, we don’t think we have big exposure there. On the M&A and franchise of not for profit, our M&A strategy, while you have like high-end M&A strategy acquiring high-end facility, high-end brands to strengthen our position in the premium kindergarten services sector and acquiring similar operations or acquiring sort of facility or premium locations, we actually had a clear sort of internal operational sort of indication that we will not acquire or we will stay away from high-risk facilities, which means facilities that are very likely to be defined as not for-profit operations. From franchise operation perspective as well, one is, with kindergarten as you guys know we’ve virtually paused the further expansion of any franchise operations for kindergarten and we are in the process of remodeling our non-direct owned kindergarten services model, currently the idea is, first of all on the [indiscernible] franchise side our target market is a high-end or premium quality premium service i.e. the 20% of the kindergarten service market. For that part, we aim to offer more controlled sort of management outsourcing rather than the traditional franchise, nevertheless that should not be affected by this new proposed to rule. On the other hand, our [indiscernible] model, which was basically content curriculum sort of support and service, as well as IT system, management solutions, quality surveillance and supervision services those are not franchise service, those are more advisory and management consulting services in nature. So, we do not think those would be affected much by the new rules. Alex, I think it is a long answer to a short question that you asked, I hope that answers your question? Now, moving on to your second question about high-end KD [ph] strategy. Okay. So, the two acquisitions that we did in the quarter; one in Shanghai, one in Beijing provided a good brand, actually with good local recognition and brand in sort of goodwill, and we intend to use those brands together with the previous high-end brands we already have to expand our high-end like in kindergarten operations throughout China and those high-end, I’m actually referring to for tier 1 cities, mostly tuition fee rate of 10,000 RMB or even higher. So, this market segment is very lucrative good margin, clearly differentiated value proposition from mid-end and lower-end of the kindergarten services. So, we have very much the intention to expand as fast as we can on this particular segment. Now, touching a bit more on this, RYB, we previously mentioned our sort of brand so-called by bifurcations strategy, we actually traditionally we have RYB international kindergarten, which is the high-end of even our sort of service offerings, which in tier 1 cities charge anywhere from 6000, 7000 up to 10,000 RMB per month of tuition fee and RMB [indiscernible] premium kindergartens in tier 1 cities that basically indicates per month tuition fees of about 3,000 RMV to about 5,000, 6,000 RMB. And then the affordable kindergartens, RYB kindergartens we offer being sort of in China as well. Going forward, we added with the new acquisitions, we added a layer on top of the RYB International kindergarten, which is pure international very, very global international kind of curriculum solutions, global sort of perspective et cetera. At a price point above 20,000 and 10,000 per month. I hope that answers your question, Alex?

[Unidentified Analyst:]

Yes, thank you, Wei for your very detailed answer. I just have one follow-up. So, what’s your view on the competitive landscape of high-end kindergarten market in tier 1 cities? Thank you.

[Ping Wei:]

Well, actually it is a very interesting question as well. It should be a simple answer, but actually one is, at this moment there is scarcity, only high-end offerings with the 80% rule being ruled out and some of the government facilities currently offering high-end services to the market being converted into inclusive kindergarten, we are actually think, there will be a lot of opportunities to offer – to further expand a sort of further add availability to the market. In general, it is still not a competition market, it is still an underserved market. So, I wouldn’t worry about competition at this moment. I think, from my perspective competition is more acquisition side, rather than on like organic growth side.

[Unidentified Analyst:]

Thank you, got it. Thank you very much.

[Operator:]

Okay. The next question comes from Sheng Zhong with Morgan Stanley. Please go ahead.

[Sheng Zhong:]

Thank you for taking my question. I have two short questions here. One is about the – still about the inclusive kindergarten [indiscernible] cost are you sure that currently we are still no question about the timing, but can you share a little bit about how many kindergarten is now – in your 90 kindergartens how many of them are already the inclusive kindergarten and do you have a rough idea about the potential ones to be included in the inclusive kindergarten and what the kind of financial impact will be? Second one is, as we change the franchise model in to the revenue sharing one, can you share a little bit more color on how you charge the percentage of revenue and what do you think the difference with the previous model on the franchise fee to RYB? Thank you.

[Ping Wei:]

Very good question Sheng, and thanks for attending our conference call. And it’s good to hear from you. First question, in regard to inclusive kindergartens, we disclosed previously in our annual report as well, the number of facilities that is government facilities, we have in total high-20 facilities that is actually are least from government and primarily from Ministry of Education related than agency, or construction bureaus of the local sort of municipality, of which, right now mid-teen numbers are already inclusive kindergarten and second half of this year, we will actually have two convert into inclusive kindergarten, already starting September of this year. One more, we actually divested very recently, so three of the facilities, two of them will be converted two inclusive this year, and one we will give it back to the government. That one previously was not making money, and with that local policy, we think we will lose even more, so we said, you know you guys maybe you guys can do a better job in running this facility. So, they took it back. Okay. Now, so potential ones, I will say, we still have all the 10 facilities that potentially could be converted into inclusive kindergarten. Now, financial impact, the two facilities that will be converted into inclusive kindergarten this year, overall, impact to us is actually pretty small for this year. Reason being, one of the facility is actually a fairly sizable one. Okay. Now, let me explain what will happen once the facility is converted into inclusive kindergarten. As you know, with RYB premium bilingual kindergarten. We typically have across number of students per class at about 25, when the kids reach five years, the senior class we could accommodate up to 30 kids per class. Okay, but if we convert our facility into inclusive than according to government regulations in Beijing we’re allowed to have 35 kids per class with still 10% [indiscernible]. We said, basically we could have up to 38, 39 kids per class. So, you can see the number of kids increased. And that two facilities we offer we are converting into inclusive kindergarten, previously we are charging a fee of around RMB 3,000 to RMB 5,000 per month, now with the conversion, we actually will add quite a few kids to the facilities per class, as well as overall. Now, another side, we will not be charged much rent. Okay, and thirdly, when we run premium bilingual kindergarten we have sufficient class teachers, we have English teachers. On some cases, we actually even have like sort of excellent teachers who are native English speakers with the inclusive operation we can reduce a lot of sort of teachers and replace the teacher’s qualification and paid profile to the more, you know to the kind that’s is in-line with the service we offer inclusive services. Okay. Finally, we even with the inclusive kindergartens we offer both regular kindergarten service and after-school extended hour services. Those also sort of will contribute to extra revenues from those facility. Overall, with the current – the mid-range sort of facilities we convert, financial impact is relatively small for now. Now, we do have high-end kindergartens that potentially could have the risk of being converted into inclusive kindergarten facility, the strategy we have on that one actually is, we actually already started looking and is sort of close to final stage of securing commercial facilities nearby. So, what will happen is, for those facilities it will be split into two facilities going forward once we are required to run inclusive service on the government facility. We will have an elite high-end international kindergarten offering very differentiated curriculum with a similar fee as compared to before and we will run an inclusive kindergarten on the original location. Overall, we do expect with these two facilities a lower margin, but in terms of actual earnings it will be compatible or slightly higher. So, that will be the impact. Now, moving on to second question, as we are actually running really out of time, franchise model we revenue share it. Okay. The new pay and learn center, franchise revenue sharing model basically calls for 6% to 8% of revenue sharing, currently with a minimum annual fee that’s comparable to the prior contract level. So, that basically means a new franchise facility can easily under the new contact can easily generate an annual fee that is at least 50% to 100% even higher than the previous level. So, we do expect those to contribute quite meaningfully to our revenue and revenue growth for 2019, but since we only started adding those new contacts this year and it takes time to set up, the impact to this year will be pretty minimal. I hope that answers all your questions Sheng?

[Sheng Zhong:]

Yes. Very helpful. Thank you.

[Operator:]

Okay. The next question comes from [Mark Petra with Petra Investment Managers]. Please go ahead.

[Unidentified Analyst:]

Hi, good evening. It is [Mark Petra from Petra Investment Managers]. My question is relating to share buybacks, there don't seem to be any during the quarter, can you give an indication as to what the intention has been whether the business, whether the company still anticipates repurchasing shares?

[Ping Wei:]

Yes, thank you Mark. With the share buyback, my board gave me a clear mandate and framework as to when and under what conditions should I – shall we buy. To date, we actually have not hit the sort of the parameters that’s given by us, by the board to buy back. So, so far, we actually have not used cash in our share buyback program. In fact, the program is active for one year. Okay, thank you.

[Operator:]

Okay. I would now like to turn the call back over to Serena Xue for any closing remarks.

[Serena Xue:]

Thank you. Thank you all once again for joining us today. If you have any further questions, please do not hesitate to contact as at [e-mail] or TPG Investor Relations at [e-mail]. Thank you very much for your time, and we hope you have a wonderful day. Thank you.

[Operator:]

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