Jun 27, 2018
Executives
Kathy Bian - VP, Corporate Finance Albert Chen - CFO
Analysts
Ryan Roberts - MCM Partners Michael Schmitz - Jayhawk Capital Cyrille Pichot - Altimeo
Operator
Welcome everyone to Global Cord Blood Corporation's Earnings Conference Call for the Fourth Quarter and Full Year of Fiscal 2018. All participant lines will be placed on mute during the presentation after which there will be a question-and-answer session.
Now, I would like to introduce Ms. Kathy Bian, VP of Corporate Finance to begin the presentation.
Kathy Bian
Thank you, Anna. Good morning, everyone.
Welcome to our fourth quarter and full year fiscal 2018 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 the forward-looking statements. Kindly refer to our SEC filings for detailed discussions of potential risks.
In interest of time, we will begin with our CEO's remarks followed by a detailed report of the fourth quarter fiscal 2018 financial performance given by our CFO, Mr. Albert Chen.
Our management will be available to answer questions during the Q&A session. Today, on behalf of CEO, Tina, I will read her prepared remarks.
Let's begin our presentation. Good morning shareholders, investors and analysts, ladies and gentlemen.
Welcome to Global Cord Blood Corporation's fiscal 2018 fourth quarter earnings conference call. Fiscal fourth quarter is traditionally considered our low season, but we managed to achieve pleasing results by leveraging our strong brands and intensifying our sales and marketing activities.
During the reporting quarter, we've recruited 21,390 new subscribers, up 4% year-over-year. Guangdong market drove the growth.
In fiscal 2018, we've recorded 91,789 new subscribers in total, up 23% year-over-year. A result that marks a new record in terms of annual new subscribers.
By the end of March 31, 2018, our cumulative subscriber has reached 661,618 reinforcing our leading position. There are a couple of points to keep in mind as we move into fiscal 2019.
After the recent ramp up in volume we believe the market will take a [breather] before penetration jumps into another level. This is because, it takes time to build market awareness and volume can’t leapfrog when public acceptance towards the cord blood banking hits another critical mass.
Hence, we are likely to experience some level consolidation in terms of new subscriber numbers at this historic high level. In addition, if the U.S.-China trade talk which already dampens the market sentiment, continues to drag, its impact the economy in China, erode consumer confidence and inhibit purchasing behavior rapidly.
That said, we intend to counter this set forces by driving growth within our various geographical regions through adjusting and localizing our marketing campaigns since each market is in different phase of growth. In Guangdong Province, the productive impact of the second chart policy continued to manifest itself during fiscal 2018.
Given its large population base and uninterrupted urbanization trend, we expect Guangdong to remain the driving market of our new subscribers in fiscal 2019. We also expect both the number of births and new subscriber numbers in Guangdong Province to grow steadily in fiscal 2019.
On the other hand, we do not foresee exciting performance in the Beijing market. As we anticipate, new Board members continue to trend downward due to fundamental constraints.
Therefore, we will take different approaches to growth in accordance with each market's distinct situation to explore each market potential. We would strengthen and broaden our hospital channels, seek innovative recruitment tools to cater the needs of diverging client base and upgrade sales and marketing activities to improve penetration in the existing markets, while keeping expenses in check.
All-in-all, we aim to achieve 85,000 to 90,000 new subscribers in fiscal 2019. As many shareholders are aware, the Board of Directors of our company have been constantly reviewing the company capital structure with the purpose of balancing the long-term development needs against the efficient capital deployment.
We strongly believe a sustainable and predictable capital deployment policy will best serve the company and our shareholders. After much deliberation, taking into account our near-term and long-term strategic goals and to celebrate fiscal 2018 for being another record year.
The board is delighted to have declared a dividend of $0.08 per share payable in cash or the company's ordinary shares at the election of our shareholders. This concludes my remarks regarding our fourth quarter results.
I'd like to thank you for your ongoing support of GCBC. I will now turn the call over to our CFO, Mr.
Albert Chen, to review our fourth quarter financial performance in greater detail.
Albert Chen
Good morning, everyone. Thank you for joining our call today.
In the fourth quarter, revenue increased by 15% year-over-year to RMB233 million. Fourth quarter storage revenue increased by 20% year-over-year to RMB86 million as our net accumulated subscriber base surpassed the 661,000 mark as of March 31, 2018.
Storage revenue accounted for 37% of total revenue, up from 36% of last year. Fourth quarter processing revenue increased by 13% year-over-year to RMB147 million, as we recruited 21,390 new subscribers, where Guangdong division remained the largest contributor in terms of new subscriber mix.
As economies of scale outpace the increase in raw material costs, fourth quarter gross profit increased by 17% year-over-year to RMB189 million. Modest increase in storage fees as a percent of revenue enable gross margin to add up from 80% last year to 81% in the reporting quarter.
Operating income decreased to RMB42 million because of the addition on share-based compensation expenses recognized during the quarter. Fourth quarter operating income before depreciation and amortization and share based compensation expenses, which we also referred to as the non-GAAP operating income in our earnings release, actually jumped by 22% year-over-year to approximately RMB103 million on the back of robust top-line growth and margin improvement.
Non-GAAP operating income margin increased accordingly from 42% to 44%. All the outstanding RSU were vested in the reporting quarter, therefore, share based compensation expenses for the period increased to RMB48 million from RMB16 million last year.
Going forward, there will be no more amortization of share-based compensation from these RSUs, which normally cause around RMB20 million a quarter. And the total number of shares outstanding as of March 31, 2018 is 120.8 million.
Depreciation and amortization expenses in the fourth quarter maintained at RMB13 million levels. In the fourth quarter, our sales and marketing expenses increased by 11% year-over-year to RMB60 million, which was mainly attributable to the increase in share-based compensation of order to the sales force.
Excluding the share-based compensation expense, sales and marketing expenses only increased modestly despite our escalated sales and marketing activities. General and administrative expenses for the fourth quarter increased to RMB84 million from RMB48 million last year.
The increased was once again related to the increase in share-based compensation expense. Excluding such impact G&A expenses as a percentage of revenue only increased marginally.
In the fourth quarter of last fiscal year, we recorded income tax benefit of RMB4 million as a result of the income tax provision reversal, but no such reversal was recorded during the reporting quarter. Excluding the effect of such reversal, income tax expense was RMB14 million in the fourth quarter of last year, compared to RMB17 million in the current quarter.
With the decrease in operating income, accompanied with the increase in income tax expense, which were partially offset by the absence of interest expense. Net income attributable to the company shareholders for the reporting quarter was RMB31 million, compared to RMB38 million last year.
taking into account the shares issued upon vesting of the RSUs and the CP conversion back in April 2017. Basic earnings per ordinary share for the reporting quarter were RMB0.27 compared to RMB0.45 last year.
Diluted earnings per ordinary share for the reporting quarter were RMB0.25 compared to RMB0.45 last year. As of March 31, 2018, the company had cash and cash equivalent of approximately RMB4.3 billion, total defer revenue were approximately RMB2.2 billion, net cash provided by operating activities for the reporting quarter was RMB194 million.
As mentioned in the CEO remarks, the Board declared a dividend of US$0.08 per ordinary share to be pay in cash or in scrip at the election of the shareholders. The dividend will be payable on August 20th, but in any event no later than August 24, 2018 and the record date is set on July 30, 2018.
Election form and dividend scheme are now available on our website for shareholders review and this pretty much wrap up my, the highlights of the results and I’m happy to take any questions that you may have.
Operator
Thank you, Albert. [Operator Instructions] Your first question comes from Ryan Roberts from MCM Partners.
Your line is now open, Ryan. Please go ahead.
Ryan Roberts
Good evening, thanks for taking my question. I've got a couple of quick questions.
First one is just off on the top line color shared during the prepared remarks about kind of some consolidation expected. I was just kind of curious.
Looking at the seasonality of new subscriber acquisitions. Looks like actually in the past couple of years, Q4 hasn't seen a dropped as sharp as was recorded in Q4 of '18 -- sequentially fell about 12% versus a 4% rise in '17 and a 7% drop in '16?
I was just kind of curious if you can give us some more color on what you're seeing in the market just more of a saturation issue or if there's some other factors at play? And then I have a follow up, thank you.
Albert Chen
Thank you for the questions. It's hard to actually just simply predict the quarter-over-quarter performance based on historical because our past experience suggests that because of the Chinese zodiac calendar issue, it tends to distort the picture.
But our past experience do suggest that it seems like for example from July 1 to the end of December tend to be our prettiest moment, which account for slightly more than half of the full year where from our perspective first quarter and the fourth quarter of our fiscal year tends to be what we called a slack season on the relative scale. So now with that being said, you will notice in our prepared field remarks we talked about markets consolidating and leapfrogging again.
Part of the reason I want to highlight that to investors is because cord blood banking is a very interesting and unique business model. Every six months, you are faced with a bunch of new clients and you have to reeducate them again.
So past experience do suggest that the way we grow is not directly a linear function, but instead if our growth pattern seems to mimic a what we called a step function, where you reach certain penetration level and you stay there for a couple of years. And once you hit critical mass, you jump to another penetration level.
So that tends to be the case for cord blood banking at least in the area where we operate. I hope this helped to address some of your questions.
Ryan Roberts
I did. Thank you for the color.
Zodiac is always an interesting dynamic there for sure. Maybe just kind of a more technical one.
Just to follow up on kind of amortization side of things. I was just curious if there is anything happening on prices.
It looks like revenue -- processing and other revenue per kind of new subscriber is moving around a little bit in Q4. I was just kind of curious if you could give anything on the pricing side to influence that?
Albert Chen
Normally the average or the ASP per new clients get affected because of the sales catalog and when we issue the testing results to the clients. At least from a management perspective, I can tell you that we are not doing anything funny on pricing.
We are not revising up a lot, lowering our pricing. But that has -- but that kind of seasonality tend to go away.
For example, sometimes, this quarter is higher than next quarter and in the following quarter it comes back down again. When you pull the yearly average, it tends to kind of average out so it’s probably about 6,800 x 0.94 [indiscernible].
Ryan Roberts
If I could maybe sneak one last one in. Should we read anything into the dividend, this is a one-time thing that’s potentially something we can look for in the future.
If management can share some color on capital allocation, use of cash in the balance sheet that will be much appreciated. And that's all from me.
Albert Chen
Thank you for the question. As many of you are aware that we have tried share purchases in the past and we have constantly reviewed our capital allocation strategies and we have to examine our capital allocation decisions in light of our business expansion opportunities, as well as our own development strategies.
Now many of you may aware that we are -- well fair to say that we are a bunch of extremely prudent people. We don’t want to do anything radical.
To the extent possible, we want to maintain a posse that is predictable with certain level of transparency. Now with that being said, there is no guarantee that we’re going to do this dividend again next year, but this is certainly something that we want to, to the extent possible.
Ryan Roberts
Thank you very much.
Albert Chen
Sorry, I’m not allow to give you a direct answer, that’s all. I apologize for that.
Ryan Roberts
It’s okay.
Operator
Your next question comes from Michael Schmitz from Jayhawk Capital. Michael, your line is now open.
Please go ahead.
Michael Schmitz
Could you provide a rough breakdown of by province of the new subscribers as you have done in the past?
Albert Chen
No problem, Mike. In terms of new subscriber breakdown, you’re looking at about 60% to 62% from the Guangdong Province, 20% from Zhejiang and the rest from Beijing.
Michael Schmitz
And then kind of following on the dividend question. I think you just mentioned that you hope to do it again next year.
So, will that be to expect that this is not, a quarterly dividend, it’s more of an annual review and you will make a decision each year as to what the dividend will be?
Albert Chen
It’s something that we are constantly reviewing internally. So fair to say, this is the first time we do it and we will continue to -- we’ll examine the market reaction and we’ll take into account investors feedback and shareholders feedback about this proposition and to the extent possible fine tune it going forward.
So, don’t have a definitive answer to your question, honestly Mike. But whatever, we do, we try to make this a long-term sustainable and predictable pattern.
So that it will be easier for management for budgeting purposes and also easier for shareholders as well. Let's hope it works.
Michael Schmitz
I think that makes sense. I think, obviously my comment on that will be that providing some guidance now to what you would hope to be able to do would be something in line with that thinking of being transparent and obviously roughly $10 million dividend, when you’re generating $30 million cash a quarter, is very sustainable from that standpoint.
So, would appreciate any further comments you can make on that. And then on a related note, I think you also kind of mentioned that your share repurchases have been tried in the past.
Have those been kind of ruled out for the foreseeable future or is that something that's still being discussed at the board level as well?
Albert Chen
As part of the capital allocation decisions, when we enter into that kind of discussions, we have no intention of ruling out share repurchases for goods, but it's just that we think that this is, we hope shareholders will prefer a dividend payment. So that's why we do it this time.
Michael Schmitz
Okay, thanks. I have no further questions right now.
Operator
Thank you, Michael. Your next question comes from Peter from [Heng Ren].
Your line is now open. Please go ahead.
Unidentified Analyst
Yes, Albert. On the dividend and the capital allocation.
This is only a tiny first step and some of the other shareholders are just dancing around the issues because they'll be griping later when we call. But for 5 years, this company has had a floated balance sheet with way too much cash on it.
And to say that you're careful and consider it and deliberate about the capital allocation and the dividend is comical. You've been considering this and been pushed by shareholders for 5 years to get your balance sheet right.
And here we are with a $10 million dividend when you generate $130 million in free cash flow this year, it's little depressed. And I think today on this call, the company needs to put their hands over their heart and pledge to commit to shareholders for once.
Would you do that?
Albert Chen
Well I mean, I think if you look at the -- as you kindly pointed out, the dividend returned to approximately about $10 million is actually about 26%, 27% of our full year earnings. So, I guess this will be a good starting point.
Unidentified Analyst
We've been saying that you've been saying this for 5 years. Shareholders been putting up with this for several years.
It's been tip toed and danced around and we've been put off and dodge on a very critical issue through share price performance for 5 years. The time is up, it's time to commit to shareholders and reallocate capital to shareholders.
You won't do a serious buyback, it's time to do a serious dividend and start with a big special dividend or a commitment to a regular annual dividend.
Albert Chen
Well I mean as I mentioned in the -- in response to the prior questions, we have constantly looked at the capital allocation positions. And it doesn't mean that the capital allocation position with respect to this dividend policy is carved in stone, but it is certainly something that we'll constantly review.
Investors may like it, investors may not like it, but at the same time, we have to consider long overall, the long-term development need of the company. I think this is a good starting point as I said earlier on.
If investors don’t like it then, I guess we'll look at it again in the future.
Unidentified Analyst
Well, I would just like to say your share price is, what your corporate governance is, what your capital allocation policy is, it’s not what the fundamentals are. If the fundamentals were driving this stock, it be well over $20 a share.
But instead because of cord corporate governance and unfathomable capital allocation policies, we are below 10. And I know shareholders terribly dislike this.
Albert Chen
Well, it’s not something that I can address from an earnings call perspective, I apologize for that. Can we move on to the next question?
Operator
The next question comes from Cyrille Pichot from Altimeo. Your line is now open.
Please go ahead.
Cyrille Pichot
Just one question, 2 questions actually. Are you looking at some acquisition targets right now based on the fact that you have decided to change your name three months ago maybe abroad?
I don’t know, if you can just elaborate a little bit about that. And maybe this is the explanation why you are keeping huge amount of cash in your balance sheet, good explanation I mean.
Also, are you may be keeping your cash, because potentially in 2020 in China, there will be more provinces you know actually right there are seven licenses. So maybe there will be more opportunities and definitely you will need some cash account of course.
And just last question is about the same one that teaches about Qilu's stake. You heard the 24% stake in Qilu.
This is, honestly, it is completely a hidden asset for the market. I mean, only very sophisticated investor can understand the value of this stake.
I know it’s very complicated to do anything about that. But potentially can you just speak about Qilu, about some metrics Qilo, we know that they are doing a huge net income every year based on the managing filing.
So, I think it’s just the same. I mean potentially maybe you can try to buy the other 76%, I don’t think management will be okay but you can try.
So that’s it. Thank you.
Albert Chen
First of all, as we talked about in our prior calls, we have changed the name from China to Global and it also partly reflects our change in our corporate strategies and for those of you who actually follow us in the prior earnings call I talk about this in the past as well that we are actually in, I would say we are relatively active in terms of looking at potential opportunities both inside and outside of China. So yes, so long story short, we are looking at potential opportunities that we can leverage upon our core competences and our core, I’d say, our strength in the PRC.
So, I guess, we are definitely looking to that. Whether or not that actually includes the Shandong Cord Blood Bank I'm not in a position to discuss about that.
But I will not real possibilities in both at home as well as offshore. But obviously doing acquisition in U.S.
given our controlling shareholder is a PRC individual, may somewhat be complicated at the current juncture.
Cyrille Pichot
Thank you.
Operator
Thank you, Cyrille. There are currently no more questions in queue.
[Operator Instructions]. At this point, there appears to be no further questions.
I will now turn the call back to Ms. Kathy Bian.
Please go ahead.
Kathy Bian
Thank you, Anna. This concludes our earnings conference call for fourth quarter and full year of fiscal 2018.
Thank you for your participation and ongoing support. Have a good day.
Anna, you may now disconnect. Thank you all.
Operator
Thank you, ladies and gentlemen. That does conclude our conference for today.
Thank you all for your participation. You may all now disconnect.