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Global Cord Blood Corporation (CO) Q2 2021 Earnings Call Transcript

By Motley Fool Transcribers - Nov 25, 2020 at 12:00PM

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CO earnings call for the period ending September 30, 2020.

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Global Cord Blood Corporation ( CO -0.25% )
Q2 2021 Earnings Call
Nov 25, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Global Cord Blood Corporation's Earnings Conference Call for the Fiscal 2021 Second Quarter. [Operator Instructions] After which there will be a question-and-answer session. [Operator Instructions]

Now I would like to introduce Ms. Cathy Bai, Vice President of Corporate Finance to begin the presentation. Please Cathy Bai over to you.

Cathy Bai -- Vice President of Corporate Finance

Thank you, Sheen. Good morning, everyone. Welcome to our fiscal 2021 second 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 report of our fiscal 2021 second quarter financials given by our CFO, Mr. Albert Chen. Our management will be available to answer questions during the Q&A session. To give everyone a chance to ask questions, we'd appreciate if you could ask one question at a time. Today, on behalf of our CEO, Tina, I will read her prepared remarks. Let's begin our presentation.

Zheng Ting, Tina -- Chairperson, Chief Executive Officer, Director, and Chief Executive Officer of Beijing Division

Good morning, ladies and gentlemen. Welcome to our second quarter fiscal 2021 earnings conference call. During this important quarter, the COVID-19 pandemic and the ongoing impact on consumer sentiments continue to affect our operations.

As the management team continues to adjust its sales and marketing tactics based on the changes in the field, the group managed to recruit 17,643 new subscribers this quarter, down by 18.1% year-over-year and up by 2.4% quarter-over-quarter, in line with management's expectations. By September 30, 2020, our accumulated subscriber base expanded to over 867,000.

During the second quarter, there was a noticeable decline in newborn numbers across Beijing, Guangdong and Zhejiang. Although, the magnitude of such declines varies across this different regions. In addition, anti-pandemic measures tend to vary from region to region. At some hospitals still adopted stricter entry and access [Phonetic] policy, which hindered our ability to reach potential clients.

Meanwhile, due to the COVID-19 impact household tends to prioritize spending related to pandemic prevention over other value-added healthcare services, which further hindered our client conversion assets. We also believe that consumer remain cautious as the rate of economic recovery has varied across industries and regions in China. Together these factors continue to weigh on our business operations.

That being said, now that we are nine months into the pandemic, consumers are slowly adapting to the new normal, and the extent and magnitude of the pandemic shock on consumer behavior has begun to fail. As restructuring improved our sales activities and consumer experience is offline, we have also expanded our online marketing efforts to reach a broader pool of potential consumers and intend to continue improving the online experience for potential clients. We have noticed that our target consumers have been more willing to participate and engage in our online marketing activities, compared to the pre-COVID era.

Overall, the management team remains hopeful that we will reach our new subscriber target for full fiscal 2021 of between 62,000 and 67,000. Looking ahead, the current one license per region and no more than seven licenses policy will expire by the end of 2020. The management team will continue to closely communicate with various departments within the National Health Commission and prepare for multiple possible outcomes in China's cord blood banking industry. The management team will simultaneously continue to seek business development opportunities in healthcare industry with a goal of expanding our business and revenue channel.

This concludes my remarks regarding our second quarter fiscal 2021 financial results. Thank you for your support of Global Cord Blood Corporation. I will now turn the call over to our CFO, Mr. Albert Chen, who will address our second fiscal quarter financial performance.

Chen Bing Chuen, Albert -- Chief Financial Officer and Director

Good morning, everyone. Thank you for joining our call today. In the second quarter, revenues decreased by 9% year-over-year to RMB286 million, as the decline in new subscribers resulted in a decrease in revenues from processing fees and other services. Various challenges were still in place during the reporting quarter. However, we managed to overcome these difficulties and remain on track to achieve our annual targets.

In the second quarter, we recruited 17,643 new subscribers, representing a decrease of 18% year-over-year. Correspondingly, revenues generated from processing fees and other services decreased by 18% year-on-year to RMB164 million, which accounted for approximately 58% of total revenues, compared to 64% in the prior year period.

By the end of September 2020, our accumulated subscriber base exceeded 867,000. Accordingly, storage fees revenues for the second quarter increased by over 7% year-over-year to RMB121 million.

Gross profit in the second quarter decreased by 9% year-over-year to approximately RMB241 million. Gross margin decreased by 30 basis point to approximately 84%, as raw material costs continue to add pressure to the margin despite our cost saving efforts.

As we applied various measures to enhance cost efficiency and preserved our margins, operating income decreased by less than 4% year-over-year to RMB139 million and operating margin improved to almost 49% from 46% of last year.

Depreciation and amortization expenses were approximately RMB12 million, representing a slight decrease from the prior year period.

Non-GAAP operating income decreased by less than 4% year-over-year to approximately RMB151 million. While non-GAAP operating margin improved to 53% from 50% in the prior year period.

To cope up with the current situation, we selectively reduced the size and remuneration for our sales force, as well as our promotional activities to optimize efficiency. As a result, sales and marketing expenses decreased by 17% year-over-year or 2% quarter-over-quarter to RMB54 million.

Sales and marketing expenses as a percentage of revenues decreased to 19% from 21% in the prior year period.

General and administrative expenses decreased by 14% year-over-year to approximately RMB43 million, due to lower staff costs and provisions. General and administrative expenses as a percentage of revenues decreased to less than 15% from approximately 16% in the prior year period.

In the second quarter, we also recognized an increase of approximately RMB6 million in fair value of equity securities or more commonly known as mark-to-market gain, compared to a mark-to-market loss of RMB7 million in the prior year period. This past reporting quarter, we also received an approximately RMB1 million dividend income from our equity investments whereas no dividend income was recorded in the last year period.

As the recognition of mark-to-market gain and dividend income compensated for the decline in operating income. Income before tax for the second quarter increased by 8% year-over-year to RMB156 million.

Net income attributable to the company's shareholders increased by 9% year-over-year to RMB131 million. Net margin improved to 46%, as compared to 38% in the prior year period. Basic and diluted earnings per ordinary share for the reporting quarter RMB1.08 per share.

These are the highlights of our second quarter results. We are now happy to turn the floor for any questions.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Yes, we have the first question from Mr. Jeff Moeller [Phonetic] from Lone Star Funds. The floor is yours, sir.

Jeff Moeller -- Lone Star Funds -- Analyst

Hello. Thank you for taking my questions. I have several questions. The first is, can you share your new subscriber breakdown by region and payment options please?

Chen Bing Chuen, Albert -- Chief Financial Officer and Director

For the second quarter of fiscal 2021, in terms of new subscriber breakdown, about 69% of new subscribers come -- came from the Guangdong regions, approximately 20% came from the Zhejiang regions and the remaining came from the Beijing regions.

In terms of payment option breakdown, new subscribers, who elected normal payment option represent approximately about 28% of this quarter new subscribers. Bullet payment option subscribers' account for 42% of this quarter total and the remaining 28%, 29% came from basically installment options across different regions, which remain at a relatively high level, as compared to a year ago.

Jeff Moeller -- Lone Star Funds -- Analyst

Okay. Thank you. That's very helpful. My second question is, how do you feel about the current margins? What levels do you believe they are sustainable?

Chen Bing Chuen, Albert -- Chief Financial Officer and Director

This is actually a very good question. In order to cope with the current situations, on one hand we have some lingering effect from the recent pandemic, which to a certain extent affected our access to potential clients. And then at the same time, we are looking at the market with falling number of births. So I guess, to maintain our cost efficiency, while at the same time trying to control our costs in this troubled times, we have done a lot of -- we are put in a lot of extra cost measures in place.

But with that being said, you notice that in terms of absolute amount, for example, our general and administrative expenses is now standing at around RMB43 million per quarter, as compared to, for example, in the first quarter of this year, which is only about RMB44.5 million and these are relatively low level and we are trying to keep it that way. And in terms of the sales and marketing expenses as we highlighted during the de-briefing, it now only accounted for less than 20% of our revenue. This is probably one of the lowest level that we have seen in the past couple of years.

Obviously, management is on a ongoing crusade to enhance the company operating efficiency and cost effectiveness. But I am -- but I think that if we -- if things gradually recovered and as we are starting to tune up our marketing and promotion activities as we restart our hiring engine again, I will not be surprised to see that the SG&A start going back up again. So I guess, the current margin level, I think, the current cost structure is already at a relatively low level. We try to suppress as much as we can. But if we go and tune in up the activities going forward, I will not be surprised to see the cost will start to go back up again. I think this is probably the best way to answer your questions.

Jeff Moeller -- Lone Star Funds -- Analyst

Okay. Understood. That's helpful. Lastly, do you have any update regarding the one license per region?

Chen Bing Chuen, Albert -- Chief Financial Officer and Director

As many of you is aware, the one license per region policy is expiring at the end of the current calendar year. We are keeping -- we are maintaining a ongoing dialogue with all the industry experts and business intelligence in hope to gain -- in hope to gauge a better understanding about with respect to the policy direction going forward.

But unfortunately, I think, there is nothing to report at this stage. But obviously, if there is any groundbreaking development with respect to policy direction, we will be the first one to put out a press release. We'll be among the first few to put out the press release with respect to that. But we are certainly following up on our end with respect to any potential leads and hopefully to get the upper hand situations. But with that being said, we are right now in a -- I guess, we are preparing ourselves for multiple possible scenarios at this stage.

Operator

Okay. Thank you very much. Now we have the next person Mr. Cyrille Pichot from Altimeo Asset Management. The floor is yours, sir.

Cyrille Pichot -- Altimeo Asset Management -- Analyst

Yes. Thank you. Thank you for the question. So congrats on the results. I have quite simple question. Is it a fair assumption to say that the Board of Director of Global Cord Blood is waiting to get big clarity, you know, on the -- all the regulation stuff in the cord blood banking industry before taking any decision regarding capital deployment, like potential dividend, potential share repurchase, potential acquisition. So because you are -- I mean, you are doing very well. You are accumulating cash every quarter. You have at least $900 million cash in your balance sheet. So of course, I think, that all your shareholders are waiting to see what you will do with all these cash. So can you just elaborate a little bit? Thank you.

Chen Bing Chuen, Albert -- Chief Financial Officer and Director

Thank you for the questions. I think the capital deployment decisions, as I previously -- as I mentioned previously in other conference calls, has to be in line with the company and shareholders' interest as a whole. But we have to take into account the future strategic development direction of the company, as well and whether or not there are opportunities available. Obviously, the competitive landscape in China is subject to change depending on the policy outcome, depending on the revisions on the policies. So I think capital deployment would definitely need to take that into considerations.

But I also mentioned in my other earnings call -- on my prior earnings call, I said, the company is looking for opportunity to diversify some of its operation of risk; such as the single country risk or single market risk, I should say, and the single business risk. So single line up business mainly. So I think, whether or not we're going to adopt other capital deployment decisions in the future beyond 2020. Really depends on what directions we are -- we will be choosing to head toward.

But with that being said, we will always be considering what is best for the company and shareholders as a whole and how to take the company forward. For some of you who have been with the company for some time, this ongoing policy renewal, which happens once every five years is definitely no fun. So to the extent possible, I mean, we should really look into how we can expand our service portfolio and I -- to -- and one, to a certain extent is trying to mitigate any potential future impact as a result potential policy changes. And also to better utilize ourselves with money resources that we have rather than just selling one product. So I hope this answer questions.

Cyrille Pichot -- Altimeo Asset Management -- Analyst

Yes. But, I mean, just to clarify, can we expect that when you will get some clarity? I mean, we don't know when, it's -- maybe it's going to be beginning of 2021, maybe it's going to be mid-2021. We don't know the date. But when you will get some clarity about future regulation? Can we expect as a shareholder that the Board will take some decision like acquisition, like doing some stuff and that is my question, but I guess the answer is, yes, probably, I hope so.

Chen Bing Chuen, Albert -- Chief Financial Officer and Director

Thank you.

Operator

Thank you very much. [Operator Instructions] I think, there would [Phonetic] be no question at this time. I would like to turn the call back to Ms. Cathy.

Cathy Bai -- Vice President of Corporate Finance

Thank you, Sheen. And thank you, everyone. This concludes our earnings conference call for the fiscal 2021 second quarter. Thank you all very much for your participation and support. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Cathy Bai -- Vice President of Corporate Finance

Zheng Ting, Tina -- Chairperson, Chief Executive Officer, Director, and Chief Executive Officer of Beijing Division

Chen Bing Chuen, Albert -- Chief Financial Officer and Director

Jeff Moeller -- Lone Star Funds -- Analyst

Cyrille Pichot -- Altimeo Asset Management -- Analyst

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