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Edited Transcript of CO earnings conference call or presentation 12-Mar-20 12:00pm GMT

Q3 2020 Global Cord Blood Corp Earnings Call

Central Apr 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Global Cord Blood Corp earnings conference call or presentation Thursday, March 12, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bing Chuen Chen

Global Cord Blood Corporation - CFO & Director

* Cathy Bai

Global Cord Blood Corporation - VP of Corporate Finance

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Conference Call Participants

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* Michael D. Schmitz

Jayhawk Capital Management, LLC - CFO and Chief Compliance Officer

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Presentation

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Operator [1]

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Welcome, everyone, to Global Cord Blood Corporation's Earnings Conference Call for the Fiscal 2020 Third Quarter. (Operator Instructions) Now I would like to introduce Ms. Cathy Bai, VP of Corporate Finance, to begin the presentation. Please go ahead, Cathy.

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Cathy Bai, Global Cord Blood Corporation - VP of Corporate Finance [2]

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Thank you, Anna. Good morning, everyone. Welcome to our fiscal 2020 third quarter earnings conference call. A press release discussing our financial results has already been published, and a copy is available on our company's website. During the call, our management team will summarize corporate developments and financial highlights for this quarter. A question-and-answer session will follow.

Before we begin, please note that today's discussion will contain forward-looking statements that are subject to certain risks and uncertainties, and actual results could be materially different from these forward-looking statements. Kindly refer to our SEC filings for detailed discussions of potential risks.

In the interest of time, we will begin with our CEO's remarks, followed by a detailed report of our fiscal 2020 third quarter financials given by our CFO, Mr. Albert Chen. Our management will be available to answer questions during the Q&A session. In view of recent developments, we understand investors and shareholders have various questions to ask. (Operator Instructions) Today, on behalf of our CEO, Tina, I'll read her prepared remarks. Let's begin the presentation.

Good morning, ladies and gentlemen. Welcome to our fiscal 2020 third quarter earnings conference call. During the third quarter, suspension of the U.S.-China trade war briefly lifted consumer sentiments. However, due to a drag from the expectations on slower economic growth in China, potential clients remained cautious on health care expenses and attracting new clients remained challenging.

In response, each subsidiary adjusted their respective marketing strategies and resource deployment aiming to maintain steady volume and momentum. In the third quarter, the group managed to recruit 23,387 new subscribers, in line with management expectations. By the end of December 2019, the accumulated subscriber base had expanded to 815,000.

As previously announced, the group's operations so far in 2020 have been substantially impacted by the unprecedented coronavirus outbreak. Promotional and sales activities have been significantly impacted by various factors. For example, some hospitals are in lockdown mode, have raised their alert levels or are limiting access to hospital staff and patients only. Expectant mothers are cutting down on hospital visits and checkups.

Meanwhile, the cost of procuring additional protection gear for our staff is adding to operational costs. Although the group is trying its utmost to achieve its new subscriber target for fiscal 2020, it is expected that fiscal fourth quarter results will be impacted and the impact may spill over into next fiscal year.

As we mentioned in an earlier press release, during the reporting quarter, a new regulatory policy in relation to the cord blood banking industry was rolled out by National Health Commission, or NHC, of China. The new policy has not yet provided specific implementation details. So we assume more specific industry-related policies or implementation rules shall be issued in the future.

Bearing in mind that the current policies of 1 license per region and no new licenses before 2020 may expire in the near future, we will continue to closely monitor any policy developments or implementation rule announcement and assess the potential impact to our business. We will continue communicating with the NHC and other relevant government agencies while preparing ourselves for different scenarios.

Looking ahead, the regulatory uncertainty and concerns over a slowing economy still remain and the impact of the coronavirus outbreak lingers.

In addition, we have entered the Year of the Mouse which traditionally is not a year associated with high birth rates in China. We will continue to keep a close eye on all these factors, proactively address new issues, remain nimble and be ready to quickly and frequently adjust our deployment of resources. We will also continue to explore new marketing and sales channels to foster organic growth and step up our efforts to assess opportunities to expand our service offerings and mitigate our business concentration risks.

This concludes my remarks regarding our fiscal 2020 third quarter results. Thank you for your ongoing support of GCBC. Together, I believe we will overcome this time of difficulty.

I would now turn the call over to our CFO, Mr. Albert Chen, to review our third quarter financial results in greater detail.

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Bing Chuen Chen, Global Cord Blood Corporation - CFO & Director [3]

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Good morning, everyone. Thank you for joining our call today. In the third quarter, revenues increased by 32% year-over-year to CNY 335 million, which was the result of the new processing fee that became effective in April 2019 and subsequently lifted processing fees revenues. As a result of the new pricing, revenues from processing fees and other services increased by 39% year-over-year to CNY 219 million. This represented approximately 65% of our total revenues as compared to 62% of last year.

The group managed to recruit 23,387 new subscribers in the reporting quarter representing a 1% year-over-year decrease as concern over slower economic growth in China overshadowed positive progress made in relation to U.S.-China trade talks, which placed pressure on our target clients. By the end of December 2019, our accumulated subscriber base reached 815,000. Accordingly, as a result of the expansion of our subscriber base, storage fees revenues for the third quarter increased by 20% year-over-year to CNY 116 million.

Gross profit in the third quarter grew by 37% year-over-year to approximately CNY 283 million. As the increase in processing fees exceeded the increase in raw material costs, gross margin improved to 85%, similar to that of our second quarter.

Operating income in the third quarter increased by 65% year-over-year to CNY 153 million. Operating margin increased to 46%, similar to that of last quarter. Depreciation and amortization expenses were approximately CNY 12 million. Non-GAAP operating income increased by 57% year-over-year to CNY 165 million. Non-GAAP operating margin also increased to 49%.

In the third quarter, we proceeded to ramp up our marketing and promotion activities to raise awareness regarding cord blood storage. To achieve conversion targets, we also expanded our sales team and improved their incentives. As a result, sales and marketing expenses increased by 17% year-over-year to CNY 76 million. Sales and marketing expenses as a percentage of revenue was 23%, down by 3 percentage points from last year but up by 2 percentage points from last quarter.

General and administrative expenses amounted to CNY 48 million compared to CNY 45 million of last year. The increase was mainly attributable to rising labor costs, which outweighed the effect of cost-saving measures and a lower bad debt provision. General and administrative expenses as a percentage of revenues decreased by approximately 3 percentage points to 14%.

In the third quarter, we recognized an increase in fair value of equity securities, or more commonly referred to as mark-to-market gain, of CNY 8 million compared to the mark-to-market loss of approximately CNY 28 million in the prior year period.

The benefit from the new processing fee pricing, coupled with the increase in fair value of equity securities, contributed to the increase in income before tax, which surged by 129% year-over-year to CNY 172 million. Net income attributable to the company's shareholders increased by 136% year-over-year to CNY 145 million.

Net margin also improved to 43% from 24% of last year. Basic and diluted EPS for the third quarter were CNY 1.19. These are just the highlights of our results, and we are now happy to take any questions concerning our latest financial results, our recent operations and -- as well as our future developments.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Mike Schmitz from Jayhawk Capital.

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Michael D. Schmitz, Jayhawk Capital Management, LLC - CFO and Chief Compliance Officer [2]

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Looks like you guys had a very strong quarter operationally again, so thank you for that. I did not hear -- so I'm assuming there's been no change to your guidance for the year in terms of the total number of new subscribers suspected. But my question relates to -- I noticed that about $20 million was spent this quarter on investing activities, which I didn't see any explanation about in the release or hear anything about yet.

And I noticed it looks like about $16 million of that looks like it probably went into the noncurrent deposits, which is also where the previous deposit that's kind of been sitting there for years and years with no explanation as well. But if you could maybe elaborate a little bit on what that was -- what that current amount was for. And any update you have on the existing amount in that noncurrent deposit account?

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Bing Chuen Chen, Global Cord Blood Corporation - CFO & Director [3]

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Thank you for the questions. Well, first of all, to answer your first question regarding the guidance, as many of you are aware, the coronaviruses and the outbreak has certainly affected a lot of companies in the PRC and including ours as well. And we've seen a lot of challenges in the current quarter.

But based on the number that we have seen so far, I think we are still trying our very best to achieve our original guidance, which we have -- which we indicated back in June of last year. So the guidance for current fiscal year 2020 is still within 80,000 to 85,000 new subscribers, and we are still trying very hard to -- trying to achieve that.

So at this point in time, we have no intention of lowering our guidance for fiscal year 2020, bearing in mind that we are now in the -- is already in the final quarter of the year anyway. So -- but if there's any more developments, obviously, we'll keep the market updated.

With respect to the noncurrent deposit, the -- as you are aware, the company is exploring multiple alternatives to -- for the purpose of expanding our operations, both geographically as well as trying to address our business concentration risk. So some of the projects that we have looked at previously didn't work out, and we have actually received those money back.

But as for this juncture, as for the December quarter, we are currently looking at more than one potential target, and we have parked aside capital in case we need to proceed. So that's why you see an increase in noncurrent deposit.

But right now, I mean we are still in the due diligence and negotiation process. So I think nothing is definitive at this stage. But if we decided to proceed on any particular transactions, we will certainly make an announcement and keep the market informed as well.

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Operator [4]

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(Operator Instructions) At this point, there appears to be no further questions. I will now turn the call back to Ms. Cathy Bai.

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Cathy Bai, Global Cord Blood Corporation - VP of Corporate Finance [5]

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Thank you, Anna. This concludes our earnings conference call for the fiscal 2020 third quarter. Thank you all for your participation and ongoing support. Have a great day, and you may now disconnect. Thank you.

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Operator [6]

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Thank you, ladies and gentlemen. Thank you all for your participation. You may all now disconnect your lines.