China Cord Blood Corporation (CO) Q4 2016 Results - Earnings Call Transcript

| About: China Cord (CO)

China Cord Blood Corporation (NYSE:CO)

Q4 2016 Results Earnings Conference Call

June 15, 2016 8:00 a.m. ET

Executives

Kathy Bian – Vice President-Corporate Finance

Albert Chen – Chief Financial Officer

Analysts

Scott Henry - ROTH Capital

Kent McCarthy - Jayhawk Capital

Operator

Welcome everyone to the China Cord Blood Corporation’s Earnings Conference Call for the Fourth Quarter and Full Year of Fiscal 2016. All participants’ lines will be placed on mute during the presentation, after which there will be a Q&A session.

Now, I would like to introduce Ms. Kathy Bian, VP of Corporate Finance to begin the presentation.

Kathy Bian

Good morning, everyone. Welcome to our fourth quarter and full year of fiscal 2016 earnings conference call. A press release discussing our financial results has already been published and a copy is available on our company’s Web site. 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 this 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 and full year of fiscal 2016 financials given by our CFO, Mr. Albert Chen. Our management will be available to answer questions during the Q&A session.

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

Good morning, ladies and gentlemen. Welcome to our fourth quarter fiscal 2016 earnings conference call. The remaining impact from the tail end of the Year of the Sheep and the Chinese New Year holiday in the fiscal fourth quarter resulted in an ongoing contraction of number of newborn babies compared to the prior year period. Despite such challenging conditions, our results were generally in line with our outlook throughout the fiscal 2016 and we were able to record 14,472 new subscribers in the reporting period. Resulting in the group accumulated subscriber base surpassing half million mark to 504,268 subscribers as of March 31, 2016.

In the reporting quarter, our revenue mix in terms of regional contribution remained stable. The Guangdong market remained our largest contributor in terms of new subscriber number along with a noticeable improving trend from our Beijing region. We also made steady progress in the Zhejiang market as our growing team gradually expanded its hospital network and continued to push for higher rates of client conversion and we didn’t experience significant changes to our client payment mix.

As we look ahead to the coming fiscal year, management expects the number of newborns to recover from the low levels experienced during the Year of the Sheep. However, we expect a slowing economy to dampen demand for high end medical services. Meanwhile we believe abolishment of the one child policy is a positive factor to foster economic growth in China and to support the development of our industry in the long run.

However, it will take time for the group to attain meaningful traction due to the end of this policy. Factoring this into account, we expect the number of newborn subscribers for the group to reach between 65,000 to 68,000 for fiscal 2017. Our near-term goals include working diligently in a variety of areas to push for higher client conversion rates, increase and diversify our marketing campaigns to heighten cord blood banking awareness and tightening our cost structure. We will continue to identify new strategic cooperation opportunities to strengthen our overall competitiveness and safeguard our leading position in the industry.

This concludes my remarks regarding our fourth quarter results. I would like to thank you for your ongoing support to CCBC. I will now turn the call over to our CFO, Mr. Albert Chen, to review the fourth quarter financial performance in greater detail.

Albert Chen

Good morning, everyone. Thank you for joining our call today. As discussed in the CEO remarks, our fourth quarter results were impacted by both the tail end of the Year of the Sheep and seasonal factors related to the Chinese New Year holiday.

Despite the drop in the number of newborn babies, we managed to add approximately 14,500 new subscribers in the fourth quarter compared to 15,000 or close to 16,000 new subscribers in the same period of last year. Revenue in the fourth quarter of fiscal 2016 totaled to RMB157 million compared to RMB163 million in the prior year period.

Due to our enlarged total subscriber base, revenue generated from storage fees increased to RMB64 million in the reporting quarter, up approximately 16% as compared to RMB55 million of last year. By the end of March 2016, the group accumulated subscriber base reached 504,268. Storage fees accounted for 41% of total revenues, up from 34% in the prior year period. Revenues generated from processing fees in the fourth quarter were RMB93 million compared to RMB108 million in the prior year period as a result of the decrease in new subscribers signed up.

Revenues from processing fees now accounted for approximately 59% of total revenues as compared to 66% of last year. Gross profit for the fourth quarter of fiscal 2016 was RMB122 million compared to RMB129 million in the prior year period. The change was primarily due to the decline in new subscribers, nonetheless we reported a gross margin of 78% similar to the 79% in the prior year period.

In the fourth quarter, the company incurred sales and marketing expenses of approximately RMB37 million, which was in line with the sales and marketing expenses incurred in the first three quarters of fiscal 2016 but approximately RMB2 million higher as compared to the same period of last year. We continue to deploy resources on the sales and marketing front to boos awareness and attract new subscribers despite the seasonally slower fourth quarter.

As a percentage of revenues, sales and marketing expenses were 24% as compared to 21% in the prior year period. General and administrative expenses for the fourth quarter stood at RMB43 million, similar to the third quarter of fiscal 2016 but approximately RMB2 million higher as compared to the same period of last year. As a percentage of revenue, general and administrative expenses were 27% compared to 25% in the prior year period.

Operating income for the reporting quarter was RMB40 million compared to RMB50 million in the prior year period due to decrease in the gross profit and slight increase in operating expenses. Operating margin in the current quarter was approximately 25% as compared to 30% of last year. Operating income before depreciation, amortization and share-based compensation expenses was RMB67 million compared to RMB77 million in the prior year period. Depreciation and amortization expenses for the fourth quarter were RMB12 million compared to RMB13 million in the prior year period.

Share-based compensation expense was RMB15 million as compared to RMB14 million of last year and the increase in share-based compensation amount was mainly due to the depreciation in RMB against the U.S. dollar. Operating income before depreciation and amortization and share-based compensation margin in the fourth quarter remained robust at approximately 43%. Interest expense in the reporting quarter was RMB28 million compared to RMB25 million of last year. The increase was due to the compounding interest effect of the convertible notes and the translation difference which arose from the depreciation of RMB against the U.S. dollar.

Fourth quarter income before income tax amounted to approximately RMB17 million compared to RMB29 million of last year. Net income attributable to the company's shareholder for the fourth quarter of fiscal 2016 was approximately RMB8 million. Basic and diluted earnings per share for the fourth quarter were RMB0.18. In terms of cash flows, net cash provided by operating activities for the fourth quarter of fiscal 2016 amounted to approximately RMB139 million as a significant portion of our new subscriber picked at the upfront payment options. This kind of wraps up my financial highlights with respect to the results for the fourth quarter of fiscal 2016. We are now happy to turn to the floor for any questions.

Kathy Bian

Operator, we are now ready to take the questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question and it comes from the line of Scott Henry from ROTH Capital. Please go ahead, your line is open.

Scott Henry

Just a couple of questions. First, could you give color as to the mix of the subscriber shares between Beijing, Guangdong and Zhejiang?

Albert Chen

For the fourth quarter of fiscal 2016, new subscriber coming from Beijing account for approximately 29% of the total new subscribers, and new subscribers coming from Guangdong province accounted for approximately 58% of the total new subscribers and the remaining 14% came from Zhejiang.

Scott Henry

Okay. Great. And shifting gears just to the -- what sort of tax rate should we expect for 2017?

Albert Chen

Well, I mean both the Beijing divisions, as you have noted that both the Beijing and Guangdong divisions are in possession of the higher [indiscernible] to launch enterprise preferential tax treatment, so on average you are looking at approximately from the operations, subsidiaries levels is about 15%. And because some of the offshore expenses aren't tax deductible, so if you are looking at it from the operating line, I mean excluding all these -- the share-based compensation expenses as well as the finance cost, you are mainly looking at about close to about 20%.

Scott Henry

Okay. So we should think about 20%, sounds like...

Albert Chen

It does [indiscernible] 20% using as a benchmark. Again the operating income but excluding offshore expenses such as, for example, share-based expenses which is not tax deductible.

Scott Henry

Okay. And final question. Some of the expense items were a little bit higher in fourth quarter than the rest of the year as a percentage of sales. Would you expect Q4 to be more reflective of what we should see in 2017 or should it look more like the rest of the year.

Albert Chen

I think from -- let me break this down for you in such a manner. I mean as you know, fourth quarter is a seasonally weaker quarter through our fiscal year. And as the volume comes down, you see a reduction in revenues. But some of the costs, including for example, sales and marketing expenses and general and administrative expenses, I think you can use the fourth quarter as a pretty good point of reference. You notice that for example the sales and marketing expenses in the fourth quarter is not coming down. And it actually is a combination of two factors.

First of all, we added additional about 3% to 4% in terms of headcount in the fourth quarter as we continue to [map out] [ph] our network and also replenish and also beef up our sales and marketing forces to maintain our market presence. So we actually increased hiring in the fourth quarter and at the same time, we have not backed down from the promotion and marketing activities at all. So we are keeping the market [indiscernible] and also keeping our service available and also keeping people aware about brand as well. So as a result, I think the fourth quarter sales and marketing expenses should be a good point of reference but not as a percentage of revenues. But right now at least you will be looking into projecting into the first and second quarter, I think the sales and marketing expenses should, the fourth quarter should be a very good reference point.

Now in addition for the general and administrative expenses, it actually don’t vary too much with the top line. So a lot of these increases had related to, for example, higher fees and as a result basically higher cost of conducting business in China. So in terms of the absolute amount, the fourth quarter should be a good point of reference. But as pointed out in our CEO remarks, we do anticipate a moderate level of volume recovery in the fiscal 2017. So I think the weakness, I will say the not so encouraging result in the fourth quarter should be a temporary and seasonally issue only.

Operator

[Operator Instructions] Our next question comes from the line of Kent McCarthy from Jayhawk Capital. Please go ahead. Your line is open.

Kent McCarthy

Couple of questions. One is, for the year, you got a dividend of about 7 million from Guangdong versus maybe 1, 2 the prior years. Is Guangdong starting to grow pretty rapidly or am I reading something wrong?

Albert Chen

The dividend policy or the operation as you know, we do not actively directly participate in the Guangdong operations. And as a result of that, it's hard to determine whether they have managed to grow in full strength of there is a particular capital requirements or there is some particular capital planning which resulted in the dividend payment. So I always suggest investors to not treat the dividend payment from Guangdong as a recurring factor because I personally don’t.

Kent McCarthy

Okay. But it was significantly higher than its averaged in the past.

Albert Chen

I would tend to agree to that, yes.

Kent McCarthy

Okay. Then secondly. Once the Golden Med deal goes through with Nanjing with the minority shareholders. Will we be negotiating directly with NXD or the next move is NXD to decide whether they want to try to buy us out or could you give us an update on that?

Albert Chen

As far as I am aware, I think all these transactions are still ongoing. Golden Meditech has put out a preliminary offer on the table which the special committee is evaluating. And it is hard to say whether, how that Golden Meditech proposal will unfold. And at the same time as you know, I mean there is a possible transaction going on between Golden Meditech and Nanjing as well, based on their public filings. If they choose to transact on what's going to happen, I think it still remains to be seen. I think right now it's just simply too many moving parts right now.

Kent McCarthy

Yes. I think so. But the offer from Golden Med was over a year ago and it's pretty obviously the special committee won't accept that and Golden Med really has no more economic interest as they would have to turn around and sell it anyway. So it would be natural to assume the negotiations would start with NXG? Or do you disagree with that logic or no comment on it? And lastly, if you guys end up management with new incentive shares, you will be on the same side of the table as the rest of the minority shareholders. So just comment on the logic of [indiscernible] offer, you know those two points.

Albert Chen

I guess because I am not personally involved in the special committee, so I guess once the special committee reaches a certain stage when they may [indiscernible] and when they are feeling comfortable making such an disclosure or announcement, I think they would certainly do so. Right now, I guess it is hard to say what's on the table and what's off the table. And I hope I can give you more color but as you know, I am pretty much -- as much in the dark as everyone else. As for the future, if the transaction between Golden Meditech and Nanjing Xinjiekou came through, I think I have to worry about my job security, Kent.

Kent McCarthy

Kind of [promoted] [ph] for us. So, okay. But the share-based compensation would end up being the CO shares not the Department Store shares. Correct? Or was that also...?

Albert Chen

The share-based compensation is directly related to the [RHU] [ph] scheme which we have put to the shareholders for vote back in 2011. And as far as I know, those [RHU] [ph] will be converted into shares of CCBC.

Kent McCarthy

But the old shareholder incentive thing was 10% to 15% baby growth which you are not going to make according to your guidance. So it is true that you guys are negotiating a new -- we wanted you to get good shareholder agreements. We want you to be on our side of the table. But it sounds like you are in the dark a little bit on that. It's preliminary, that has not been finalized. But that will be announced when it's finalized because the deal cannot go through until the shareholders -- until management renegotiates there contract on the incentive shares. That’s a mechanical point that hopefully you agree with or no differently on -- it's just in the legal papers that has to be done before the transaction goes with the department store and Golden Meditech. They both voted the transaction through so the only obstacle is the incentive share. So do you agree with that mechanically?

Albert Chen

I am not sure I understand entirely your questions but I guess it is fair to say that there is still a lot of moving parts and also as far as I know I am certainly not aware of any, like if the transaction between Golden Meditech and Nanjing Xinjiekou actually came through, I can't tell, where I don’t even know what that future arrangement is going to be because I don’t know yet.

Operator

Our next question comes from [Peter Halesworth from Angren] [ph]. Please go ahead. Your line is open.

Unidentified Analyst

Just a quick statement about the CFOs comments. We also would have similar concerns about job security if the buyout goes to [$6.40] Quick question, just on the two child policy. Wondering if China Cord has done any internal studies or market surveys to understand the inclinations of their current subscribers. Whether they have one child cord stored, if they would be inclined to also do that for a second child, if they did have one. And then secondly, would Chinese consumers or subscribers be inclined to do it all if they do have two children. Thank you.

Albert Chen

From our internal like statistics or the data, it seems to indicate that the second child only account for a small fraction in terms of new subscribers. For example, in the fourth quarter, looking at some of the data points, it accounts for only about 4% of new subscribers. So that number remains small. I mean as pointed out in our CEO remarks, we notice that even long-term the one child policy, the relaxation of the one child policy seems to be positive because they actually incur additional consumption, additional demand. But in the near term we really don’t see a material impact or a huge surge in terms of new subscribers. I guess probably some of the potential subscribers is having concern with respect to the future for the [indiscernible] and also the economics involves in having a second child as well.

So to a certain extent this kind of works like a double-edged sword because it increases demand but also raises the the cost burden as well. So if people think this is a huge burden to bear from a cost perspective, I think a luxurious preventive healthcare measures may sometimes be compromised.

Operator

And at this point there appears to be no further questions. I will now turn the call back to Ms. Kathy Bian.

Kathy Bian

Thank you. This concludes our earnings conference call for the fourth quarter and full year of fiscal 2016. Thank you all for your participation and ongoing support. Have a great day. Operator, you may now disconnect.

Operator

That does conclude our conference for today. Thank you for participation. You may now disconnect. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!