Nov 24, 2015
Executives
Kathy Bian - VP, Corporate Finance Albert Chen - Chief Financial Officer
Analysts
Brian Tanquilut - Jefferies & Co. Scott Henry - ROTH Capital Michael Schmitz - Jayhawk Capital
Operator
Welcome everyone to China Cord Blood Corporation's Earnings Conference Call for the Second Quarter and First Half of Fiscal 2016. All participants' lines will be placed on mute during the presentation, after which there will be a question-and-answer session.
To allow everyone a chance to ask a question, please limit yourself to one question at a time. Now, I would like to introduce Ms.
Kathy Bian, Vice President of Corporate Finance to begin the presentation.
Kathy Bian
Good morning, everyone. Welcome to our second quarter and first half of fiscal 2016 earnings conference call.
A press release discussing our financial results has already been released and a copy is available on our website. During the call, our management team will summarize corporate developments and financial highlights for this quarter.
A question-and-answer session will follow. To allow everyone a chance to ask a question, please limit yourself to one question at a time.
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 for operational risks.
In the interest of time, we will begin with our CEO's remarks followed by a detailed report of our second quarter and first half of fiscal 2016 financial performance by our CFO, Mr. Albert Chen.
Our management will be able 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 second quarter fiscal 2016 earnings conference call. During the second quarter, the market remained challenging and it continued to contract due to the reduced birthrate during the Chinese Year of the Sheep.
However with our collective marketing and sales efforts among different regions, we were able to recruit 16,744 new subscribers, representing a year-over-year increase of 7.4% and a quarter-over-quarter increase of 4.1%. At the September 30 this year, the Group has recruited over 470,000 subscribers cumulatively, which further consolidates our client base and market leadership.
In this reporting quarter, subscribers from Guangdong province account for the majority of our new subscribers due to the province’s large population, as well as our sales and marketing efforts we have undertaken, which has helped us to partially mitigate the impact of market contraction. Additionally, we are continuing to increase our hospital coverage in Guangdong province and gradually step up our presence in the key market.
Based on current market conditions and our Group’s performance in the first two quarters of fiscal 2016, the management team is cautiously optimistic about our performance in the second half of this fiscal year. We believe we are on track to meet our target of 63,000 to 65,000 new subscribers in fiscal 2016.
This concludes my remarks regarding our second quarter results. I would like to thank you for your ongoing support to CCBC.
I would now turn the call over to our CFO, Mr. Albert Chen to review our second quarter financial performance in greater detail.
Albert Chen
Good morning, everyone. Thank you for joining our call today.
As highlighted in our CEO remarks, the Year of the Sheep impact remained in force and the number of new born babies continued to contract in the regions where we operate. Despite such challenges, we have managed to recruit 16,744 new subscribers during the September quarter, up approximately 7% year-over-year thanks to the collective sales and marketing efforts from all divisions.
Revenues for the second quarter amounted to approximately RMB171 million, an increase of approximately 13% from last year. During the second quarter, revenues from processing fees increased modestly to approximately RMB111 million, up from RMB103 million of last year.
In terms of revenue mix, revenues from processing fees accounted for approximately 65% of our total revenue. Revenues from storage fees increased by 21% year-over-year to RMB60 million, and representing approximately 35% of our total revenues.
The accumulated subscriber base at the end of the second quarter reached 474,000. Gross profit for the second quarter increased to approximately RMB134 million, representing a 10% increase over last year period.
Gross margin was approximately 78%, compared to 80% last year; the difference was mainly caused by the increase in raw material costs. In the second quarter, the company incurred approximately RMB37 million of sales and marketing expenses, compared to RMB31 million of last year.
The increase was mainly because of the increased marketing and promotion efforts and the recognition of a share-based compensation expense. No share compensation expense was incurred in the prior year period.
Sales and marketing expenses accounted for approximately 22% of revenues, compared to 20% of last year. G&A expenses increased to approximately RMB43 million from RMB31 million of last year.
The increase was mainly a result of the recognition of the share-based compensation expense, which was approximately RMB10 million in the second quarter whereas no such expense was incurred in the same period of last year. G&A expenses accounted for about 25% of the second quarter revenue compared to 20% of last year.
Operating income for this quarter was RMB52 million, compared to RMB57 million of last year. Operating margin was about 31% compared to 38% in the prior year period.
The decline in operating margin was once again related to the increase in sales and marketing expenses and the recognition of the share-based compensation expense. Operating income before depreciation and amortization and share-based compensation expenses amounted to approximately RMB80 million, representing a 13% year-over-year increase.
EBITDA margin before share-based compensation expense in the second quarter remained stable at approximately 46%. Interest expense incurred in this quarter was RMB26 million, compared to RMB25 million of last year.
The interest expense of both periods were mainly related to the company outstanding convertible notes. By the end of September we received RMB10 million dividend income from the company’s equity investments in Shandong Cord Blood Bank, whereas no such dividend was received last year.
Impairment loss on available-for-sale securities of approximately RMB8 million was also recognized in this period. This amount is related to the accumulated decline in fair market value of the ordinary shares of Life Corporation Limited listed on the Australian Securities Exchange.
Second quarter profit before tax amounted to RMB32 million compared to RMB37 million of last year. Net income attributable to the company’s shareholders was approximately RMB19 million compared to RMB27 million of last year.
Basic and diluted earnings per share for the second quarter were RMB0.25. Net operating cash flow for the second quarter reached RMB169 million.
This pretty much wraps up the highlights for the second quarter results. I would like to turn the floor for any potential questions.
Operator
[Operator Instructions] Your first question comes from the line of Brian Tanquilut from Jefferies & Co. Please go ahead.
Brian Tanquilut
Hi good morning Albert. Just a – first question for you, so as we exit the Year of the Goat or the Year of the Sheep, do you have any visibility right now in terms of what the volume looks like and I figured that you are that point where you are starting to get inquiries from potential customers or new customers, so just want to hear what you are seeing and what your expectations are for next year as we go into the new lunar year?
Thanks.
Albert Chen
Well, as we have highlighted in the past couple of quarters results, we are definitely in a down year, which is kind of seasonal or cyclical because of the Chinese culture. While we continue to see market contraction in multiple regions, we remain hopeful that as we exit the Year of the Sheep and going into the following – the subsequent Lunar New Year hopefully things will improve from that point onward.
I think that is what I want to say for now.
Brian Tanquilut
All right, got it. And then Albert, just one thing, I noticed that there is a non-cash charge, if you don't mind just giving us some details on that one?
Albert Chen
The non-cash charge is actually related to our strategic investment in Cordlife Group Limited back many, many years ago. Originally Cordlife Group Limited was listed on the Australian Securities Exchange.
Couple of years ago, they divest their operation and relist themselves in the Singapore Stock Exchange in the form of a distribution in specie and then followed by subsequent IPO, and as a result of such our original investment in Cordlife Group Limited in Australia resulted in two separate – resulted in two strategic investments, one of which is related to the Singapore listed Cordlife Group Limited, and the other one being the Life Corporation Limited, which after the spun out became a [share] company listed on the Australian Securities Exchange. So this is more like a legacy issue as a result of our investment in Cordlife Group Limited, but despite the fact that our strategic investment so far seems to be – have yield handsome results from both a operational as well as a strategic point of view, but under the US GAAP we have to view these two investments as separate investments despite the fact that collectively we make a handsome return or gain out of it not just by looking at the investment return alone, but also we have a lot of strategic value derived from that investment as well.
So – but as I tried to highlight in my transcript, the – this investment is actually – I think this is more to reflect the fact that Life Corporation has been below our investment course for some time. So for prudent purposes and also in accordance with US GAAP we have marked it down in accordance with the market value.
But please be aware that this is not our – we have no intention in the current spectrum to immediately dispose the company. So the actual or the true gain or loss should come in the future when we actually dispose it.
So this is more like – as of the time being this impairment provision is more like an accounting treatment, and it is definitely non-cash.
Brian Tanquilut
Okay. Albert, last question from me, so I know that in the past you guys have announced that the board has formed an independent committee or a special committee, so is that committee still in existence and are they still doing an evaluation at this point?
Thank you.
Albert Chen
To answer the first part of your question, yes, they are definitely in existence and we are definitely relying on them performing the valuation regarding the proposed offer from Golden Meditech. I have no reason to doubt that they are not performing their responsibilities and duties.
Operator
Thank you. Your next question comes from the line of Scott Henry from ROTH Capital.
Please go ahead.
Scott Henry
Thank you and good morning. I guess for starters, new subscriber share, how would you break that up between the regions?
Albert Chen
In terms of new subscriber breakdown, new subscribers coming from Guangdong still account for a lion’s share of the new subscriber numbers on a quarterly basis. Approximately – more than 60% of new subscribers are derived from the Guangdong market and approximately 27%, 28% of new subscribers came from Beijing, and the remaining came from [Indiscernible].
Scott Henry
Okay, excellent. And I thought in the prepared remarks I heard guidance was for new subscribers of 63,000 to 65,000, did you inch up the bottom of that from 62,000 to 63,000, I just wanted to see if I took that down wrong, or if that was a slight change?
Albert Chen
Sorry, Scott. We have a little bit of a connecting – connection issues in here, do you mind repeating that questions again, because I think the line kind of broke up a little bit in the middle?
Scott Henry
No problem Albert. I guess the question was I had written down company guidance of new subscribers of 62,000 to 65,000, and it looks like you inched that up to 63,000 to 65,000 on the prepared remarks, is that correct?
Albert Chen
The target – new subscriber number target for the current fiscal year – fiscal 2016 is between 63,000 to 65,000.
Scott Henry
Thank you. That is helpful.
I guess the only other question with regards to the corporate actions under review, what – as you would list all of these things under recent developments in the press release, are there any data points we should be thinking about in the next couple of months as far as the independent review and just anything we should be focusing on?
Albert Chen
Well, I guess at the special committee of China Cord Blood will perform their responsibility and evaluate the propositions and take into accounts the recent developments that have been publicly announced. Unfortunately I am not in a position to say at what time or stage they will make their subsequent disclosure, or subsequent press releases.
But I am pretty sure that once they make any material developments, they would definitely keep the market informed.
Scott Henry
Okay. Thank you for taking the questions.
Albert Chen
Thank you, Scott.
Operator
[Operator Instructions] Your next question comes from the line of Michael Schmitz from Jayhawk Capital. Please go ahead.
Michael Schmitz
Good morning Albert. Just a quick question and you can – I am not sure how much you will able to tell beyond this, but given that the Nanjing Company as disclosed in your press release has tentatively agreed to pay Golden Meditech about $14.50 a share.
It doesn't seem to make sense that they are only willing to pay the other shareholders $6.50 per share, so I was going to see if there is anything at all that you could provide related to, how the special committee is looking at the proposed valuation of the company and whether you are taking those factors into account?
Albert Chen
Thank you for your question Mike. I'm not sure if the line is getting really reliable here because it is actually breaking up a little bit.
So I will try my best to explain to say this but I guess, well first of all because right now the information that is seen from public disclosure seems to indicate that this is a nonbinding proposal. But I guess the special committees will probably evaluate the original Golden Meditech proposal and take into consideration of all the latest development as well.
Whether they are going to make recommendation or not I am not in a position to comment. But I sure hope that they have all of the information that they need to actually perform their duties and evaluate all the proposals on a fair basis.
Michael Schmitz
I appreciate it. Thanks Albert.
Albert Chen
Thank you, Mike.
Operator
[Operator Instructions] 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, Edward. This concludes our earnings conference call for the second quarter and first half of fiscal 2016.
Thank you for your participation and ongoing support. Have a great day.
Operator, you may now disconnect. Thank you all.
Operator
That does conclude our conference for today. Thank you for participating.
You may all disconnect.