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Edited Transcript of CO earnings conference call or presentation 28-Aug-19 12:00pm GMT

Q1 2020 Global Cord Blood Corp Earnings Call

Central Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Global Cord Blood Corp earnings conference call or presentation Wednesday, August 28, 2019 at 12:00:00pm 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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* Chun R. Ding

CRCM Venture Capital - Managing Partner

* Jonathan P. Brodsky

Cedar Street Asset Management LLC - Portfolio Manager

* 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 first quarter. (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, Anna. Good morning, everyone. Welcome to our fiscal 2020 first 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 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 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 first 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 will read her prepared remarks. Let's begin the presentation.

Good morning, ladies and gentlemen. Welcome to our fiscal 2020 first quarter earnings conference call. During the first quarter of 2020, the number of newborns in China was similar to that of the prior year period. Consumer sentiment also remained cautious under the pressure of a slower economic growth in China as well as the U.S.-China trade tensions. Therefore, it remained challenging to convert a prospect into a client.

Despite the unfavorable conditions and taking into consideration the short-term impact of the processing fee adjustment implemented in April, we managed to recruit 20,815 new subscribers in the reporting quarter, in line with our expectations. Guangdong remained the key driver of the growth. By the end of the first fiscal quarter, our accumulated subscriber base had surpassed 770,000, further enhancing our leading position in the global cord blood banking industry.

However, as we head towards a period of unprecedented macroeconomic uncertainty, compounded by the potential regulatory changes in China for the cord blood banking industry, we will closely monitor the macroeconomic impact on consumer demand, especially the related preventive health care services. We must also stay alert on any new regulatory developments in our operating markets and be ready to further adjust our sales and marketing strategy in various potential scenarios.

Meanwhile, for the long-term benefit of the company and our shareholders, we continue to reiterate the need to expand our revenue source and diversify our risk profile. In addition to expanding our current business, we will also seek future development opportunities through acquisition in the health care industry and other compelling options.

This concludes my remarks regarding our fiscal 2020 first quarter results. Thank you for your ongoing support of Global Cord Blood. I will now turn the call over to our CFO, Mr. Albert Chen, to review our first 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.

In the first quarter, revenues increased by approximately 17% year-over-year to CNY 273 million. Top line growth was mainly driven by the increase in processing revenue as the new processing fee was put in place in April of this year.

In the first quarter, we managed to recruit 20,815 new subscribers despite pressure from an upward price adjustment of the processing fee as well as a generally weaker consumer-spending environment. Consequently, first quarter processing revenue increased by 17% to CNY 168 million. And our Guangdong division remained the core driver in our business. Our accumulated subscriber base increased to over 770,000 at the end of June. As a result, first quarter storage revenue increased by 17% year-over-year to CNY 106 million. Storage revenue now accounted for approximately 39% of total revenue, which was a similar percentage to the prior year period.

First quarter gross profit increased by 19% year-over-year to CNY 228 million. Gross margin increased to 83% from 82% of last year as the increased processing fee exceeded our increase in direct costs, such as raw materials and collection costs. As gross profit improvement was partially offset by the increase in operating expenses, operating income increased by 18% year-over-year to CNY 112 million. Depreciation and amortization expenses in the first quarter were CNY 12 million compared to CNY 13 million last year. Non-GAAP operating income increased by 15% year-over-year to CNY 125 million.

In the reporting quarter, sales and marketing expenses were CNY 61 million compared to CNY 51 million last year. Taking into account the upward adjustment of the processing fee and the lukewarm consumer sentiment, we proactively accelerated our sales and marketing activities as well as our sales force recruitment. Sales and marketing expenses as a percentage of revenues remained at 22%, which was similar to the prior year period.

General and administrative expenses for the first quarter totaled CNY 50 million compared to CNY 41 million last year. The difference was mainly a result of higher administrative expenses, staff costs, legal and professional fees. General and administrative expenses as a percentage of revenues remain at 18%, again, similar to last year.

In the first quarter, an increase in fair value of equity securities, or more commonly known as mark-to-market gain, of CNY 10 million was recognized while a decrease in fair value of equity securities of CNY 9 million was recorded last year. The changes were mainly attributable to the company investment in Cordlife. As a result of the increase in operating income and the increase in fair value of equity securities, income before income tax for the first quarter increased by 42% year-over-year to CNY 129 million.

Net income attributable to the company shareholders for the first quarter increased by 47% to CNY 108 million. Net margin for the reporting quarter improved to 40% from 31% last year. Basic and diluted earnings per ordinary share for the first quarter increased to CNY 0.89 compared to CNY 0.61 over the prior year period.

These are the highlights of our first quarter results. We are now happy to take any questions concerning our latest financial results and our recent operational 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 Chun Ding from CRCM.

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Chun R. Ding, CRCM Venture Capital - Managing Partner [2]

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First of all, the numbers looks good despite the difficult environment. My question is only one thing, which is, with our stock price way below the cash value of $4.60, why are we going to acquire other business? Can we buy back shares or pay dividend at this level? It's -- there's nothing out there that's as cheap as we are.

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

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Thank you for your questions. Appreciate your comment regarding the operational achievement. Allow me to say that this particular first quarter has been challenging. And at the same time, we are also taking a relatively cautious view regarding the near term outlook of our business. That's also because of the macro uncertainties, I should say, with respect to the China economy as well as the -- all the negative headlines. But with that being said, I trust that you have read our CEO transcripts, and as pointed out in our previous earnings calls, we believe that it is important to take a prudent approach in this market environment, and at the same time, we should continue to look for opportunities regarding how to diversify our risk, and at the same time, is to expand our revenue streams as well.

Regarding the share price, I know that the share price has been relatively weak recently. That is a -- I think it's a combination of multiple factors, including the uncertainty that we're currently facing as well as the, I'll say, the potential -- let me rephrase, the expirations of the one license per region policy as well. So I think there are multiple factors that are actually affecting us, and hopefully, we can cruise through this troubled waters.

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Operator [4]

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Your next question comes from Mike Schmitz from Jayhawk Capital.

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Michael D. Schmitz, Jayhawk Capital Management, LLC - CFO and Chief Compliance Officer [5]

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Albert, could you -- I believe you discussed this on the last quarterly call as well slightly. But could you describe in more detail some of the reasons why the Board decided not to pay a dividend? And in what way that was in the best interest of all shareholders?

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Albert Chen, Global Cord Blood Corporation - CFO & Director [6]

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Again, thank you for the questions. I think in terms of the capital deployment decisions, I think the Board has taken into -- multiple factors into account. On one hand is the pending expirations of the existing licensing regimes, and at the same time, is the company future growth and the ability to expand our services to go beyond just purely cord blood banking within one single market. So I think it's multiple factors that we have to take into account, and that's why no dividend was recommended in the prior quarter.

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Operator [7]

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Once again, Mike, do you have any follow-up questions?

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

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Yes, I was just asking if there was a certain amount of cash that you need for those activities that above which, you could begin paying dividends again.

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

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That really depends on the situations and the opportunities that we explore. So it's actually hard to put a hard figure in that. It's hard to put a particular hard figures as a threshold.

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Operator [10]

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(Operator Instructions) Your next question is from Jonathan from Cedar Street.

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Jonathan P. Brodsky, Cedar Street Asset Management LLC - Portfolio Manager [11]

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Albert, can you extrapolate a little bit more on the revision to the licensing regime, the process by which you understand that development to be occurring and the time line for it, please?

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Albert Chen, Global Cord Blood Corporation - CFO & Director [12]

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Thank you for the questions. As you recall from our prior filings, the cord blood banking industry has a licensing regime in China. In order to provide the umbilical cord blood stem cell storage services, one will require to possess a license issued by the government authorities. And also pursuant to that policy is the one license per region policy. The original policy was scheduled, I think, was meant to expire in 2010. And I think at the beginning of 2011, the authorities has extended that policy from -- policy deadline from 2010 to 2015 and remain one license per region no more than 7 licenses. And I think before the end of 2015, the authorities once again extended the policy deadline from 2015 to 2020. Again, we remained to be one license per region and no more than 7 licenses. So -- and other interesting aspect is that the -- with the existing licensing regimes coming to an expiration at the end of next year, there is always a possibility that the licensing regime may change. Because in China, right now, there are a total of 7 umbilical cord blood banking licenses. But technically, if the authorities follow one license per region, they can issue up to 31 licenses because there are many other parts of China where cord blood banking license simply does not exist. So as a result, every time when there is a potential change in policies, there's -- it always brings uncertainties. While we are continuous -- while we are continuously monitoring the situations, we are not at the present time getting any clear indications. So fair to say that the policy may change at the end of 2020. So I think this is one of the uncertainty that we're currently facing.

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Operator [13]

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(Operator Instructions) You have a follow-up question from Mike from Jayhawk Capital.

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

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Albert, specially since no one else has asked about this. Could you please provide an update on the work the special committee has done, if any, on the proposed merger with Cordlife? What have they done since they haven't rejected the deal but they don't appear to have hired any advisers to help them evaluate the deal? Could you please comment on that?

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

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Again, Mike, thank you for the questions. I think regarding the work of the special committees, I think this is more related or at least it's definitely within the purview of the special committee. So I don't have the liberty to comment upon. But I guess that it is fair to say that even at this stage, there is no certainty that a deal will happen or whether a deal will actually happen or not. So -- however, I mean, upon the special committee instructions, we will definitely publish the relevant press release and update the market regarding the Cordlife proposed offer.

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Operator [16]

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Once again, since there are no more questions at this point, I will now turn the call back to Ms. Cathy Bai. Please go ahead, Cathy.

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Cathy Bai, Global Cord Blood Corporation - VP of Corporate Finance [17]

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Thank you, Anna. This concludes our earnings conference call for the fiscal 2020 first quarter. Thank you all very much for your participation and ongoing support. Have a great day. Anna, you may not -- now disconnect.

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Operator [18]

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Thank you. Ladies and gentlemen, this concludes our earnings conference call for the fiscal 2020 first quarter. Thank you all for your participation and ongoing support. Have a great day. You may all now disconnect.