Mar 1, 2016
Executives
Kathy Bian – Vice President-Corporate Finance Albert Chen – Chief Financial Officer
Analysts
Scott Henry – ROTH Capital Mike Schmitz – Jayhawk Capital
Operator
Welcome everyone to China Cord Blood Corporation’s Earnings Conference Call for the Third 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. Please go ahead, ma’am.
Kathy Bian
Good morning, everyone. Welcome to our third quarter and first nine months of fiscal 2016 earnings conference call.
A press release discussing our financial results has already been released and a copy is available on our Company’s website. During the call, our management team will summarize corporate development and financial highlights for the 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 this forward-looking statements. Kindly refer to our SEC filings for detailed discussions of potential risks.
In the interest of time, we will begin our CEO's remarks followed by a detailed report of our third quarter and first nine months 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 third quarter fiscal 2016 earnings conference call. During the third quarter, the pressure from the Chinese Lunar Year of the Sheep was still didn’t force and overall market trend remain unexciting.
In view of such market conditions the group recorded 15,603 new subscribers in reporting period, representing year-on-year decrease of 11.5% and quarter-on-quarter decrease of 6.8%. As of December 31, 2015 the group has recruited about 490,000 subscribers cumulatively.
In the reporting quarter a majority of the new subscribers came from Guangdong Province with sizeable original market and mature operation are both in place and the [indiscernible] from American Association of Blood Banks boosted the regional market confidence. All of this has have Guangdong to mitigate the impact from market contraction.
In this quarter our hospital coverage and the market awareness in Guangdong Province kept on improving at a stable pace, but Beijing market remained sluggish as the impact of market contraction and weak economic sentiment is more widely felt. Based on the group’s performance in the first three quarters of fiscal 2016 and overall projection of the market direction in the coming fiscal quarter, the management team remained cautious about our performance of the fiscal 2016.
Nevertheless we still aim to meet our target of 63,000 new subscribers in this fiscal year. Before wrapping up my remarks I also want to report to you all that on December 31, 2015 the National Health and Family Planning Commission of PRC, NHFPC in short issued a notice to extend the current one-license per region regime to 2020 and keep the seven existing cord blood banks as the only cord blood bank operators in China.
And NHFPC would not grant any additional cord blood bank licenses until 2020. As such we will continue to serve the Beijing, Guangdong and Zhejiang markets as the only cord blood banking service provider to store umbilical hematopoietic stem cells in the coming five years.
This concludes my remarks regarding our third 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 our third quarter financial performance in greater detail.
Albert Chen
Good morning everyone thank you for joining our call today. While the third quarter remained challenging we recruited 15,603 new subscribers during that three-month period as compared to 17,622 new subscribers of last year.
Even though revenues for the third quarter increased modestly by about 2% to approximately RMB169 million, this was mainly driven by the increase in storage fees. In the reporting quarter, the accumulated subscriber base increased to more than 489,000.
Accordingly, revenues from storage fees increased by approximately 18% year-over-year to RMB61 million. In terms of revenue mix, revenues from storage fees accounted for approximately 36% of total revenues, compared to 31% of last year.
Such upward trend has helped to stabilize our topline during segment market cycle. Revenues from processing fees was approximately RMB108 million, down 6% year-over-year.
The decrease was mainly attributable to the continuing market contraction of “the Year of the Sheep effect”, especially in the regions where we operate. Revenue from processing fees now accounted for approximately 64% of our total revenue, compared to 69% of last year.
Gross profit for the third quarter increased by about 2% to approximately RMB133 million. Gross margin was approximately 79%, similar to the 78% of last year.
In the third quarter the company incurred approximately RMB37 million in terms of sales and marketing expenses, compared to RMB30 million of last year. The increase was mainly due to the recognition of a share based compensation expense and increased marketing effort to sign off the down market.
Sales and marketing expenses accounted for approximately 22% of revenue as compared to 18% of revenue of last year. G&A expenses in the reporting quarter rose to approximately RMB43 million, as compared to RMB30 million of last year.
The increase was mainly a result of the recognition of the share based compensation expense. G&A expenses accounted for about 25% of the total third quarter’s revenue, compared to 18% in the prior-year period.
Excluding approximately RMB10 million worth of share-based compensation expenses, G&A expenses remained largely in line as compared to the pervious quarters. Operating income for this quarter was RMB51 million, compared to RMB68 million of last year.
Operating margin was down to 30%, compared to 41% of last year. The decrease was primarily a result of the recognition of the share-based compensation expenses, and the increase in sales and marketing expenses as we just talked above.
Operating income before depreciation, and amortization and share-based compensation expenses amounted to approximately RMB79 million, down from RMB83 million of last year. The EBITDA margin before share-based compensation expense in the current reporting quarter remained robust at approximately 46%.
Interest expense incurred in this quarter was approximately RMB28 million, compared to RMB26 million of last year. Like our prior quarters, the interest expense of both periods was mainly related to the company outstanding convertible notes.
Also we’re highlighting is that during the current quarter we recorded approximately RMB38 million in terms of dividend income from the company's equity investment, mainly from our investment in Shandong Cord Blood Bank, as well as Cordlife Group Limited. The dividend income helped offsetting the downward trend of our operating income and lifted the profit before tax.
Third quarter profit before tax amounted to RMB64 million, up 37% year-over-year. Net income attributable to the company’s shareholders was RMB50 million, up 51% year-over-year.
Basic and diluted earnings per share for the third quarter were RMB0.63, up 54% year-over-year. In terms of operating cash flows, net operating cash flow continued to remain robust, and we recorded RMB143 million in terms of net operating cash flow during the quarter ending December 31, 2015.
Now these pretty much wrap up the financial highlights with respect to the third quarter results. We are now happy to take any questions with the respect to the company operation and the latest developments.
Kathy Bian
Hannah, we may now begin the Q&A session.
Operator
Thank you. [Operator Instructions] Our first question comes from Scott Henry from ROTH Capital.
Please go ahead, your line is open.
Scott Henry
Good morning, if I can start just with the mix of new subscribers by region. Albert, the number you typically give us?
Albert Chen
Hey good morning, Scott. The new subscriber breakdown in terms by regions, for the third quarter ending December 2015 approximately 64% of new subscribers came from the Guangdong province, 23% came from Beijing and approximately 12% came from Zhejiang.
Scott Henry
Okay, thank you. And then looking at the income statement obviously there was a one-time benefit in the quarter, it looks like almost $6 million, could you just talk a little bit about that?
Albert Chen
That was – the dividend that we received from Shandong Cord Blood Bank, as well as the Cordlife Group Limited, I think Cordlife Group Limited paid out a special dividend and we recorded in the third quarter.
Scott Henry
Should we expect…
Albert Chen
And also Shandong as well.
Scott Henry
Okay, should we expect any recurring dividends going forward or should just model that as a one-off?
Albert Chen
I think it is prudent to model as a one-off item especially when it comes to, for example Cordlife Group Limited, as well as Shandong Cord Blood Bank which we have no control over. And also especially for Shandong Cord Blood Bank, as well it seems like they don’t have a particular patent in terms of distributing their earnings.
So I think it is prudent to assume this is a non-routine event.
Scott Henry
Okay that makes sense. And then the final question, I think you reiterated new subscribers of 63,000.
Being the Year of the Sheep, we know this will be lower volume. But can you talk a little bit about how we should think about volumes in 2017.
I would expect that this will be an easier comp and we may see a strong growth in 2017, but I just want to get your thoughts on that.
Albert Chen
Thank you for the question Scott. We don't renew – no, well, I mean it is our practice to renew our annual guidance in the annual earnings conference call, in the annual results conference call, which is normally due in June.
So right now all I can say at this point is that there is no doubt that Year of the Sheep is a down year. So I think most of it is actually behind us now.
But I think if you read between the lines, you’ll probably realize that we have reiterated repeatedly thing that the Year of the Sheep was a challenging year. We’re still attending our very best to try to achieve our regional new subscribers target which is 63,000 new – between 63,000 to 65,000 for fiscal 2016.
So we are still trying to – we’re still aiming for that, but there may still be risk in order to achieve that numbers. With that being said, looking beyond fiscal 2016, I think the market will probably resume back to normal in the year going through the year of 2017.
The question though is there are some other factors which are currently in play, for example, as highlighted in our CO transcript, it seems like the weak economic as well as capital market sentiment has somewhat dampened individuals’ intention, somewhat affected the people discretionary spending. Now with blood not being considered as a service of absolute necessity, we kind of feel that weak economic sentiment seems to have an impact on us recruiting new subscribers as well.
But I guess that if you balance out the two impact, I mean, coming out from the Year of the Sheep that overshadowed by a weak economic sentiment, I think it is fair to say that we still maintain aggressively prudently optimistic outlook going into 2017. I think that’s probably the best way to answer questions right now.
Scott Henry
Okay, thank you. That is helpful Albert.
And thank you for taking the questions.
Operator
[Operator Instructions] Our next question comes from Mike Schmitz from Jayhawk Capital. Please go ahead, sir.
Mike Schmitz
Hi, Albert. I mean, I think everyone is aware about CO’s management and directors, taking tie away from minority shareholders one example of that was the convertible bonds that were issued to KKR at a low price and then subsequently issued the Gold Med at the same price and then none of the money that was raised was ever used.
It looks like now Gold Med is going to be selling those shares for about $660 billion [ph]. Second the incentive share based compensation from last year was egregiously large was 10% of the shares outstanding taking away about $100 million of value from shareholders as well.
I mean this kind of mistreatment you’re just clearly just asked the staff. So like in this proposed privatization transaction that has been ongoing for – coming up on a year now, I think everyone, the director and management and directors well need to make sure that all the shareholders are receiving the exact same deal from the ultimate buyer NXD or this thing should be canceled?
So I guess can you provide whatever update you can on that particular with regards to expect the timing. I'm sure you can comment on any specific terms.
Albert Chen
Well Mike, thank you for the questions. And as you know I’m not involved in the special committees, but I do aware that the proposal offer from Golden Meditech has been around for some time and I'm pretty sure that the special committee is evaluating their proposal from multiple perspective.
And given the fact that there has been a lot of development ever since the proposed offer has been made public, I think there are still a lot of materials for the special committee to chew on. But one thing that’s for sure is that I think the special committee is taking into account all the facts that are available to them.
And also make sure that the, whatever conclusions that they arrive there will be in the best interest of the show as a whole. But I’m too aware that this has been dragging on for some time and this is just – as this not only distracting investor, but also distracting our management sources as well.
We do hope that we can – we do hope that sooner or later there will be an answer to it. But there’s not – I'm not in a position to actually push the special committee to arrive any definitive decisions.
And I think the special committee should carefully evaluate the proposals and make sure that multiple angles are being considered and make sure that whatever they can to recommend all this recommend will be in the best interest of the company and shareholders as a whole.
Mike Schmitz
Okay. And just in terms of the timing I think in January some of the announcements not by CEO by Golden Med and NXD mentioned that a potential vote at the CEO level in April.
Do you have any reason to believe that that's not still the expected timeframe?
Albert Chen
I don't think I have sufficient evidence to actually to arrive as a – at a timeframe as to when this will end, unfortunately. But I did notice that there are some public information out there which indicate that there is a possibility of that.
But as far as I can tell I'm not aware that we are rushing to meet any particular time of deadline. I think more importantly is to make sure that the proposal is being considered and evaluated on the fair and equal basis.
I don't think it is fair to everyone to rush against any particular deadline. And as far as I can tell there is no deadline being imposed on me.
Mike Schmitz
Okay. Thanks.
Operator
[Operator Instructions]
Albert Chen
If there is no other questions at this time I also want to take this opportunity to mention something which came at the end of last year. I noticed that not many of you are aware of this development and we are also monitoring the situation, as well but in the Beijing municipality government, I think at the end of 2016, I think they have put out a media report.
And the media report made reference to a resolution passed by the Beijing municipality city officials. This is not really a passed paper or resolutions, but they still indicated that that kind of resolution at the Beijing municipality government have the intention to try to prevent the population within the Beijing municipality area from skyrocketing.
Long story short is that I think they’re trying to prevent Beijing municipality area from being too crowded. In the resolutions itself, it did talk about the municipality government official has an intention to maintain the Beijing population base at about – at approximately 25 million people.
However, that’s still a lot of, I would say, lot of uncertainties surrounding that resolutions, in the resolutions aside from the 25 million targets is also mentioned the possibility to explore various measures as to how to control the population including, for example the relocation of some of the not so essential government services to regions outside of the Beijing Municipality areas and also the possibility of re-aligning some of the education as well as healthcare infrastructure as well. Now at this stage we are not sure as to how the government official at the city level intend to implement those various measures, so we will continue to monitor the situation and if there is time and if there is any new major development with respect to that, we will definitely keep the investment community aware of it.
And also at this stage I think we – a little bit too premature to arrive at any sort of quantitative analysis with respect to the potential impact of such resolutions especially not knowing how those measure will be implemented and what kind of measure will be implemented. So we will there by we’ll continue to monitor the situation.
I am – also be interested to see how this play out because as many of you are aware that China is already in the process of removing or relaxing its single child policy. This city level resolution seems to be acting somewhat moving in the opposite direction towards the relaxation of the single child policy.
So it will be interesting to see how this plays out. That will definitely keep the market aware if we have any more concrete developments or if we are aware of any new measures coming into place.
I think at the current juncture we just want to alert the investment community with respect to this development and we will keep the market updated in case of any new measures coming into play. I guess that’s all I want to say for now.
End of Q&A
Operator
Thank you sir. At this there appears to be no further questions.
So I will now turn the call back to Ms. Kathy Bian.
Kathy Bian
Thank you Hannah. This concludes our earnings conference call for the third quarter and first nine months of fiscal 2016.
Thank you for your participation and I’m going to abort. Have a great day.
Hannah you may now disconnect. Thank you all.
Operator
That does conclude our conference for today. Thank you for participating.
You may all disconnect.