Ladies and gentlemen thank you for standing by and welcome to the TAL Education Group Fourth Fiscal Quarter and Fiscal Year 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, Tuesday, April 22, 2014. I would now like to hand the call over to your first speaker for today, Ms. Mei Li. Thank you ma’am. Please go ahead.

Thank you all for joining us today for TAL Education Group’s Fourth Fiscal Quarter and Fiscal Year 2014 Earnings Conference Call. The fourth fiscal quarter and fiscal year earnings release was distributed earlier today and you may find a copy on the company IR website or through the Newswire. During this call, you will hear from Chief Financial Officer, Mr. Joseph Kaufman. Following his prepared remarks, Mr. Kaufman will be available to answer your questions. Before we continue, please note that the discussions 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 are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in the public filings with SEC. For more information about these risks and uncertainties, please refer to our filings with the SEC. Also our earnings release in this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures. I would now like to turn the call over to Mr. Joseph Kaufman.

Thank you, Mei and thank you all for joining us on our earnings conference call for the fourth fiscal quarter and full fiscal year of 2014. We are pleased to report an excellent fourth quarter with revenues at the high end of our guidance and very strong bottom line results. Today, I will discuss the highlights for the quarter and full fiscal year. Next, I will update you on our online education initiatives and discuss our key themes for fiscal 2015. Finally, I will go over the financials with you. Net revenue for the fiscal fourth quarter increased 45.9% year-over-year to $87.0 million. Revenue growth was supported by a 38.8% increase in enrollments. Our core small-class offering comprised of Xueersi Peiyou and the ages 3 to 8 Mobby young learners business was again the main driver of our growth. We are pleased to report that each of the 15 cities in which we have operations delivered at least double-digits revenue growth in the quarter and 10 cities had triple-digits revenue growth. We also added a learning center in Jinan in February making it the 16th city in our national K-12 learning center network. We will begin regular test operations in Jinan starting with the summer term this year. As I explained when guiding for the quarter, we had some additional revenues from the first week of classes of the spring term captured in the fourth fiscal quarter due to the timing of Chinese New Year this year. Excluding this estimated RMB26 million impact, year-on-year revenue growth would have been approximately 38%. You may recall we had a similar windfall in the second quarter of fiscal 2014. Basically, the timing of Chinese New Year versus that of our fiscal year causes revenue tailwind in the second and fourth quarter of one…

(Operator Instructions) Your first question comes from the line of Fei Fang from Goldman Sachs. Please ask your question.

Hi, Joe and Mei. Thanks for taking my questions. Weak set of results. My first question is among the 190 new classrooms that you have added, could you provide a rough breakdown by city and how do you think about the geographical focus of your future expansion? Thanks.

Sure. I will give it you by learning centers, Fei. So, in Beijing, we added three learning centers and discontinued course where we net down one in Beijing. In Shanghai – in Tianjin rather, we were up two small-class learning centers in the quarter. In Xi`an, we added one small class and one one-on-one learning center. In Nanjing, we were up one small class learning center. In Wuhan, we were up one small class learning center. In Zhengzhou, we were up one small class learning center. Chongqing was one, Shenyang was one, and Jinan is the city we entered in the quarter, the new city was one as well. So that brought us to a net of 8 small class and 1 one-on-one to get us to 9 in total.

Right. So, that’s all over the math. Would it be fair to say that going forward, the focus will be more broad-based new app centers in Beijing (indiscernible) your cities?

Yes. I mean, I think that in Beijing you can see it’s more opportunistic. So, we maybe at the end of and at least see an opportunity to consolidate from smaller centers to larger centers. So, I still think that the bulk of the net adds will probably be coming from cities outside of Beijing.

Got it, great. My second question is on FX, so renminbi has recently stopped appreciating against U.S. dollars, so how do you think about the impact on your earnings, especially on the – regarding the other income line? And what will be the underlying FX assumption that you are working with in providing the guidance?

Sure. So, in terms of renminbi, we try not to make currency calls. So, in my guidance for the first quarter, I assumed no significant change in exchange rates. So, I am not assuming that the renminbi will go down in a big way and I am also not assuming they will go up in a big way. In terms of my Q1, I think that when you think about other income, that’s a good question. Other income already this year was lower than in previous years, other income, of course, a big factor that for us as exchange gain on the U.S. dollars that we have offshore. So, on a going forward basis, part of it will be the exchange gain we are not expecting to be as large for the renminbi if at all. And then you also had the fact that our offshore dollars are less now than they were before, so that there is also that will have an impact on the amount of exchange gain you are able to derive from those offshore dollars.

Got it, great. My last question is that I noticed that you added one one-on-one learning center during the quarter, so is that – does it indicate that you are back into the growth mode for the Zhikang brand?

We are continuing to manage the growth of our one-on-one business. So, you will see for the full year, it was 20% as a percentage of revenues, which is consistent with what I guided in previous quarters. And we expect small class and our online courses business to both grow faster than one-on-one in these coming years. So, you should expect that to come down further by a percentage of revenue going forward. That doesn’t mean that there aren’t opportunities in select markets for one-on-one and Xi`an will be such a market, where our small class business is quite strong and one-on-one as the complement to our small class business has also grown quite well. So, we will opportunistically look for one-on-one opportunities, especially in the cities outside of Beijing, where one-on-one is still relatively under-penetrated.

Great. Thanks, Joe.

Thanks, Fei.

Thank you very much. Your next question comes from the line of Timothy Chan from Morgan Stanley. Please ask a question.

Hi, Joe and Mei. Congratulations on the very strong results and thanks for taking my questions. My question is actually a follow-up to your online education strategy. As you may know, some online players are now entering in this space, how do you see in terms of the change in any competitive dynamics and what they think is the competitive edge of TAL with these online platforms? Thank you.

Great, thanks Timothy. So, yes, we are happy to see a lot of interest in the online education space. The way we think about the advantage of the other players that may be going in more internet related companies is they are more of a platform business. So for them they have lots of users and they are looking to aggregate content and provide it to their users. So I think that that is a different kind of business and what we are trying to achieve. With our xueersi.com online school we differentiate through both the customer experience and the product itself, so the content and curriculum in each market. So, on the experience side we want to emphasize service and being there for our students as a trusted education advisor given our sole focus on K-12 education. And then in terms of the product, we spend a lot of resources in terms of understanding the local content and curriculum of each local market. So it’s very different from a platform business, we are focusing on a product business, our B2C proposition where we differentiate based on our deep knowledge of the K-12 sector.

Thank you. That’s very helpful.

Thank you, Timothy.

Thank you. Your next question comes from the line of Tian Hou from TH Capital. Please ask the question.

Hi Joe and Mei. Congratulations on the good quarter. Sorry, so I have a question related to your ASPs, if I look at the growth drivers I think it’s quite healthy that most of the growth are really coming from the enrollment growth and I think for the education budget actually in terms of families or the whole society to CPIs, we all have some kind of increase, you guys have been pretty much in line with the CPI growth and I wonder if there is any plans going forward to increase the price, that’s question number one. Question number two, so in the content categories I know you are putting a lot of R&D efforts in developing new content or new formats of content. I wonder if there are new categories of the content are you going to add in your content portfolio, that’s the second question. So I will stop right here, Joe you can start give us answer?

Okay great. Thanks Tian. In terms of ASP as we do have plans to increase price beginning with the summer term in Beijing, Shanghai, Shenzhen and some other markets as well. So there will be price increase as part of the mix this year in our small class business. We typically give a coupon to recurring student to encourage retention and moderate into the price increase. So we will probably continue to do that again this year. In terms of what you are seeing another factor is actually mix. So there are a couple of mix issues. One is within small class we are getting a lot of growth from cities outside of Beijing and Shanghai. And there are going to lower ASPs in Beijing, Shanghai, Guangzhou and Shenzhen which are typically roughly the same level, Beijing is slightly higher. So that’s going to naturally cause ASP on a blended basis even within the small class Peiyou business to be lower than in some of our select cities where we may be taking 10% or more percent price increase. So in a given city we are likely to be a bud CPI, but we had structural shifts and we are not taking a price increase across all of our cities based on where they are in their level of development. And then when you look across our products one-on-one which is the high ASP business becoming a lower percentage of revenues, so it went from 23% in last year fiscal 2013 to 20% in fiscal 2014 and then we are expecting to be lower again this year. So that will also on a blended ASP basis which you see in the release have an impact in moderating the overall blended ASP increase. And then online courses is growing quite well…

That’s very helpful. Thank you, Joe.

Thanks, Tian.

Thank you very much. Your next question comes from the line of Clara Fan from Jefferies. Please ask the question.

Hi hello. Thank you for taking my question. I have a small question. Firstly, can you give us the guidance on your targeted number of center openings and fee expansion in first quarter ’15 and the full year ’15 and whether the openings will be more secured towards the first half or the second half. And secondly, you mentioned that the online revenue and small classes revenue will probably be growing faster than one-on-one going to fiscal year ’15 and so on, so I am just wondering what kind of revenue contribution should we be looking at. And lastly, we saw that – I was wondering what was the utilization last quarter compared to a year ago and what that target for fiscal year ‘15? Thank you.

Sure, I will handle each of those questions separately. The first question related to learning centers, we added 19 learning centers last year, based on plan we expect to add 25 incremental learning centers at least this year. Of course, we will add one learning center in each of the new cities we are entering. So in addition to G9 there will three more that we will be adding. We are also going to be adding new learning centers because there are a number of cities where over the last few years we have entered, but we are still less than 10 learning centers, so we feel like it’s the right stage of development for us to continue to add new centers in those cities. So that’s the idea in terms of learning centers. Of course, we will also continue to be opportunistic in terms of adding classrooms to existing learning centers. Obviously that’s the best way to get leverage from your operating costs, but it’s not exactly something you can depend on. It depends on the overall occupancy situation and how you are able to negotiate with the landlord etcetera. So that’s what I would say on the learning center side, they will be primarily driven by small class. And then I would say there will be slightly swung ended towards the first half of the year as we do like to get learning centers in before the summer season as possible. That will of course depend on execution and that we are able to find the right locations that we want at the right price, of course, but that’s the goal, so that’s I think the question related to learning centers. In terms of you asked the question about utilization, the utilization was about 10% higher this quarter than the same period last year. So that’s quite good and we have done that now for a couple of quarters. I think going forward you should expect it to be more like single digits increase in terms of utilization, utilization which is a ceiling at some point. So I wouldn’t necessarily expect that much next year what we do still expect to get utilization gains particularly in certain markets like Beijing and others. You had a third question remind me Clara.

Yes, on the revenue contribution we expected for small class, one-on-one and online in fiscal year ’15?

Right. So, I think that the (indiscernible) revenue will come down from 20%, it’s hard to say exactly how much maybe in kind of the 17% to 18% range as a percentage of revenue this coming year, that’s a guess at this point. The online may go up from 3% to say 4% as a percentage of revenue next year. And then the remainder will be small class. So we are not talking dramatic changes, we are talking about slight moderation.

So just a follow-up question on the eduu.com, so do we think that we will probably maintain like the revenue contribution from eduu.com would it be same minimum it will be down to 15% or probably will stay at around that range in the long-term?

I mean I think that over the long-term you could see one-on-one continued to go down as a percentage of contribution. It’s going to continue to grow. We just think that the small class and online courses businesses will grow faster.

And one quick follow-up question on the three new cities that you mentioned, is there – are there particular cities that we think you are?

There are, they are already said and ready to go, but for competitive reasons, we won’t disclose them and so we are in them.

Again, we are more thinking of them in the first half for these three new cities as well.

No, no, they should be in the first quarter. So, we think by the end of May, you would have – we would be in most of them.

Okay, thank you very much.

Thank you, Clara.

Thank you very much. Your next question comes from the line of Ella Ji from Oppenheimer. Please ask the question.

Thank you. Congratulations on strong quarter. My first question is with regards to your growth rate, could you breakdown your growth rate by organic growth in existing centers versus the growth from the new centers in the ballpark? And also as we are looking to the full year FY ‘15, can you talk about your expectations of the growth trend as we begin to face – as we begin to lose the benefits in the year-over-year comp?

Right, okay. So, your first question, I don’t have exact numbers for you for that, it’s kind of in line with what I talked about with Clara in terms of utilization, because I think one way to think about utilization in our sectors as people will think about same-store sale growth in our retail sectors. So, I think we are going to be primarily driven by capacity increases, i.e., new stores or new classrooms to existing centers, because there still be a same-store growth component, but less. So this year, if you look at the utilization improvement in many markets, it was 10%. So that’s a pretty healthy same-store growth type number. And then on a going forward basis, I think that that number is going to go down to more like a single-digit number. In terms of the revenue growth number, I think you are right to say that there will be some harder comps this year than in previous years. I mean, yes, one is that in Q3, Q4 this year, we are pipelining a lower base than in previous years. And then also I mentioned the Chinese New Year impact which this year we have a bit of headwind in Q2 and Q4. So, Q2 and Q4 would be the ones to lookout for in terms of where the comps maybe a little bit more difficult, but that said well, I don’t provide full year guidance on revenues internally according to our budget, we are shooting for at least 35% top line growth. So, we are still pretty confident in terms of the top line.

Thank you. And that’s very helpful. And then my second question is you – obviously you provided a lot more new offerings on online and also more interactive services in class. Can you talk about among other things you now provide, what are the new things that’s most welcomed or most popular by the like students and their parents? And as you continue to invest, what do you think is there anything like return on the investment target that you have internally? And just lastly, could you compare your current offering to the peers – to the ones that your peers have?

Okay. So, in terms of online, what works are two things, one is the customer experience and two is the quality of the product. So, that’s what we are trying to get right in everything we do online. And so you will see us experimenting with different ways of achieving that, whether it’s life where we are trying to have more direct interaction with students, whether it’s adding life to pre-recorded and so doing something more like a flip classroom, where you have the prerecorded video content, which is transferring knowledge to them offering students the opportunity for practice, to have live interaction with teachers, whether it’s apps or other drills online to help kids to be able to do practice exercises during the week. So that’s one thing that’s key, the customer experience having high quality interactions with students and providing good service to students. The second is the product itself and we believe that a lot of that depends on our deep knowledge of the content and the curriculum. So I think that those are the two things that we are trying to do across all of those different online products that I mentioned on the call and then in response to Tian’s question earlier. In terms of how we compare to competitors, I think that’s better really just for you guys to do the research and see. I think that for us we are focusing on K-12, we are focusing on those key areas that I talked about in terms of our online strategy from social platform providing that O2O community that helps to bring people into our classrooms to provide a lending learning to providing a top online courses solution for K-12 parents. And then we are experimenting with a lot of other new and different things that could potentially be disruptive or at least differentiating in the sector like flip classroom like live online, etcetera. Have I answered your questions, Ella?

Yes, that’s certainly helpful. Just a quick follow-up, I am just wondering if with all those improved customer experiences, do you think they will help grow your enrollments eventually or you think at this point it probably will just stay as like better customer experiences which will certainly help with your business in the long-term, but you are not expecting these new offerings to help with your enrollment?

Well, I mean, we are already seeing an enrollment contribution from online or online courses had 11% share of enrollments in Q4. So we are seeing them. Year-to-date, it was about 13%. So, I think that where we have continued high expectations that online will help drive enrollments as well as improve customer experience. The ASPs for online courses are lower as I mentioned. So the contribution to revenues we expect to continue to be lower than the enrollment contribution.

Okay, thanks. And the last question is regarding your business expansion strategy for this FY ‘16 so you made some acquisitions, small size acquisitions last year. Can you talk about what’s your planning for this year? And are you going to make more acquisitions or do you plan to just focus on the existing ones and just help those companies grow bigger and better?

Yes. We will be opportunistic in terms of acquisitions or strategic investments. You actually see us do a lot more in the strategic investment time taking minority stakes other than full acquisitions. I think we will continue to be focused more on internet, mobile and that intersection of technology with education. We haven’t done kind of center-based acquisitions in the last year and I think that will probably continue to be the trend going into the next year.

Got it. Thank you so much.

Thanks, Ella.

Your next question comes from the line of (indiscernible) from JPMorgan. Please ask your question.

Yes, hey, hi, it’s (Lyon). Nicely done on the results. I just have a quick question like you have this massive improvement in your EBIT margin basically in the last two quarters, right, the question is just how did you do that? Thanks.

Yes, sure. In terms of the EBIT margin, I mean, I think that other analysts have talked about the fact that we were cycling a lower quarter in the second half of the year. So I mean I think part of it was through strong enrollment and revenue growth we are able to scale on the SG&A side and then by focusing on the balance between utilization of existing facilities and adding new facilities we were able to drive gross margin and we also took a price increase in certain markets over the last year including Beijing. On a going forward basis we don’t provide more urgent guidance but based on budget I could see approximately 250 basis points of compression on a non-GAAP basis. Q4 I mentioned the Chinese New Year impact, so there is likely to be a swing of a couple of 100 basis points of margin windfall in one year that would be headwind in the next year. So this past year if you talk about the second half of the year and how we did it a lot of it was execution but we did have some nice headwind just in terms of the timing of Chinese New Year that helps us in Q2 and Q4 of last year which we won’t have in this year. But I you take out that impact then we’re going to try to keep it flat to maybe 100 basis points of compression on a non-GAAP basis. If we weren’t investing in various businesses like online, ICS 3.0, O2O and other backend systems we wouldn’t likely see a decline at all except to the fluctuation margins given to the Chinese New Year. But we think these makes sense for the long-term growth of the company as I mentioned would be other analysts that we’re asking about online, we don’t see this is disrupting K-12 but we see it as a big opportunity. So I just wanted to – in addition to answering your questions about how we did in the second half of the year also give a bit of a heads-up about how we’re thinking about it for next year.

Just a quick follow-up I don’t want to ask about next year but just by – how do you – when you’re applying your G&A and your selling expense for the entire year like do you do it like a quarter at a time or just you do it in the whole fiscal year and if you had a surprise increase in sales and like for the last part of the year then you basically don’t change the expense at all like an annual budget like that, that’s the question?

Yes, we do have an annual budget. We started our budgeting process in September of each year by establishing a work plan by department by business unit and then if we tie that to our budget which is eventually tied to performance KPIs for everybody in the system. So we have a pretty integrated annual budget system that usually ends in March every year and is approved by the board in April the following year. So we will continue to look at things quarter-by-quarter and as we do see that we’re achieving over budget in some cases if we believe that there are opportunities to invest more like I mentioned ICS 3.0 that interactive classroom pad thing. That we could just do it in Beijing if we were achieving very strong top-line we may decide that it makes sense to roll that out more broadly especially if we get great consumer feedback about it because then we’re really investing in our future growth. So that’s the way we think about it, yes.

Okay, alright. Thanks.

Thank you very much. There are no further questions in the phone at this time. I will now like to hand the call back to your presenter for today Mr. Joseph Kaufman. Please continue.

Thank you. Thank you all for taking the time to be with us tonight. We look forward to continuing to have communication with you. If you guys should have any questions or like to arrange the time to come to Beijing please reach out to myself, to Mei or to any of our IR personnel. Thanks so much and have a good day.