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Edited Transcript of CO earnings conference call or presentation 26-Feb-19 1:00pm GMT

Q3 2019 Global Cord Blood Corp Earnings Call

Central Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Global Cord Blood Corp earnings conference call or presentation Tuesday, February 26, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Albert 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

* Jeff Neal

* Joshua Raizin

Cedar Street Asset Management LLC - Research Analyst

* Kent Charles McCarthy

Jayhawk Capital Management, LLC - Founder, CEO, and President

* 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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Hello, ladies and gentlemen, and welcome to today's Q3 Financial Year 2019 Global Cord Blood Corporation Earnings Call. (Operator Instructions) I'd now like to hand the call over to our speaker today, Cathy Bai. Cathy, please begin.

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

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Thank you, Hugh. Good morning, everyone. Welcome to our fiscal 2019 third quarter earnings conference call. A press release discussing our financial results has already been published, and the copy is available on our company's website.

During the call, our management team will summarize corporate 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 interest of time, we will begin with our CEO's remarks, followed by a detailed report of our fiscal 2019 third quarter financials given by our CFO, Mr. Albert Chen. Our management will be available to answer questions during the QA session.

Today on behalf of our CEO, Tina, I will read her prepared remarks. Let's begin our presentation.

Good morning, investors and shareholders. Welcome to our fiscal 2019 third quarter earnings conference call. Due to the lasting effect of -- on exciting consumer sentiment, in the last quarter, consumer behavior in the reporting period became more cautious. Despite vigilance from the demand side, we managed to recruit 23,663 new clients. This represents a year-over-year decrease of 2%, but a quarter-over-quarter increase of 3%, in line with our expectation.

By the end of December 2018, our cumulated subscriber base had surpassed 728,000, further enhancing our leading position in the cord blood banking industry. The management team was able to successfully maintain steady operations in the reporting quarter, and our overall margin remained stable. Our 3 divisions continued their solid performance as they had in the previous 2 quarters. Guangdong once again led the growth of our business. Beijing held a series of promotions and marketing activities to reward clients for their continued support over the past 16 years. Zhejiang passed the routine inspection from National Health Commission, and their work was, again, recognized by the inspection team.

During the reporting quarter, the Beijing and Guangdong governments ruled out specific policies to support stem cell processing, storage and treatment experiments based on stem cell technology and applications.

We leverage the opportunity to promote the potential use of cord blood stem cells to our target clients in order to stay on track with our conversion rate.

Looking into our fourth quarter of fiscal 2019. We expect that there will be fewer babies born in Beijing and Zhejiang as compared to the prior year period. Meanwhile, the economy in China continues to trend up at a slower pace and uncertainties of global trade and industry regulation remain. Taking these factors into consideration, we will continue to stand ready to further adjust our marketing strategy whenever necessary. We remain committed to achieving our new subscriber target for fiscal 2019, which is between 85,000 and 90,000.

Looking ahead, we will remain vigilant on macroeconomic trends, market conditions, industry policies and their impact on the cord blood storage business. At the same time, we will stay agile. We will be ready to adjust our business in response to changes in the market and market demand. We will continue nurturing and penetrating existing domestic markets. We will also carefully explore business opportunities to expand and diversify our revenue stream.

This concludes my remarks regarding our fiscal 2019 third quarter results. Thank you for your ongoing support of GCBC.

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

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

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Good morning, everyone. Thank you for joining our call today. During the third quarter, revenue increased by approximately 4% year-over-year to CNY 254 million, and the increase was mainly attributed to growth from historic revenue, which partially offset by the year-over-year decrease in new subscribers.

Storage revenue for the third quarter increased by approximately 19% year-over-year to CNY 97 million. And our accumulated subscriber base exceeded 728,000 by the end of December 2018. Storage revenue now accounted for approximately 38% of the total revenues, up from 33% of last year. In spite of the cautious market behavior in the reporting quarter, we managed to recruit over 23,000 new subscribers, which represented a 2% decrease year-over-year, but 3% increase quarter-over-quarter, which is on track with our new subscriber target for the current fiscal year of 2019.

Consequently, processing and other revenue for the third quarter amounted to CNY 157 million. Tracking revenue growth. Third quarter gross profit increased by 4% year-over-year to nearly CNY 206 million. And gross margin improved slightly to 81%.

Sales and marketing expenses in the third quarter increased by more than 8% year-over-year to CNY 65 million. During the reporting quarter, we increased the sales force to more than 750 people, representing over 20% year-over-year increase in terms of headcount. We also posted and sponsored multiple conferences and exhibitions to promote industry advancement to our potential clients as well as the broader medical community pushing ourselves and marketing expenses to more than 25% of revenues.

General and administrative expenses for this quarter decreased by 21% year-over-year to CNY 45 million, largely due to the absence of share-based compensation expense. General and administrative expenses as a percentage of revenues was down to less than 18%.

Due to the absence of share-based compensation expense, operating income increased by 18% year-over-year to CNY 93 million despite higher sales and marketing spending in the third quarter. Operating margin improved to 36%. Operating income before depreciation and amortization and share-based compensation expense, which we refer to as non-GAAP operating income, was CNY 105 million. Non-GAAP operating margin was 41%. Depreciation and amortization expenses in this quarter remained at CNY 13 million.

Share-based compensation expense for the same quarter last year was approximately CNY 20 million, whereas, no such expense has been recorded since April 1, 2018.

In the third quarter, we recognized CNY 28 million in unrealized holding loss for equity securities as other expenses under the new accounting standard. Such mark-to-market loss was mainly attributable to our investment in Cordlife Group Limited. In the same quarter of last year, we recorded similar loss of CNY 3 million, but it was recorded as other comprehensive loss, which means it doesn't flow through the P&L.

As the increase in operating income was hit by the mark-to-market loss, net income attributable to the company's shareholders for the third quarter of fiscal 2019 was CNY 61 million. Net margin for the reporting quarter was 24%. Total number of shares issued and outstanding as of December 31, 2018, was 121.55 million. Basic and diluted earnings per ordinary share for the third quarter were CNY 0.51. These are just the highlights of our third quarter results. We're now happy to take any questions that you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Mike Schmitz at Jayhawk Capital.

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

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I have a couple kind of simple mechanical questions and then another follow-up if you allow me to. First question is, could you provide the kind of percentage breakdown by province for the new subscribers?

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

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Mike, for the third quarter, 64% of new subscribers were derived as from the Guangdong regions or from our Guangdong market, 16% from Beijing and the remaining from the Zhejiang market.

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Michael D. Schmitz, Jayhawk Capital Management, LLC - CFO and Chief Compliance Officer [4]

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All right. And then on the payment plan breakdown. Could you just give me a quick rough number for how many new subscribers are taking the full upfront payment plan versus the kind of payment processing fee and the pay storage fees separately?

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

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No problem. For the third quarter, approximately 55% of new subscribers elected the normal payment option. Approximately 38% of new subscribers elected the upfront payment option, also we call bullet payment option. And the remaining are from other payment method like installments and payment promotions.

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Michael D. Schmitz, Jayhawk Capital Management, LLC - CFO and Chief Compliance Officer [6]

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Okay, great. And then maybe I missed this, but are you guys providing any guidance yet for number of subscribers for the fiscal 2020 year?

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Albert Chen, Global Cord Blood Corporation - CFO & Director [7]

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Fiscal year 2020, we will provide the guidance in -- when we announce the fourth quarter results. The current guidance is for the current fiscal year only, and it is for the year ending March 31, 2019. And the new subscriber target is between 85,000 to 90,000, but this is only for the current fiscal year.

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Michael D. Schmitz, Jayhawk Capital Management, LLC - CFO and Chief Compliance Officer [8]

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Okay. And then -- I know we've kind of talk about this quite a bit or I do I think way. In terms of the Shandong province, you guys having 24% of the -- as we discussed, isn't really reflected anywhere in any of the financials, value-wise or earnings-wise. I guess, I would ask, again, that maybe we would consider another kind of non-GAAP measure in addition to your non-GAAP operating income, but to provide kind of another non-GAAP number that could include some of the Shandong operations that would help give investors a better sense of the true value that's being generated by the company?

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Albert Chen, Global Cord Blood Corporation - CFO & Director [9]

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Interesting, Mike. I think this is certainly very interesting propositions. And let me take this back and see what the teams think about it because this disclosure on the U.S. side, which requires Shandong to provide a U.S. GAAP numbers. And see whether -- I need to consult with them before we actually do such a thing, but it certainly is interesting proposition.

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Michael D. Schmitz, Jayhawk Capital Management, LLC - CFO and Chief Compliance Officer [10]

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Sure. And like I said, I mean, I'm talking about a non-GAAP number. So something that would be clearly labeled as not subject to U.S. GAAP standards. But -- and I'm sorry, I have one final question, I'll let you go. You've referenced the Cordlife Group Limited as kind of in a drag on earnings last couple of quarters because of the change in the accounting law. Am I correct that if that share price of that company were to go back up that would be an increase and a positive result to our -- to the earnings of the company?

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Albert Chen, Global Cord Blood Corporation - CFO & Director [11]

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I think one way or the other, as I mentioned in the earnings call, this is more or less a change in accounting presentation. In the prior years, the -- I'll say the mark-to-market impact was recognized in the other comprehensive sections of our payment of operations. And -- but because of the new accounting standards, the impact into flow through to P&L, but one way or the other. I mean, this is not a reflection of the actual performance of the companies and this is more an accounting presentation. I guess, many sophisticated investors, such as yourself, will certainly look beyond that.

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Michael D. Schmitz, Jayhawk Capital Management, LLC - CFO and Chief Compliance Officer [12]

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Great. My question actually was referring more to, like, it's not just a write -- included as it marks down, but it also goes the other ways of the valued increase that would be a positive -- coming to positive...

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Albert Chen, Global Cord Blood Corporation - CFO & Director [13]

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I'm certainly more than happy to see they certainly coming back up.

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Michael D. Schmitz, Jayhawk Capital Management, LLC - CFO and Chief Compliance Officer [14]

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But if it did though that would be recorded on the income statement in just the same way as just...

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Albert Chen, Global Cord Blood Corporation - CFO & Director [15]

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Yes, they're still nonoperational. Yes.

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Operator [16]

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Now over to the line of Jeff Neal at [Merrill Lynch].

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Jeff Neal, [17]

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My questions relate to the rather significant increase in commission to salespeople or representatives that you have out in the field that occurred during the quarter. Obviously, this is a pretty big month. Whether -- was there any one province in which this hiring of additional people was concentrated, first of all?

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Albert Chen, Global Cord Blood Corporation - CFO & Director [18]

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The expansion in sales force is more concentrated in both Beijing -- sorry, in both Guangdong as well as the Zhejiang province. It is -- it goes beyond just to replenish some of the losses that we had in the prior quarters. But you also reflect the fact that we want to -- in a challenging market, we don't want to scale back our marketing effort. And so we are actually extending our sales and marketing effort. As you recall in our CEO remarks early on this earnings call, we did highlight the fact that we are -- based on what we have seen the data sets currently available to us, we are expecting the number of newborns to come down, at least for the next couple of months. In light of that, we think that we should keep the -- keep our marketing effort. Actually, we have to turn up our marketing effort just to make sure that we are penetrating further and deeper into the market. So which is part of the reason why we're expanding our sales force? And while we -- as you know, we constantly adjust and rationalize our sales force. I think right now, we are kind of stabilizing at the current level. But if the market has made the turn in favorable returns, and we will not rule out the possibility that we will adjust the size of our sales force, again. But meanwhile, we are kind of between the 730 to 750 range.

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Jeff Neal, [19]

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And does that represent -- do you have these people in more locations? Or are you simply increasing the number of people per location? How -- what is the dispersion of the sales force in that context?

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Albert Chen, Global Cord Blood Corporation - CFO & Director [20]

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Actually, a little bit of both, Jeff. In hospital, which we have high conversion rate, we have increased number of sales force, but they are also being allocated on 5 different shifts. At the same time, we are covering more -- slightly more remote hospitals as well. So it's a little bit of both.

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Operator [21]

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We now go over to Cyrille Pichot at Altimeo.

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Cyrille Pichot, [22]

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This is just a question more about capital markets. Based on my understanding with -- by the discussion with Cathy Bai, especially, I understand that you would like to increase the liquidity and the shareholder basis of the stock. So based on that and in the current context, would you consider if, of course, this is legally possible, to get dual leasing of Global Cord Blood in Hong Kong or in China? Maybe in China, decision to compare versus the launch of the new tech board, which is not yet launched, but it's in the process of and potentially in few months now. You will have the possibility potentially to have a dual listing. So just my question is that would you consider that, if it's possible?

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Albert Chen, Global Cord Blood Corporation - CFO & Director [23]

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Thank you for the questions. I think in the context of where does the company should seek additional listing for the purpose of improving the potential as well as the liquidity of the company, I think to answer that question I think we are considering multiple options certainly having a more than one listing venue may help to bring in additional investor base. But at the same time, they are costs associated with that. So to answer questions at the current juncture, we are not considering seeking additional listing locations or having a few listing locations, but we did consider that proposal in the past. And we decided not to go along with it because of the cost associated. But we will not rule out the possibility that we may revisit the topic in the future if it deems beneficial to everyone.

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Operator [24]

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Before going on to the next question which is Kent McCartney at Jayhawk Capital (Operator Instructions)

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Kent Charles McCarthy, Jayhawk Capital Management, LLC - Founder, CEO, and President [25]

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Most of my questions have been answered. But is there any effort marketing wise to keep reading the industry to expand product offerings to the mother and any vertical expansion efforts?

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Albert Chen, Global Cord Blood Corporation - CFO & Director [26]

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Kent, excellent questions. There has been -- we are actually looking into that specific topic and see whether we can actually expand our revenue sources, both onshore and offshore actually. On one hand, is to expand the services along the line where our existing client base will be able to benefit from services that involve, for example, the well-being of the mother as well as the child is something that we look closely into. A lot of people ask me whether the company is interested in diagnostic services. The question is yes. We have look into it. If it makes a lot of commercial sense, well, it's something that we definitely consider.

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Operator [27]

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We now go to Joshua Raizin at Cedar Street Management.

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Joshua Raizin, Cedar Street Asset Management LLC - Research Analyst [28]

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You continue to have significant cash balances, which are throughout the metrics of the company on an earnings basis, which may limit some investor interests on their initial screen. How does the company think about this? And what are the plans for these large cash balances?

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Albert Chen, Global Cord Blood Corporation - CFO & Director [29]

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Thank you for the questions. As you know, starting from last year, the company has start giving out dividends. And we also want to maintain a steady dividend stream as possible -- as one of the way to return capital back to the investor. But at the same time, from -- in terms of the company long-term development, we retain part of the capital, in fact from day-to-day operations. We also retain capital for potential expansion need. And further to what just being -- further to Mr. McCarthy question a moment ago, we remain active in the space in the -- on the M&A front and potential collaboration front to see whether we can -- to see how we can best leverage our existing client base as well as our industrial expertise. So I asked the question early on that whether or not we want to look into other related services? The answer is yes, we are actively looking into that. And at the same time, we also want to potentially diversify our revenue streams by going offshore. So as you know, I mean, all the company revenues are now currently to divide this from the PRC market. And with the PRC regulations subject to review at the end of 2020, we believe that it is only prudent for the company to expand our revenue streams rather than just being 100% focused within China. So to answer question is as we -- part of the capital is retained for the purpose of expansion, we will not rule [out] the possibility of continuously returning capital back to the investor whether in the form of dividends or share repurchases. So that is what we are currently thinking about capital allocation.

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Operator [30]

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That was the question we have time for today. So Cathy, it's back to you for any closing comments at this stage.

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Cathy Bai, Global Cord Blood Corporation - VP of Corporate Finance [31]

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Thank you, Hugh. This concludes our earnings conference call for this quarter. Thank you very much for your participation and support. Have a great day. Hugh, you may now disconnect.

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Operator [32]

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Thank you. This now ends the call. Thank you all very much for attending. Your lines will be now disconnected.