Global Cord Blood Corporation (CO) Q2 2022 Earnings Call Transcript

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Global Cord Blood Corporation (CO)
Q2 2022 Earnings Call
Nov 26, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome everyone to Global Cord Blood Corporation's Earnings Conference Call for the Fiscal Year 2022 Second Quarter. [Operator Instructions] After which, there will be a question-and-answer session. [Operator Instructions]

Now I would like to introduce Madam, Cathy Bai, VP of Corporate Finance to begin the presentation. Madam, please go ahead.

Cathy Bai -- Vice President of Corporate Finance

Thank you, Caulfield. Good morning, everyone. Welcome to our fiscal 2022 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 2022 second quarter financials given by our CFO, Mr. Albert Chen. Our management will be available to answer questions during the QA session. We understand investors and shareholders may have various questions to ask. 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 the presentation.

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

Good morning, everyone, and welcome to our second quarter fiscal 2022 earnings conference call. During the reporting quarter, the Group managed to recruit 19,066 new subscribers, up 8% year-over-year as a result of the relatively low base in the previous year period and down 3% quarter-over-quarter, in line with management's expectation.

At the end of September 2021, our accumulated subscriber base surpassed 938,000. During the second quarter, although business environment continue to improve long-standing challenges remained. As a result of the effective COVID-19 pandemic control measures implemented in our operating markets, potential clients were less concerned about hospital admissions for child birth and pandemic impact on our business were gradually alleviated.

However, as economic activities resumed, occasional local outbreaks forced certain hospitals to maintain strict access policies. thereby, still hindering our sales activities in hospital channels. In addition, the overall number of women of childbearing age and newborns continue to decline. Given its intractable nature, we do not expect this demographic trend to reverse in the near future. Compared to the previous quarter, there have not been many observable industry-related policies or changes that affected the Group's business in the second quarter.

Regarding the three child policy, various regulatory bodies in China rolled out series to our follow up rules and measures aimed at reducing the cost of childbearing and raising children. Such as expansion of child care services, rectification of off-campus education and training, and curbing of health crisis in select school districts among others. Despite these efforts, current contributions of a family's third child have yet to make a substantially notable difference to the Group's new subscribers.

As discussed last quarter, concerns over cord blood banking licensing regulations and biosecurity laws have yet to subside. The management team continues to closely monitor any new development related to these policies and potential industrywide implications that may be announced.

With this in mind, the management team maintains the guideline for the fiscal 2022 new subscriber target, which is expected to fall within the range of 72,000 to 75,000. Facing regulatory and market uncertainties, the management team will continue to focus on the company's long-term development, maintain active communication with the relevant regulatory agencies, expand marketing and sales channels and carry out extensive work as we dive deep into new business development opportunities.

This concludes my remarks regarding our fiscal 2022 second quarter results. Thank you for your ongoing support of Global Cord Blood Corporation.

Now, I will turn the call over to our CFO, Mr. Albert Chen, to discuss our second fiscal quarter financial performance. Mr. Chen. Please go ahead.

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

Good morning, everyone. Thank you for joining our call today.

In the second quarter, revenues increased by 10% year-over-year to approximately RMB314 million, driven by the increase in revenue from both processing fees and storage fees. During the second quarter, the Group recruited more than 19,000 new subscribers, representing an increase of 8% year-over-year, partially due to the low comparable base in the same quarter of last year, the improved business environment and also our sales efforts during these challenging times.

As a result, revenue generated from processing fees and other services increased by approximately 10% year-over-year to RMB180 million, which accounted for 58% of total revenues. By the end of September 2021, our accumulated subscriber base expanded to over 938,000 and storage fee revenues for the same quarter increased by 10% year-over-year to approximately RMB134 million.

Gross profit in the reporting quarter increased by 11% to approximately RMB268 million and gross margin improved to 85% from 84% of last year. Economy of scale continue to drive margin improvement, but partially offset by higher labor costs.

In the second quarter, operating income increased by 15% year-over-year to approximately RMB161 million, mainly due to the topline growth coupled with a relatively moderate increase in SG&A expenses.

As a result, operating margin improved to 51% from 49% of last year. Depreciation and amortization expenses for the reporting quarter were RMB12 million, similar to last year. Non-GAAP operating income increased by 14% year-over-year to RMB173 million. And non-GAAP operating margin improved to 55% from 53% last year.

Sales and marketing expenses in the second quarter increased by 5% year-over-year to RMB57 million, primarily attributable to an increase in labor costs. But at the same time, we continue to scale down marketing and promotional activities. Sales and marketing expenses as a percentage of revenue decreased to 18% from 19% in the prior year period.

General and administrative expenses increased to approximately RMB45 million from RMB43 million of last year, mainly due to the increase in labor costs. General and administrative expenses as a percentage of revenue decreased to 14% from 15% of last year.

In the second quarter, the company recognized a decrease of approximately RMB13 million in fair value of equity securities or mark-to-market loss, compared to approximately RMB6 million of mark-to-market gains in the prior-year period. In addition, during the reporting quarter, we did not record any dividend income from equity investments.

As the increase in operating income were offset by mark-to-market loss of equity securities, income before income tax for the second quarter stood at RMB156 million. Income tax expense for this quarter was RMB28 million. Net income attributable to the company's shareholders decreased by 4% year-over-year to RMB126 million. Basic and diluted earnings per ordinary share for the reporting quarter was RMB1.03.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] So we have one first question from Mr. Jeff Oliver from Star Funds. Sir, please go ahead.

Jeff Oliver -- Star Funds -- Analyst

Hello, thank you for taking my questions. Can you discuss the geographical breakdown of your new subscribers? And also, could you provide a payment method breakdown as well? Thank you.

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

Thank you for the questions. For the second quarter new subscriber breakdown by geographical regions is as follows: Beijing region represent approximately 12% of our total new subscribers recorded in the second quarter; Guangdong represented approximately 66% of our total new subscribers recorded in the second quarter; and the remaining 21% new subscribers derived from the Zhejiang province.

In terms of payment methods breakdown, approximately 30% of new subscribers recorded during the second quarter elects the normal payment scheme or more commonly referred to as option one of our payment options -- of our payment methods. Approximately 40% of our new subscribers signed up during the second quarter elected upfront payment or more commonly known as option two. And the remaining 30% our subscribers, who elected instalment payment plan, either in the form of three years or in the form of 10-years.

Operator

Thank you, sir. We have no other questions. [Operator Instructions] So we have next question from Mr. Bill Jones from Panamas Capital. Sir, please go ahead.

Sam John -- Panamas Capital -- Analyst

Hi. Thank you for taking the question. This is Sam John [Phonetic]. Can you talk about the timeline, it might take for the special committee to evaluate the offer that was made nine months ago, that's question number one. Number two, how do you think about the potential for a stock buyback? What are the returns you might be able to achieve on deploying a cash for stock buyback as opposed to maybe capex? And then the third question is, do you have any capex estimates or a budget for next year? Thank you.

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

Thank you for the questions. As you all aware, the special committee is formed to evaluate the non-binding proposal offered by Alternate Ocean to the company. And I believe that the independent or special committee is taking the lead in evaluating the offer. Unfortunately, I'm not in the position to discuss the details regarding the latest discussions. But I'm sure that the special committee will try their very best to evaluate, as well as come up with the appropriate recommended course of actions for the company with the best interest of the shareholders and the company as a whole in their mind.

In terms of the company capital allocation plan, we're constantly exploring different capital allocation decisions. We have done obviously share repurchase in the past, we have also dividend out -- part of our income in the past as well. And as for the time being, we are also looking into other new opportunities that can potentially diversify the company income streams and to a certain extent, mitigate some of our geographical concentration risk.

With that being said, if the Board decided to relaunch a share repurchase program, or announce a dividend decisions or even a potential acquisition in the future, we would definitely make those decisions known to the market through our announcement and publications.

In terms of capital expenditure for time being, routine capital expenditure as you can see from our press releases, for the past six months, our capital expenditure is approximately roughly at RMB6 million and those capital expenditure were spent on the procurement on the equipment's in the absence of building out a new facility, routine capital expenditure will mainly consist of the purchase of storage equipment and the replacement of laboratory equipment.

But with that being said, we are keeping a close eye in terms of our capacity utilization and if there's a need for further expansion in our storage facilities, we will definitely do so. However, currently we don't have an immediate plan to expand our capacity as of this point in time. But obviously, the capital expenditure plan will change, if the new subscriber numbers are picked up significantly, and we certainly hope that will be the case.

Operator

Thank you, sir. We have no other questions. [Operator Instructions]. We have another question from Mr. Sam John from Panamas Capital. Sir, please go ahead.

Sam John -- Panamas Capital -- Analyst

Thank you. As a follow up, what do you estimate your current capacity utilization is?

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

For our Beijing facilities, the current capacity utilization rate is approximately 70%. For our Guangdong facilities is roughly similar, around between 65% to 70%. Zhejiang facilities probably has the lowest in terms of utilization rate, you're looking at probably less than 25%.

Operator

Thank you, sir. We have no other questions. Back to you for the conclusion.

Cathy Bai -- Vice President of Corporate Finance

Thank you, Caulfield. At this point, there appears to be no more questions. So this concludes our earnings conference call for the fiscal 2022 second quarter. Thank you all very much for your participation and ongoing support. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 22 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 Oliver -- Star Funds -- Analyst

Sam John -- Panamas Capital -- Analyst

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