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Edited Transcript of CO earnings conference call or presentation 30-Jun-20 12:00pm GMT

Q4 2020 Global Cord Blood Corp Earnings Call

Central Jul 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Global Cord Blood Corp earnings conference call or presentation Tuesday, June 30, 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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* Cyrille Pichot

Altimeo Asset Management - Portfolio Manager & Partner

* Sandy Mehta

Evaluate Research Limited - CEO and CIO

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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 Fourth Quarter and Full Year Fiscal 2020.

(Operator Instructions) Now I would like to introduce Ms. Cathy Bai, VP of Corporate Finance, to begin the presentation.

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

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Thank you, Tai. Good morning, everyone. Welcome to our fourth quarter and full year of fiscal 2020 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 operational developments and financial highlights for the 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 discussion of potential risks.

In the interest of time, we will begin with our CEO's remarks, followed by a detailed report of our fourth quarter fiscal 2020 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 will read her prepared remarks. Let's begin the presentation.

Good morning, ladies and gentlemen. Welcome to Global Cord Blood Corporation's Fiscal 2020 Fourth Quarter Earnings Conference Call. During the quarter from January to March 2020, the group faced tremendous challenges as efforts to contain and control the COVID-19 outbreak stalled the economy and the consumer market languished. Despite the extremely difficult environment, the management team managed to achieve the company's fiscal 2020 new subscriber target. In the reporting quarter, we recruited 18,488 new subscribers, down by 17% year-over-year and 21% quarter-over-quarter. For fiscal 2020, we acquired 84,241 new subscribers in total. By March 31, 2020, our accumulated subscriber has reached 833,094.

Data from China's National Bureau of Statistics shows that newborn numbers in China and the group's operating markets continued to trend downward in 2019. Despite a flatter downward slope, judging by the general direction in the past 3 years and our first-hand observations from the field, we anticipated that the newborn pool in fiscal 2021 will continue to shrink. Although cross-province migration continued to be population drivers in Guangdong and Zhejiang, the immediate benefit to our business is limited. Moreover, our COVID-19 countermeasures have resulted in additional upward pressure to our operating cost, though we continue to strive to curtain such impact.

In the meantime, the pandemic continues to erode the already weak consumer sentiment, further discouraging consumer discretionary spending and may possibly delay some of our potential clients' pregnancy plans. Therefore, management expects that the group's total new subscribers for fiscal 2021 will drop to between 60,000 and 65,000. Furthermore, as China's National Health Commission has not yet provided any guidelines to its policies, regulatory uncertainties in the cord blood banking industry in China remains. We will need to be mindful of such uncertainty and continue to proactively make ourselves ready for changes in the market. Facing a rather complicated operational and regulatory environment, we need to be prepared to constantly adjust our sales and marketing resources in order to mitigate the impact from fewer expected newborns, slower economic growth, more cautious consumer sentiment and the continued impact of the COVID-19 pandemic.

In addition to focusing on achieving our fiscal 2021 target, the management team continues to evaluate opportunities that possess the best shared synergies with the group's existing resources and core competencies in order to ensure the company's sustainable development over the long run.

This concludes my remarks, and thank you again for your support of GCBC. I'll now turn the call over to our CFO, Mr. Albert Chen, to go over the highlights of our fourth quarter financial performance.

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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 fourth quarter, revenues increased by 19% year-over-year to approximately CNY 300 million, which was mainly driven by the adoption of a new processing fee since April 2019 and the expansion of the accumulated subscriber base. During the reporting quarter, the COVID-19 pandemic continued to affect the company's operations. Although the business environment remained tough, we still managed to recruit 18,488 new subscribers, finishing the year at the high end of our target range. As a result of the new processing fee, processing and other services revenues increased by 23% year-over-year to CNY 183 million, which accounted for 61% of total revenues. As our accumulated subscriber base increased to more than 833,000 as of March 31, 2020, fourth quarter storage revenues increased by 13% year-over-year to approximately CNY 117 million. Storage revenues accounted for 39% of total revenues compared to 41% in the same period of last year.

Fourth quarter gross profit increased by nearly 26% year-over-year to CNY 256 million. Gross margin expanded to nearly 86% compared to 81% of last year period, thanks to the boosting effect from the new processing fee. As a result of improved gross profit as well as the application of multiple cost-saving measures, operating income in the reporting quarter increased by 68% year-over-year to CNY 149 million. Operating margin increased to nearly 50%. Depreciation and amortization expenses were approximately CNY 12 million. Non-GAAP operating income increased by 59% year-over-year to CNY 162 million. Non-GAAP operating margin increased by 13 percentage points to nearly 54%.

During the fourth quarter, sales and marketing expenses decreased by 10% year-over-year and 20% quarter-over-quarter to less than CNY 61 million. As the COVID-19 pandemic evolved, client recruitment remained challenging, which led to a decrease in staff and performance-related costs. At the same time, we imposed a massive cutback in our marketing and promotional activities, and nonessential marketing and promotional activities were either suspended or delayed. Sales and marketing expenses as a percentage of revenues dropped to 20% in the reporting quarter, an abnormal low from 27% in the prior year period.

General and administrative expenses decreased to CNY 43 million from nearly CNY 44 million in the prior year period and CNY 48 million in the prior quarter. The reduction was mainly driven by reductions in provisions and staff-related expenses. General and administrative expenses as a percentage of revenues decreased to 14% from 17% in the prior-year period, and remained the same as in the previous quarter.

In the reporting quarter, the company recognized a decrease in fair value of equity securities or mark-to-market losses of CNY 24 million compared to a mark-to-market gain of approximately CNY 12 million in the prior-year period. As a result of the increase in operating income, which was partially offset by a decrease in fair value of equity securities and an increase in income tax expense, net income attributable to the company's shareholders increased by 7% year-over-year to CNY 97 million. Net margin for the reporting quarter was 32%. Basic and diluted earnings per ordinary share improved to CNY 0.80.

These are the highlights of our fourth quarter results. We are now happy to take any questions from the floor.

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Cathy Bai, Global Cord Blood Corporation - VP of Corporate Finance [4]

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Hello, Tai, I think we could move on to the question-and-answer section now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Cyrille Pichot from Altimeo Asset Management.

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Cyrille Pichot, Altimeo Asset Management - Portfolio Manager & Partner [2]

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This is Cyrille Pichot from Altimeo Asset Management. Did you hear me, yes?

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

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Yes. Your sound quality is excellent.

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Cyrille Pichot, Altimeo Asset Management - Portfolio Manager & Partner [4]

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Okay. Yes. Just -- I have just a few questions very quick, just about the tax rate. Can you just elaborate a little bit why it's higher than in the previous quarters? And do we have to consider that this is -- I mean, in the coming quarters, what will be the tax rate? Second question is just about the -- can you comment a little bit about the trend of your business, I mean, in the last 2 months? I mean are you seeing an improvement based on the improving situation with COVID-19 within hospitals? And last question is, has the Board thought about alternative listing place because of the situation for Chinese companies listed in the U.S. and all the trend of Chinese company going to list in Hong Kong, especially?

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Bing Chuen Chen, Global Cord Blood Corporation - CFO & Director [5]

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Thank you. I will answer your questions one at a time. In terms of the income tax expense, as we highlighted in our earnings release, the income tax expense for this quarter was approximately CNY 34 million, roughly. And it's slightly higher than normal because -- partly because of the upstream dividend that we receive from the onshore subsidiaries, which result in an additional roughly CNY 4.5 million additional income tax expenses. Stripping that out, that will put the company effective tax rate at the lower bracket. The company -- because several of our subsidiaries are still enjoying what we call the High and New Technology Enterprise tax incentive. So the onshore subsidiaries tax rate is 15%. But if you look at our prior disclosure or our prior quarterly earnings, you will realize that on a group basis, after taking into account offshore subsidiaries and offshore expenses, which are not tax deductible under the PRC tax law, normally it's at the high end of the -- between the 15% to 20% range. So what we consider to be a normal effective tax rate, in our case, on a group basis will be probably at the 15% to 20% range. And -- but that said, the fourth quarter of last year is slightly higher than normal, that is largely because of the additional withholding tax that we have paid. But if you strip out that CNY 4.5 million, the number kind of brings you back to the normalized tax rate. So that is the question with respect to the income tax expense.

The second question is regarding the latest business trends that we are experiencing. If I recall correctly, when we published a press release, I think, early this year, pre -- suggesting a potential target range for fiscal year 2021, which will be between 60,000 to 65,000, we also mentioned that the situation was dire, and we are kind of heading towards the low end of the range. I think based on what we have seen in the past couple of weeks before the second wave hit in as -- in Beijing, I mean, I'm sure that many of you are aware that there are also another round of infection that's going on in Beijing regions. As a result, that there is a mini lockdown going on. Prior to that event, I think the overall business trend is definitely trending up. We are seeing some positive feedback and also some positive development on the hospital side. So instead of heading towards the low end of the range, I think we are kind of comfortable to suggest that now we are -- look like we're heading towards the mid-range of our full year target range. So I think this is definitely a positive development. But it all depends on how the COVID-19 pandemic evolved. And I definitely hope that there won't be any more lockdown from this point onwards. And I also obviously hope that the world will come out from this and be a better place. So that's my comment on the latest business trends.

As for the company, whether or not we have explored other potential listing venues as a result of the latest U.S. regulatory developments, we have also -- we are still monitoring the situations because right now, we -- I think the regulatory bodies in the U.S. has not issued any definitive policies with respect to how U.S.-listed foreign issuer will be treated because of the PCAOB inspection issue. We are monitoring the development on that front. And also looking at potential alternatives as well. But no definitive answer at this stage. But we are also -- as you rightfully pointed out, we are also aware that several U.S.-listed issuer is seeking a second listing in Hong Kong. So it will be interesting to see how that goes.

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Operator [6]

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Moving on to next question. We have Sandy Mehta from Evaluate Research.

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Sandy Mehta, Evaluate Research Limited - CEO and CIO [7]

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Congratulations on a strong fourth quarter and a full year result. I have 2 questions. One is the new policy announced by China of 18 pilot free zones, could you comment on the status of that and the time line and rollout of that policy? And what benefit there could be to your company? And my second question was, your margins have been very strong. You talked about strong cost controls in terms of sales and marketing, SG&A expense. What is the outlook for those expenses and the margins for this new year?

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Bing Chuen Chen, Global Cord Blood Corporation - CFO & Director [8]

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Thank you for the questions. Maybe I'll answer your second question first, which is regarding the margin trend. As we discussed during the earnings call, in light of the lockdown which took place in the first quarter of this year or mainly between January and March, we have proactively basically stopped and put a lot of our promotional activities on hold. Looking back at the company's historical track record, our sales and marketing expenses tend to range bound between 20% to 25%, which, in our view, is supposed to be -- which, in our view, is considered to be a normal range. And the fourth quarter fiscal 2020 sales and marketing expenses is definitely at the low end. And we -- and that's because we're putting in a lot of effort to make sure that it happens. But going forward, I think a fair assumption is that assuming business going back to normal, a fair sales and marketing expenses as a percentage of revenue should range bound between, I would say, probably 22% to 26% roughly. So that's our view with respect to the cost on sales and marketing expenses.

General and administrative expenses is a little bit tricky because most of the costs are not variable costs, and a lot of those costs are actually fixed costs. So we have to put in more effort to actually contain that cost. And believe it or not, actually, one of the key drivers that have been pushing up the general and administrative expenses has been labor cost. And the same goes with the direct cost component as well. So we are keeping a close eye on it. But general and administrative expenses technically should -- we are trying our very best to try and maintain the existing quantum with respect to the general and administrative expenses. But again, fourth quarter of fiscal 2020 G&A is -- we really pushed the envelope. So it's definitely on the low end as well.

In terms of the direct cost itself, part of the reason for the gross margin expansion, as I explained earlier, is because of the introduction of a new processing fee, as we revised our processing fee from CNY 6,800 to CNY 9,800. But the direct cost itself, we are facing some level of upward pressure, I mean, as you can imagine, namely on the raw material side and the labor cost side. So that is something that we try to contain as well. But as you are aware, I mean, our gross margin is reasonably lucrative. So I think there are enough buffer, at least on the direct cost side, to absorb some of the upward cost pressure.

With respect to your questions on the policy itself, instead of answering your questions with respect to the policy of the 15 free-trade zones, I want to address your question to the overall policy environment. As you are aware, cord blood banking in China is heavily regulated, and it's a one license per region in the past until they introduce the free-trade zone policies. And the one license per region policy is meant to expire at the end of this year. This -- in order to better understand the situation, we have been constantly reaching out to the relevant authorities to try to indicate -- or try to get a sense as to where the policy is heading. Unfortunately, because of the COVID-19 pandemic, it's definitely affected -- or I think definitely it created a lot of distractions from the regulatory authorities' point of view. So to answer your question in short is that right now, we don't have a clear indication as to whether or not there will be more opening up or whether the policy will stay status quo or there will be any potential changes.

So we don't have a clear indication from the authority as of this point, but we will continue to monitor the situation, and we'll continue to reach out to the authorities and try to better understand the situation. But fair to say that I think the pandemic has really created a lot of distraction in terms of government attention.

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Operator [9]

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There are currently no questions in the queue. (Operator Instructions) At this point, there appear to be no further questions. I will now turn the call back to Ms. Cathy.

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Cathy Bai, Global Cord Blood Corporation - VP of Corporate Finance [10]

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Thank you, Tai. This concludes our earnings conference call for the fourth quarter and full year of fiscal 2020. Thank you all for your participation. Have a great day. Tai, you may now disconnect.

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Operator [11]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.