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Mindray Medical International Limited (NYSE:MR)

Q4 2012 Earnings Call

February 26, 2013, 08:00 am ET

Executives

Cathy Gao - Manager, IR

Jie Liu - COO

Alex Lung - CFO

Analysts

Ingrid Yin - Oppenheimer

Jessica Le - CICC

Richard Yeh - Citigroup

Wei Du - Goldman Sachs

Jinsong Du - Credit Suisse

Gideon Lo - Nomura

Sean Wu - JP Morgan

David Turkaly – JMP Securities

Operator

Good morning, everyone. Thank you for standing by and welcome to Mindray’s Fourth Quarter and Full-Year 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks we will conduct a question-and-answer session. Today's conference is being recorded for relay purposes. If you have any objections you may disconnect at this time.

I would now like to hand the call over to your host for today's conference, Ms. Cathy Gao, Mindray's Manager of Investor Relations. Please proceed Ms. Gao.

Cathy Gao

Thank you. Hi everyone Welcome to Mindray's 2012 fourth quarter and full-year earnings conference call. We are pleased we released our financial results last night and they are now available on the company's website and the Newswire services. There will also be an archived webcast of this conference call on our Investor Relations website.

Joining today's call are, Mr. Li Xiting, our President and the CEO; Mr. Jie Liu, our Chief Operating Officer; Mr. Minghe Cheng, our Chief Strategic Officer; Mr. Alex Lung, our Chief Financial Officer and Ms. May Li, our Deputy Chief Financial Officer.

In a moment, Mr. Jie Liu will provide an update of the company's operational performance. Mr. Alex Lung will review the detailed financial results as well as the company's outlook for 2013. After that we will be happy to take your questions.

Before we continue, please note that this call will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Statements made and the views expressed here which are not historical facts are forward-looking statements. You should be cautioned that forward-looking statements are only predictions and may involve inherent risks and uncertainties. As such, our actual results may be materially different from the statements and the views expressed here today due to a variety of factors.

A number of such risks and uncertainties, and the factors are outlined in our public filings with the SEC. In particular, please refer to risk factors beginning on Page 5 of our Annual Report on Form 20-F. Any projections made here today are based only on limited information currently available to us, and are subject to change. Mindray does not undertake any obligations to update any forward-looking statements, except as required under applicable law.

I will now turn the call over to Mindray’s COO, Mr. Jie Liu.

Jie Liu

Thank you, Cathy. Good morning and good evening ladies and gentlemen. Thank you for joining us today. 2012 was another significant year for Mindray. We surpassed $1 billion in annual sales for the first time and continue to deliver solid financial results. We recorded strong year-over-year revenue growth of 20.4% and $1.06 billion for 2012, higher than the sales target of at least 18% that we set out earlier.

Excluding the tax benefits, we also exceeded our non-GAAP net income growth guidance of at least 15% from 18.4% growth. In term of profitability, despite a rising cost in China, our full year gross margin has improved by 140 basis points in 2012 compared to the year before. Our full-year non-GAAP operating margin has also remained largely stable at 21.1% compared to 21.2% in 2011 consistent with what we have been communicating. In addition, we delivered a 59.3% increase in net operating cash inflow for 2012 as we continue to optimize our operations and improve our working capital.

Last year, China and the emerging markets were again the key drivers for our company growth. Each achieved over 20% year-over-year growth and together they represented close to 80% of our total revenues. If you recall, we have significantly strengthened our sales distribution and service capability in those regions over the past couple of years. A key account management team, together with direct servicing platform was formed to serve the large accounts and we have further [eased] our overall customer level.

We also installed the CRM system in major countries to better manage our selling process. Our growth profile in those regions reflects the success of our investment strategies. We also made in-roads in development markets as we continue to build our brand by introducing more products in increasing direct sales.

In 2012, we continued to move up the value chain and then launched several first-generation high end products into the markets, particularly in the IVD area. As a result the IVD segment achieved 28.7% year-over-year revenue growth. We have also successfully ramped up our reagent sales which had higher margin and contributed 35.3% of our overall IVD sales, up from 29.9% in 2011.

To improve our R&D efficiency, we launched the medical product innovation project last year with a focus on speed to market and the product lifecycle management. We made our product development target launching 10 new products into the market. This year in 2013 we expect to introduce another seven to 10 new products.

We also made four more acquisitions in China over the past year together with deals we did in 2011 we have completed eight acquisitions in the last two years. Some of this transaction allowed us temp into new growth areas such as endoscope and orthopedics. The integration of our prior acquisition are also well on track. Going forward, we plan to have more acquisitions in order to further space our company technology and product offering. Although, we are pleased with our revenue milestones and other achievements in 2012 and we want to thank our employees for their hardworking in making this happen.

I will now turn the call over to Alex for financial details as well as some fourth quarter and the full-year highlights.

Alex Lung

Thanks, Jie. In the fourth quarter our topline recorded a 19.7% year-over-year increase to $316.1 million. Leading our growth was China revenues of $148.1 million, a 25.9% year-over-year increase. This is primarily driven by our strong record sales that make up more than 95% of China sales in the fourth quarter.

International revenues were $168 million, a 14.7% year-over-year growth. This represents 53.1% of our total sales. Emerging markets excluding China continued to drive our performance in the fourth quarter with growth of over 20% all together.

Non-GAAP gross margin was 58.5% higher than the 54.7% in the fourth quarter of 2011 and 56.5% in the third quarter. The sequential increased was the result of our product mix and service efficiency improvement. The year-over-year increase was primarily due to better discount control, product mix and service efficiency improvement.

Our non-GAAP selling expenses were 16.2% of total revenues, lower than last year’s level of 19% and the previous quarter of 17.8%. The improvements were primarily due to improved efficiency in China. Non-GAAP general and administrative expenses were 11.4% higher than 6.3% in the year before and 9.2% in the third quarter of 2012. The sequential and year-over-year increase was primarily a result of higher year end bonus, legal and compliance costs and compensation expenses related to the realignment of US operation.

We have continued to invest in R&D over the past quarter. Our non-GAAP R&D expenses were 10.1% of total net revenues compared to 9.3% in the same period last year, and 8.6% in the previous quarter.

Our non-GAAP operating margin was 20.8% and our non-GAAP net margin was 19.5% for the fourth quarter. EBITDA was $71.9 million, a 24.8% increase over the fourth quarter of 2011.

Our cash conversion cycle continued to improve this quarter. It was 89 days in the fourth quarter down from 100 days a year ago and 106 days in the prior quarter. Even excluding seasonality patterns, our working capital also improved because of better receivables collections and inventory control.

Our accounts receivable days were 53 days, versus 66 days in the same period last year and in the third quarter. Our inventory turnover days were 83 days compared to 78 days in the fourth quarter of 2011 and 100 days in the prior quarter.

We are pleased with our progress and we continue to adopt cautious credit policies and enforce insurance protection in our key markets worldwide.

Now on to the full year highlights. Our net revenues grew 20.4% year-over-year to $1.06 billion. Excluding the tax benefits, our non-GAAP net income grew 18.4% year-over-year to $211.7 million. We have improved our gross margin which was 57.2% for 2012 versus 55.8% in the prior year.

Our non-GAAP operating margin was 21.1% in 2012 in comparison to 21.2% in 2011. Our full-year non-GAAP net margin was 20% compared to 21.2% in the year before. We generated very strong net operating cash of $325.7 million in 2012 representing a 69.3% growth compared to the previous year.

Our full-year capital expenditure in 2012 was around $66 million similar to our target. To show our commitment to the shareholders, the board of directors has declared a cash dividend on this ordinary share of $0.50 per share based on our net income for the full-year of 2012. This is the seventh consecutive year that we have declared dividends following our IPO in 2006.

In the next few years, the board of directors intends to put a sight around 20% to 25% of the annual net income for dividend distribution upon annual review.

I now turn it over the call back to Jie who will discuss our initiatives and sales trend by region.

Jie Liu

Thanks Alex. I would like first to discuss our big sales contribution region namely China and the emerging markets then on to the developed markets. As Alex discussed, we had another robust quarter for our domestic sales. China sales growth was 25.9% year-over-year. Such robust growth was a result of our IVD sales streams or improved sales (inaudible) that had allowed us to capture more opportunities as well as our expanded direct sales platform had enabled us to provide better customer service.

The sustainable strong domestic sales in the last couple of years reflect the success of our strategy. Our IVD sales in China was strong in the fourth quarter, thanks to our high end product such as BS-800 and the BC-6800 which ramps up our reagent sales in the high end segment penetration.

Over the last few quarters, we have continued to expand our product offering and integrate other IVD bills we have acquired by accelerating the process of developing one new plan incentive dedicated for IVD product manufacturing to meet future expansion.

We're optimistic about the future growth prospects of this segment based on our increased brand recognition and attractive products as well as gradual change in marketing trend in which service sales we have become a more important source of profit for hospitals.

Overall, healthcare spending environment in China continue to be positive, as the government aims to direct more patient visit to the country level hospitals and invest in expanding and upgrading these hospitals as our domestic and medical device leader with strong presence in the mid end markets Mindray is well positioned to benefit. This together with our internal initiatives makes us confident about our long-term competitive position in the sector.

As for our international sales, we recorded a growth of 14.7% in the fourth quarter. Emerging markets grew more than 20% on the whole, demand in the overall the emerging markets remained strong despite the political uncertainties and the currency risk in some regions.

You’ll probably remember that we have expanded our key account coverage in the top emerging countries and each has our capability in public sector participation, these investments continue to payoff.

In the fourth quarter, Latin America represents the highest growth region with over 50% of sales growth. We did very well in Brazil, Colombia and the Venezuela. We also recorded more than 40% sales growth in both Africa and the Middle East due to our improved grown sales in the service infrastructure in Africa and the strong Turkey sales in the Middle East.

Looking ahead, we remain confident about our expansion plan to capture opportunity in key emerging countries and we expect this margin to further lead our incentive sales growth.

Developed market sales grew around 6% year-over-year. Western Europe posted more than 30% growth while North America sales drop single-digit. Our growth in the Western Europe markets was mainly because of big orders in UK.

In North America like other industry participants, our performance was largely due to weak hospital demand. But we have implemented our sales realignment program in the fourth quarter to improve our competitive position and efficiency.

Based on our track record, we are confident that such program will also bring substantial benefits to our organization like we did in other regions. Looking ahead, we are still cautious about Mindray hospital spending environment in the developing markets.

Over the long run however, considering the government desire to reduce overall headcount cost, (inaudible) our company's owned initiatives, we strongly believe that many opportunities are available to Mindray because of our competitive value proposition, comprehensive sales service platform and the increasing brand recognition.

Now let me give you a break down of performance of our different segment in the fourth quarter. Our anesthesia products and different layers and the surgical equipment contributed to the growth of our patient monitor life support segment in the fourth quarter with the upcoming launch of Phase 7, Anesthesia product. We expect Anesthesia product and the surgical equipment will continue to drive our sales growth.

In the IVD segment, the reagent the five part hematology analyzers and the mid end by chemistry analyzers was best selling product. The BC-6800 are most sophisticated hematology systems with high possessing speed kept us target some mid-to-high end markets, and to spread our hematology reagents sales growth.

The biochemistry reagents sales also grew significantly based on the ramp up of an installation based of BS-800.

Going forward, we also expect the BS-2000 our fastest by chemistry analyzer to help out the further drive our sales. For the medical imaging segment, like Ultrasound and the portable color ultra sound system to allow our growth. With the sales ramp up of DC-8 and the launch of the economic DR products, we believe this quarter will also help us gain a stronger foothold in China and other emerging markets.

Now I will pass the call back to Alex to discuss our outlook for 2013.

Alex Lung

Thanks Jie. As we discussed in January we are maintaining our guidance of more than 17% year-over-year sales growth for 2013. Overall, we expect China and other emerging markets to remain a primary growth region for our business. We think that China will have the most favorable prospect for us, due to our strong competitive position as well as continued favorable private and government spending trends in the healthcare industry.

In emerging markets, the picture is a little more mixed. We see both private and public opportunities. But regions that have political instability or currency risks could present headwinds for us. In the developed markets as Jie stated, we are still cautious about the operating environment. However, we will continue to work on expanding our presence and we believe that our long term competitive position remains strong.

Last year we successfully expanded our gross margin and kept our operating margin at a similar level to the previous year. This is consistent with what we have been saying and we are pleased to have delivered this goal. Looking ahead for 2013, although we plan to further strengthen our international sales, services and other support infrastructure, especially in the emerging markets, we will expect our gross margin and operating margin to remain stable.

We believe that the investment if necessary for Mindray to establish a strong position in the global marketplace in the long run. Overall our company still is in its growth phase and we will try our best to strike a balance between making investments to pursue top line growth and profitability. Other non-operating figures such as government subsidies and interest income are difficult for us to predict. But as consistent with our past practice, we will give you our non-GAAP net income guidance.

We project that this year’s non-GAAP net income will grow more than 15% year-over-year. Excluding any tax benefits and assuming a corporate income tax rate of 15% for our Shenzhen subsidiary. Lastly, we expect our capital expenditure to be 130 million for this year. As disclosed previously we lowered our CapEx guidance from 90 million to 70 million in 2012 due to project approval delays from the government last year.

We are expecting to use that 20 million budget in 2013. This guidance excludes potential M&A expenditure and we will continue to actively seek external merger and acquisition opportunities. That could bring complementary technology or products to our company. This finished my prepared remarks and I would like to turn the call back to Cathy.

Cathy Gao

Thanks Alex. We will now open the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ingrid Yin of Oppenheimer. Please ask your question.

Ingrid Yin - Oppenheimer

The first one is on the guidance of the higher than 15% on the non-GAAP net income. If we compare that with higher than 17% of revenue guidance, there is a certain operating deleverage assumption during. We see really a positive trend in gross margin in 2012, its 150 bps higher than 2011 and can you give us some color, which expense line will cause this deleverage assumption. Is it selling, marketing or G&A or R&D and going forward, how should we think about gross margin in 2013? I know, Alex comment it will be stable this year but, we see really down last year. Is that sustainable for this year?

Alex Lung

Actually, the different growth rate above the top line and the net income line mainly coming from our expectation of the growth for the non-operating income. I think you observed in 2012 also the non-operating income cannot keep up with growth rate as the operating side, because of the overall environment in China lending environment we believe that it is going to continue in 2012 and closes the different growth rate.

I think we also discussed that in 2012 we have been able to achieve a stable operating margin and we did achieve the profit growth rate similar to top line. In 2013 this is something that we will continue to strive our very best to maintain that in order to balance our investment and also profitability.

Ingrid Yin - Oppenheimer

How about our gross margin will we see a further improvement or it will be more stable?

Alex Lung

In 2012, it’s actually is the year that we put a lot of efforts improving the quality of our earnings, and we have put up more (inaudible) control on various aspect. And in 2013, we will continue to exercise still cautious about running our business and hopefully that we can continue the results that we have achieved in 2012.

Operator

You next question comes from Bin Li of Morgan Stanley. Please ask your question.

Unidentified Analyst

This is [Isabella], I have a question on behalf of Bin Li. I just want to get the more colour on guideline and can you comment in terms of the mark original performance in 2013 what kind of growth you are expecting in China in developed market especially West Europe and North America and emerging markets, thank you?

Alex Lung

This is Alex Lung for the question. Overall the top line growth is 70% based on our assumption that China is going to lead the growth. We expect china to grow that around higher than 20% and followed by emerging market which is the second key growth driver which is just around 19% and then for the developed market comprising Europe and North America is on the single or low single digit, growth rate.

Unidentified Analyst

Can you put down by west Europe and North America?

Alex Lung

North America we expect it to be in the region of mid to low single digit.

Unidentified Analyst

So in that sense you said the overall the west market is low single digit and the North America is middle to single digit which means west Europe is going to be flat?

Alex Lung

Western Europe we expect is going to grow mid to high single digit.

Unidentified Analyst

Allow me to ask of follow up question; in your remarks you said that the west Europe sales growth in 4Q was that 15% or one five; how much was the 4Q sales growth?

Jie Liu

More than 30%.

Unidentified Analyst

More than 30%?

Jie Liu

Yeah, three zero.

Operator

Your next question comes from Jessica Le of CICC. Please ask your question.

Jessica Le - CICC

Your reagent sales contribution in 4Q was slightly below that in the third quarter and yet your gross margin improved sequentially. So could you please help us understand what other factors could have contributed to the gross margin improvement in the quarter? And then the other question is on your other sales. They were strong in the quarter which included sales from orthopedics business, so could you please provide us with more color on this business? Thank you.

Alex Lung

Hi, this is Alex. Thank you very much for the questions. I think the reagent as a percentage of total IVD revenue that's year-over-year growth increase; although sequentially there has been some fluctuations; but the overall effect on the overall gross margin as we mentioned you know within three different sectors is one area effecting the gross margin and secondly its partly also related to some mixed factor within the individual product line as well. So there has been two dimensions of mix affecting the overall gross margin. And then thirdly, the gross margin improvement is also from the pricing control we continue to execute that gives rise to an improvement in the gross margin. Your second question about the others, the significance of the increase of the others is actually coming, is still coming from the increase in service revenue mostly generated from improvement is coming from China.

Operator

Your next question comes from Richard Yeh with Citigroup. Please ask your question.

Richard Yeh - Citigroup

My question is related to the accounts receivables actually improved from 60 days to 53 days; can you update us where is that improvement coming from? Also on your 2013 guidance on the topline, can you break down where the growth is coming from for the 17% and also have you assumed how much have you assumed that growth is coming from previous M&A done in the last couple of years? Thanks.

Alex Lung

With regard to the accounts receivables performance in the fourth quarter, actually we have observed collection improvement from all of our regions to a different extent that covers the improvement on the North America and Western Europe and also from China and then emerging markets. We have put up a lot of efforts in terms of collections and in order to improve our working capital positions. With regard to your second question about the guidance of the 17%, as I mentioned earlier, driving the growth will be China of over 20%, emerging markets with the high teen and the developed markets will be mid single-digits.

Operator

Thank you very much. Your next question comes from [Li Yi] of Goldman Sachs. Please ask your question.

Wei Du - Goldman Sachs

Hi, this is Wei. I guess I am pretty impressed about the gross margin that the first question I think, Alex you guided, you tried to maintain 2013 margin at similar level and I think that probably sets company’s confidence, management confidence on the new product launch and I think that’s one of my assumptions. I think increasing reagent sales and optimizing product mix make a significant contribution, so whether you can confirm that?

I think the second question is a bit more direct and Alex and Jie, I am not sure whether you can provide more color. I guess, I want to give you some [the factors]; obviously, everybody is concerned about the previous FDA warning letter and how much that’s going to impact your North America business. I understand North America contribution to the earnings is quite small, but I think we want to know what will be the potential impact or if you can give any color what the management has to address in terms of like say the GMP centered and also Alex I am not sure this is too sensitive, whether you can give a bit color on the potential law suit with [Masimo] your supplier, I am pretty sure everybody want to ask that question, I happen to be the one to speak up? Thank you.

Alex Lung

Hi this is Alex. I may be answer one of the finance related questions and then I will pass it to Jie to the other operating related questions.

Wei Du - Goldman Sachs

Okay. Thank you.

Alex Lung

Yeah, it’s quite a number of questions in working there. May be I just……

Jie Liu

It is a pretty challenging question, including so many (inaudible) different perspective of the business….

Wei Du - Goldman Sachs

I know, I know, I am sorry.

Jie Liu

Too many; let’s say just squeeze one by one for the Masimo case, that’s ordinary case, right. When you do the business in the medical field, specifically in the medical technology, there are the many different...

Wei Du - Goldman Sachs

Okay. First on the first one, I am sure just the margins, obviously 2012 full year margin have been quite strong and I think if you can give us a bit fundamental reason why it’s so strong and then whether you are confidence that’s going to be sustainable?

Jie Liu

For the margin I’ll move to Alex.

Alex Lung

For the margin part I think the key achievement of what we have done this year is that on the overall control of the pricing and control of the discount is one of the key drivers for the achievement supported by our continuous improvement in cost structure from our supply chain and manufacturing. Those two couples one of the key improvements in our overall margin expansion. And this year in particular, we have seen more efficiency gain coming from our service business especially we have also achieved good result on China, so that also actually help us in the overall improvement in margin as well.

And you mentioned earlier in your question about the mix, in this year I think we have a very good achievement from the increased in the Asian sales as a proportion of total IVD sales. This actually help us to expand more of our revenue stream been to consumable related aspect and that effectually a more sustainable revenue.

I think one of the factors other than the IVD have a very, very good growth in this year, I think our other sector is also growing at a double digits, so that also overall help us to improve the overall economy of scale that can achieve a better margin.

Wei Du - Goldman Sachs

Thank you. Jie I think in my second question a little bit brief actually I think you know everyone is want to know big color on the FDA warning letter and the potential impact to, I guess you can give us scenario now just or maybe how many trend would adjust that would that affect your, let's say operating margins things like that basically, what is going to be our major concern?

Jie Liu

I think everybody know that FDA onsite audit is normal practice for every device company who apply for their (inaudible) the FDA approval. So for us it’s the same so every two years they are mollified onsite audit. So that's a normal process but the way they do their audit is they have their different audit or probably have a different interpretation regarding the standard regarding the terms the FDA require.

I think we are very consistent to provide the high quality product and a very good compliant system, its compliant with FDA requirements. When they see there are different explanations of the requirement, we are very corporative to meet the new standards, the new requirements because now it is that the auditors pushing to the device manufacturer to the pharmaceutical standard. So the other way we working together with FDA auditors, FDA officials to make sure we provided the high quality products to make sure we care about patient safety and the quality of care. So that's what we are doing, that's a normal situation.

Operator

Your next question comes from Jinsong Du of Credit Suisse. Please ask your question.

Jinsong Du - Credit Suisse

I would just like to understand a bit more about your guidance for China and also the US because for China obviously I understand that the (inaudible) kind of driver from the governments and everything else but would you let us know the key drivers of that growth in China what are the visibility in terms of your orders like how many months of other visibility and other similar things for the US because I understand that obviously you know that there are some macro impacts in the US and so you said earlier that you have done some restructuring internally as well. So how high is the visibility in the US as far as you could elaborate, that will be great?

Jie Liu

I didn't quite sure get your point but let me rephrase what we explained here, for the China is still maybe the leading growth. They are either as Alex explained earlier we are pretty confident we will be over 20% of growth in 2013.

In terms of US operation basically we were talking about North America that we got (inaudible) for Q4 to some ’12 is single-digit declining. But for the full year it's still single digit growth for the North America, they are moving to near ’13 where we did the realignment of sales force and also the R&D functionality to make sure our Mindray North America operation is more efficient situation we are moving more focus on driving the profitability of the North America growth. So that's all focus on the Mindray North America business.

Operator

Your next question comes from Gideon Lo of Nomura. Please ask your question.

Gideon Lo - Nomura

I have a question regarding your different product division growth targets in year 2013. That’s my first question and second is you mentioned your Europe market, the developed countries market, which was up strongly due to the big orders from the UK and I have question because of Alex said, your target in the Europe market you have achieved middle to high single-digit growth. I just wanted to get more color if you are taking the accounts of big orders in the year 2012, can you repeat this again to sustain a high single-digit growth in the Europe market? Thank you.

Alex Lung

With regard to your question about the European growth in 2013, I think we're very happy about our achievement we've done in the last quarter. I think it actually set a milestone about Mindray with regards to its brand recognition in the Western European markets which is traditionally is all dominated by the Phillips and Siemens.

I think what this is actually is something that give us some more confidence that the efforts that we have put together in building the brand, introducing the product so that the market understands the value proposition of Mindray products is actually virtually a (inaudible) and we continued to apply our strategy into the Western Europe with our direct sales team and also with the improvement in introducing most of the products into the same region and hopefully by exercising the strategy consistently, we will be able to gain more recognitions. I think that is the path we believe at we can achieve in Western Europe and it will be the key about our expected growth targets.

Operator

Fine. Thank you very much. (Operator Instructions) Your next question comes from Sean Wu from JP Morgan. Please ask your question.

Sean Wu - JP Morgan

I have like [US] pretty minor growth for this quarter is only like 13%, I guess that has something to do with your US sales. Normally, of your US revenue carry takes like higher gross margin or lower gross margin, or the debt have anything to do with your very high gross margin for this quarter. And related to that I have a question on your G&A even if we take out 9.7 million for the provision of US (inaudible), the G&A loses still much higher than last year, do we expect to see the same level of G&A and also do we expect to see the same like a low level selling expense ratio for this year? Those are my questions. Thank you.

Alex Lung

Hi Sean, this is Alex. Thank you very much for your question. I think with regards to the US gross margin contribution let me just remind you, actually the business in US is mostly on the patient monitor side and you know that in our (inaudible) product line, actually patient monitors are bearing relatively the lower of the gross margin range as compared to the other product line, so that will be the comparison, I will say for the US.

So for your second question about the G&A, as I mentioned earlier on the call, actually in this year our G&A increased as a result of number of factors including the legal and compliance cost that we incurred and also the cost incurred in the realignment of the US operations and also to more of year-over-year just a general bonus recording, so those are the key factors that actually increased the G&A in this year.

Operator

Your next question comes from (inaudible) Jefferies Group. Please ask your question.

Unidentified Analyst

Just two quick ones; one on China growth, I am wondering if we can just get an update on actually how many county level hospitals have been modernized to tier II status and just sort of what is the runway there and perhaps where your market share is in those hospitals that have been upgraded in terms of equipment purchases. And then on the US side, I am just wondering if we should expect a replacement for the North American President, thanks?

Jie Liu

Hey, this is Jie, for the China sales we have roughly we phased class two hospital roughly to more than 6000 hospitals. But for the county level hospitals there are two different standards, the one is county level hospital, county hospital as there are county people’s hospital. Another one is a traditional Chinese hospital in the county. The kind of county level hospitals. So in China you have about roughly 2000 counties, you can calculate it as roughly 4000 county level hospitals.

This is kind of their calculation. In terms of market share within specific segments we don't have this kind of exact number for that, but especially in this kind of county level hospital we have more market share than the general market we have. For the US what's the question?

Unidentified Analyst

President.

Jie Liu

We have new President George Solomon and he has more than 30 years experience serving in the healthcare industry where (inaudible) people to lead our next efficiency improvement for the mobile operation within the next short term period.

Operator

Your next question comes from David Turkaly from JMP Securities.

David Turkaly – JMP Securities

I know you had some correspondence over bad debt expense in the accrual and I think there was a comment that was made that you might actually increase that. Can you tell us what the level is for 2013 and is that going to go up say the 7 million to 8 million that's been recognized in the past.

Alex Lung

I just want to make sure I understand the question. You are referring to 2013?

David Turkaly – JMP Securities

Yeah, just for your bad debt accrual. I know that it’s around 7 million or 8 million. I know your receivables have grown over the last couple of years, and it sounded like there could be a potential change to increase that and I was wondering if that might have had some impact on your 2013 expense levels. Will that expense be going higher and how much.

Alex Lung

Let me just step back a little bit. Actually we have a bad debt provision policy that actually makes necessary provisions against long outstanding receivables and we have been consistently applying the same policies. So in a way the receivables provision will fluctuate from time to time as a result of the change in the ageing profile of our collections.

So it’s difficult for me to give you how it is going to perform in 2013, because I can’t possibly predict how this profile is going to look like. But from how we see our (inaudible) receivables days that we have achieved I think to us its that obtaining, achieving a fast collection is one of the key points and second point is that its important for us to keep a minimal on the long outstanding amount to maintain the quality of our asset. I think this is the goal the company will continue to be focused on. So I think that’s my summary to your questions.

Operator

Your next question comes from the line of comes from Richard Yeh of Citigroup. Please ask your question.

Richard Yeh - Citigroup

I just wanted to get some color on the market dynamics for the county level hospitals and also the class III hospitals. In the fourth quarter can we assume that county level hospitals growth is actually higher than the class III and how does that reflect in the financial guidance for 2013 and also for the top line growth for 2013, China sales, which segment will drive the 20% or more top line growth? Will that be the IVD segment or other segments? How much would the patient monitor be? Thanks.

Jie Liu

In terms of in the market change in China (inaudible) market, the two gross area, one is the country level hospitals another gross area is tier I hospitals, actually they are the big class III hospitals. But we are growing more in the country level hospitals. The difference is that country levels hospitals and the class II hospitals, there are some class II hospitals in the city didn’t grow too much in 2012. So our growth is actually coming more from the country level hospitals.

In terms of the accruals for the specific segment we don’t give the guidance, but what I can say is that for China basically the leading segment growth will be the IVD segment in the 2013.

Operator

Your next question comes from Sean Wu of JP Morgan. Please ask your question.

Sean Wu - JP Morgan

I just have a very quick question. The use of (inaudible) launch in seven to 10 product, I sense like you ramped up R&D activity last year and then you have been spending more money. In this case (inaudible) kind of the same amount or launch; so anything to do with product activities or you are just trying to launch a better product. And related. I think in this year, last year was a pretty weak for your medical [imaging] sales. So are you doing some of the thing to try to improve the sales out there in the segment and how many of the seven to 10 product we should expect to come from this segment? I just stop here thanks.

Jie Liu

Sean. You are right it is always difficult to judge the R&D productivity and efficiency. I think we would try to really balance the short term gain in the long term growth also. Not only provide some part immediately selling, but also we need to accumulate the skills and technology and some of them are not available at this moment to us.

So while you are moving up the value chain it takes more time to develop the high end of products. So that’s the reason sometime it’s hard, it’s difficult to justify the number of the new launched products. You need to see what will be launched, and also depending on the timeline sometimes some year more products get launched and some year you have more big product that means they are selling well the products, get long, its depends.

I think during the year 2013, we are pretty confident that we have someone in the (inaudible) side that will be the very good product we believe it will drive the growth of IVD more significantly, so that’s probably a good thing.

Operator

As there are no further questions at this point in time. I would like to hand the conference back to your host for today, Cathy Gao, thank you Ma’am, please go ahead.

Cathy Gao

Thank you everyone for participating in this call, as always, we appreciate your support on Mindray. The replay of today’s webcast will be available later today. Our management team and the IR team will be also available for questions. Thank you everyone.

Operator

Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.

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