Mindray Medical International Ltd. Q4 2008 Earnings Call Transcript

Mar. 5.09 | About: Mindray Medical (MR)

Mindray Medical International Ltd. (NYSE:MR)

Q4 2008 Earnings Call

March 5, 2009; 8:00 am ET

Executives

Xu Hang - Chairman & Co-Chief Executive Officer

Li Xiting - President & Co-Chief Executive Officer

Joyce Hsu - Chief Financial Officer

Jie Liu - Chief Operating Officer

Minghe Chen - Executive Vice President of Strategic Development

Ronald Eit - Group Vice President of International Operations

David Gibson - President of Mindray DS USA, Mawa

Lisa Li - Mindray’s IR Representative

Analysts

Shao Jing Tong - Bank of America

Hungbo Lu - Pipper Jeffrey

Hoki Luk - Citigroup

Yale Jen - Maxim Group

Ben Li - Morgan Stanley

Jinsong Du - Credit Sussie

Operator

Good morning and thank you for standing by for Mindray’s Fourth Quarter 2008 earnings conference call. At this time all participants are in a listen-only mode. After management’s prepared remarks there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to your host for today’s conference, May Li, Mindray’s Head of Investor Relations Manager. You may proceed.

May Li

Hi, everyone and welcome to Mindray’s fourth quarter and year end 2008 earnings conference call. Our financial results were released last night and are available on the company’s website as well as on news wide services. In addition, an archived webcast of this conference call can be available on the Investor Relations section of our website at www.mindray.com.

Joining today’s call are Mr. Xu Hang, our Chairman and Co-CEO; Mr. Li Xiting, our President and Co-CEO; s. Joyce Hsu, our Chief Financial Officer; Mr. Jie Liu, our Chief Operating Officer; Mr. Minghe Chen, our Executive Vice President of Strategic Development; Mr. Ronald Eit, our Group Vice President of International Operations and Mr. Gibson, President of Mindray DS USA, Mawa.

Our management team will review the year end highlights as well as make comments regarding the current financial and market environment in each of our major sales markets. Afterwards management will be available to answer 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. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today.

A number of potential risks and uncertainties are outlined in our public filings with the SEC. Mindray does not undertake any obligations to update any forward-looking statements except as required under applicable law.

I’ll now turn the call over to Mindray’s CFO, Mr. Hsu.

Joyce Hsu

Good morning ladies and gentlemen and thank you for joining us today for our 2008 fourth quarter and year-end earnings results conference call. Despite a turbulent operating environment in the second half of 2008, Mindray continues to deliver its excellent revenue and profit growth as well as strong operating cash generation. We also maintained our focus on a strategic and balanced approach to grow our business across all three main product segments in geographic regions.

I would start off with some key numbers for the full year and will add color to the fourth quarter numbers after Jie Liu reviews fourth quarter sales and segment data a little bit later. We are very pleased to report that our net revenue grew 86% to US $547.5 million for the full year over 2007.

The company’s full year non-GAAP net income increased 49.7% to a $132.7 million over year 2007, representing a healthy net margin of 24.2%. In addition, in fourth quarter 2008, we have generated $40 million in operating cash flow. Our R&D investment in 2008 was approximately $52 million or 9.5% of the revenue and it’s focused on expanding our product portfolio as well as continuing to drive down our manufacturing cost.

As a result of our R&D efforts, we exceeded our goals for new product development outlined for the year, by introducing 10 new products in 2008 and brought the total number of products on the market to over 60. As previously announced in 2009, to further expand our portfolio and our potential market opportunity, we plan to launch another seven to nine key products including the company’s first surgical light and the first surgical bed, and the more advanced color ultrasound system and a line of economical anesthesia machines.

Additionally, Mindray and Mawa will launch their first joint developed patient monitoring devices in 2009. Looking forward, we will maintain our commitment to productive and disciplined R&D spending as we continue to optimize R&D resources between Shenzhen and other R&D centers and realize synergy from the integration. Before I dive into financials, I would first turn to our COO, Mr. Jie Liu to spend a few minutes to discuss our self strengths for the fourth quarter and year-over-year segment numbers.

Jie Liu

Good morning ladies and gentlemen. I would like to spend a few minutes to provide some additional color on the drivers of sales.

Domestic market; our domestic market China remained strong in the fourth quarter, 2008 revenue increased to $72 million or 63.6% over the same period last year. Tender activity in the market together, from third quarter level as Chinese Government shifted focus back to the economic initiative after the Olympics in third quarter.

Tender sales accounted for 9% of our domestic sales during the quarter of Q4 and 11% of the year. Going to 2009, we expect tender levels to continue to grow up and it should end the year at a slightly higher level in 2008. The recently announced on our spending target of RMB 815 billion by the government as part of the stimulus package reinforced the committed spending in healthcare in the next three years.

Hence we believe the overall industry gross should hold up at around 20%, similar to that 2008 level. In 2008, we continue to gain much sale through all product categories in China, with growing contribution from new products launch since 2007 and our continuous penetration into more Tier 3 hospitals with our higher-end BeneView patient monitors. We are comfortable with this year’s target, to continue our share gains and achieve faster growth than the under line market growth in China.

International market, net revenue generated in international market in the fourth quarter 2008, increased $103.9 million to $95.2 million over the same period last year including Datascope patient monitoring bills, which we acquired in May 2008.

Our international sales experienced volatility particularly in countries where we saw great fluctuation in foreign exchange rates during the quarter. Such countries represent about 10% of our 2008 overall sales and are primarily concentrated in East Europe.

While our growth has significantly slowed in the fourth quarter for international sales, we saw encouraging sales trends throughout October, November and December then we ended the quarter with double-digit organic growth in emerging markets. Our business in the developed countries closed the quarter with flat growth yield for the year in the fourth quarter.

We believe we have felt better than other players in the market, as customers are increasingly focused on higher value driven solutions. Looking ahead, we continue to believe there will be many challenges internationally with slowing economic activities and the fluctuating currencies.

We expect regions such as Eastern Europe and the former south union countries to presume the most challenges given the diminished purchasing power along with the weak currencies and less government funding available. However, we are confident that we can continue to gain market share in many of the markets we participate giving our value of proposition.

Now I would like to highlight some of the main course contributed across our three product line. For the Patient Monitoring & Life Support line revenue continue to top scores the driving market share gains in the high end market in domestic China. The smooth Mawa integration assured steady performance of our international and Patient Monitoring line during the quarter.

For the In-Vitro Diagnostic line our five-part hematology analyzer continues fast goals both domestically and internationally, driving the agent sales upto 18% of the total EBITDA sales. Biochemistry analyzer recorded healthy gross in both Chinese market as well as the international market. For the medical imaging lines or color ultrasound sales continue to exhibit strength internationally, as our products become more widely accepted.

With this I would like to turn the call back to Joyce to discuss the numbers in more details.

Joyce Hsu

Thank you, Jie. I would now provide some additional color on the numbers for the fourth quarter. We achieved non-GAAP gross margin of 55.3% as a reminder fourth quarter sales typically yield a lowest gross margin in the year. We on average include the most inventory revaluation in the fourth quarter as we negotiate pricing with suppliers at year-end.

Our continues cost reduction programs have allow us to further improve our gross margin in existing products. Based on the supply contract specifically negotiated today we are looking at around 10% year-over-year decline in purchasing cost. With these cost reduction measures we target to maintain a steady margin in today’s competitive environment.

Similar to last quarter we received additional software [VATV] based payment during the quarter which were attributed to retroactive sales. The retroactive portion of the VATV fund has contributed an additional three percentage points to our non-GAAP gross margins with out which our non-GAAP gross margin would have been a 52% during this quarter versus 53% non-GAAP gross margin in fourth quarter ‘07.

Our objective in 2009 is to continue to deliver new products into the market place and drive market share across our product portfolio. To support this objective and to address current market condition we plan to pass through most of our manufacturing material cost savings as a result of our vertically integrated model to our customers, which enable us to further strengthen our value proposition and hopefully gain additional market share.

We will target to maintain our gross margin in 2009 at similar levels compared to 2008. As we get throughout the year, during the fourth quarter we continue to exercise a great control over our operating expenses, our non-GAAP operating margin was 21.6% in the fourth quarter of 2008, down 6.1% from the fourth quarter of 2007. Our higher operating expenses ratio is higher in the Mawa operation, the U.S. subsidiary.

We are confident that we will be able to manage our operating margins for the combined business with prudent pricing strategy and disciplined cost management going forward. The Board of Directors has declared cash dividend on our ordinary shares of $0.20 per share based on net income for the full year 2008. The tax dividend will be payable on or around April 24, 2009 to shareholders of record as of March 25, 2009.

Our confidence in the underling business and our ability to generate strong cash flow continued to support our dividend policy.

At this time, let me turn to Ronny for a brief update on our Mawa integration.

Ronald Eit

Thank you, Joyce. I will now provide a very brief update on our Mawa integration. David Gibson, President of our Mawa operation is also with us on the call and can answer any specific questions regarding Mawa during the question-and-answer section. We are happy to report that we continue to be on track with our integration initiatives and have already realized synergies through reduced engineering and material costs.

As previously discussed we began shipping the first batch of Mindray manufactures components to Mawa last October. Our service integration in the U.S. is ahead of schedule, with Mawa already taking over after sales services for Shenzhen products in the fourth quarter.

We have started our European training and anticipate after sales service will begin shortly. In particular, we have been leveraging Mawa’s well established platform in direct sales and service teams in both the U.S. and Europe, through enhanced distribution of Mindray’s existing product lines.

Additionally our R&D and new product development integration is moving along smoothly. Our first jointly developed product is expected to be launched in the first half of this year and will be followed by another in the second half of 2009.

In 2009, we introduced BPM, a lower price product line built on the Mindray product portfolio for the U.S. market. This complements our current Datascope line and provides another entry point for customers looking for more value oriented products.

In 2009, we have begun integrating the Mindray ultrasound product into the same platform of the Mawa operation. The addition of Mindray ultrasound products on top of the current expansion of the patient monitoring product portfolio provides greater opportunity for our sales process to meet the demand of our customers in the current economic environment.

With this, I would like to turn the call back to Joyce to discuss to the 2009 outlook.

Joyce Hsu

Thank you, Ronny. As stated in our release earlier, the company expecting full-year 2009 net revenue to grow at least 20% for the year. This guidance reflects foreign exchange rates assumptions of RMB6.85 to the dollar and $1.85 to the euro. The guidance is based on targeted organic growth of 11% to 13 % for the year and the inclusion of four additional month of sales contribution from the Mawa acquisition, which we closed in May 2008.

The company also expects the full year 2009 non-GAAP EPS to grow 20% over full-year 2008. We are confident that our disciplined cost and expense control including cost energies should allow us to achieve higher organic EPS growth than organic sales growth.

We will continue to invest in R&D, overseas extension as well as building a stronger infrastructure to support our long term growth. We will maintain our strong emphasis in operating cash flow generation, making sure appropriate measures are taken to manage our working capital efficiently.

I would like to make a quick introduction here to a most recent employee incentive initiative that will be rolled out soon. Because of the current economic conditions and the decline in the market price of our shares, the outstanding stock option held by some of the employees had exercised prices that are significantly higher than the current market price of our shares and are no longer providing the incentive that we intended when we granted them.

In response to this, we will give a choice to employees who hold these underwater options to either keep the options they currently have as they were granted or to trade them in for a smaller amount of options at current prices.

I want to stress that this would be an exchange for similarly valued grants, so that there will be minimum cost to the company. Because the employees would give up their prior grants in exchange for the new grants that they receive at approximately equal share market value.

Our board and management believe that this is the best interest of shareholders because it will help to provide adequate incentive to any employees who decide that they prefer to make this change. Further details will be available some time next week, but we wanted to give a quick introduction on the call today. Attracting and retaining best colors in ‘08 has been our priority and we believe long term equity incentive is the best tool to achieve such purpose.

Before concluding our prepared remarks, I would like to make one final comment on the announcement earlier regarding the transition of CFO role. As stated in the release effective May 1, 2009 I will be stepping down from a day-to-day management role as the CFO of Mindray to spend more time with my family.

This has been quite a difficult decision for me as I have watched Mindray grow from a company with only $20 million U.S. in net income to today more than $130 million in net income in less than five years.

When I joined the Executive Team three years ago from being the board member, I have three primary goals. First, it was to help the company with the transformation from a private company to a publicly traded company; secondly, to establish the standards for financial reporting and also corporate governance according to world wide best practices for a public company ; thirdly to help execute the strategic vision of the board in expanding overseas through a strategic acquisition.

Today, I am very proud that our accomplishments on all three goals in last three years and I’m also happy to report that we have assembled an executive team that is extremely talented and committed and motivated to bring the company forward. I remain as committed to Mindray as ever and I will continue as a non-executive director where I will stay very active in the board in the role of steering the strategic direction of the company.

I will also expand my board duties to include serving on the nominations and corporate governance committee, as well as a compensation committee. As I continue to believe that transparency and the ability to attract and retain talents are key to enhance and create long term shareholder value. I will also make myself available and to act in a consulting advisory capacity to the management if, and when my help is needed.

Appointing Ronny to succeed me was an easy and logical choice for Mindray. He posses the breadth of expertise and it’s beyond necessary to leave Mindray in the next stage of our development cycle. At the chair of audit committee Ronny has played a very important role in both financial and operational capacity in Mindray since our IPO in September, 2006.

As many of you know, he has let a successful integration of our U.S subsidiary which is critical component of our long term growth strategy. To many of you on the phone, he is not a new face or voice as he has been very active in assisting our industrial relations effort in the past six months given the anticipate focus on our Mawa integration.

I believe as a CFO, he will adhere to our long tradition of being open and communicative with our shareholders going forward. I will be working closely with him on all finance and shareholder matters over the next two months during the transition and I’m extremely glad the Board has named him as my successor.

We will be making a short trip next week to the U.S. to meet with our largest shareholders jointly and I will continue to be available to meeting or to speaking to all of you during the transition period.

Additionally, we plan to complete our 2008 audit and file our 2008 annual report before I officially step-down from the CFO role and hand it over to Ronny at the end of April. I believe the transition will be orderly, both externally and internally. I want to re-emphasis that I remain a very interested stakeholder in my Mindray and our Senior Managements interest is allied with our shareholders given the equity ownership culture in Mindray.

At this time, I would like to ask Ronny to say a few words.

Ronald Eit

Thank you, Joyce. Good morning and good evening to everyone on the call. I’m honored to be asked by the Board to take over the CFO position of Joyce. I’m also aware of the difficulty in any CFO transition and the ever bigger challenge in succeeding Joyce. In the past three years, assisting the CEO’s, Joyce has helped to leave Mindray, to a number of a significant achievement in the company’s continuous development into a global public listed company.

As Mindray has passed several corporate and commercial milestones, Joyce has become an integral part of the company. I’m glad that after Joyce steps down from the CFO position in May, she will continue to serve Mindray as a Board member and will continue to advise the company moving forward.

In the coming weeks and months, I look forward to meeting many of you who are on the call today. We as a company are committed to making this transition as smooth as possible. We will continue our policy of providing an appropriate information and we aim to maintain long-term relationships with our investors. We also look forward to continue to receive your support as we move forward.

At this time, I would like to thank you all for your continued support for Mindray and we now will return to the operator to open the call for questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Shao Jing Tong - Bank of America.

Shao Jing Tong - Bank of America

I just have one very straight forward question on your guidance. You implied that your growth for 2009 will most likely be back end loaded, I can think of several reasons for that one is seasonality, the other could be the government policy in China that could show some benefit in the second half of 2009 and also probably new product launch timing and lastly, could be some cross selling benefit in the U.S, probably showing up later of this year.

Within these reasons I can’t think of, which reason do you think is most important for that and also this back end loaded growth is that more referred to the revenue side or is that more referred to the income side?

Joyce Hsu

Thank you, Sho Jing its Joyce, I’ll take this question. I think a lot of reason that you’ve pointed out in your question are very valid when we look at 2009. As we continue to believe that first half of 2009 will be very challenging environment and we are hoping that the second half of 2009 over economies and also the currency situation would stabilize.

On both the revenue and the net income side, we believe it will be more back end loaded as we ramp up our new products that are being introduced through our Mawa subsidiary and as we look at China, where government has expressed its desire to continue very healthy level of spending into healthcare. A lot of the activity are likely to pickup after March and hopefully, well into the end of 2009.

Operator

Your next question comes from Hungbo Lu - Pipper Jeffrey.

Hungbo Lu - Pipper Jeffrey

Thank you. The question is probably for Joyce. On the non-GAAP EPS guidance, Joyce can you give us your underling assumption for share based compensation, amortization and also share counts, tax-rate, interest rate. What I try to get out of here is, you did say at least 20% year-over-year growth for top-line revenue, but you said 20% non-GAAP EPS year-over-year growth.

So, I try to understand if there is any operating leverage here because in the fourth quarter the operating expenses is little bit higher than what we have modeled. Thank you.

Joyce Hsu

Okay. For 2009, in terms of the share based amortization, currently I think with all the grants that are issued as of today will coming probably around the same level as we have expense in 2008. With the auction re-pricing program we expect that it should add minimal cost to this share based compensation. On the amortization of intangible side, we are expecting around $8 plus million U.S dollars in charges this year and this is related to both the acquisition that we made last year in May as well as the minority buyout that we executed in April, 2006.

Going back to the comment about the fourth quarter expense ratio, typically at the year end we tend to chewed up a lot of accruals, we try to make accruals through out the year related to expenses that are only being pay out at the year end, but at the year end typically there will be some chew-up expenses accrual during the last quarter and therefore making the expense ratio slightly higher every year and the fourth quarter.

In addition, given the current market environment we have also taken a very prudent approach in looking at our bad debt reserve. We have reserved an additional $1.5 million U.S in bad debt in fourth quarter and that will fall under the G&A expense.

Operator

(Operator Instructions) Your next question comes from Hoki Luk - Citigroup.

Hoki Luk - Citigroup

Hi. Thanks for taking my questions. I have a question on the China sales. It looks like the trend has been very strong especially in this past quarter even though the RMB flow Appreciation, you guys still grow at about 64%. So, can you give us a sense of what the organic growth is for this last quarter and what you expect for 2009? I believe that you expect next year China sales to represent about 40% of sales with about 30% of growth rate. Are you still sticking to that guidance?

Joyce Hsu

I think 2009, our assumption is that as Jie said earlier in his prepared remarks that the underlying industry will continues to grow very healthy and probably at around 20% similar to little more in 2008. The fact that the government has announced a number of programs or stimulus initiatives, we enforce our belief that the spending will be there. So we are looking at a very healthy underlying market trend.

Our target is to grow around 25% to 30% this year in domestic sales and that has taken into the consideration the new products we have introduced in the last 18 months, as well a very large market share base in China for 2009.

Operator

Your next question comes from Ben Li - Morgan Stanley.

Ben Li - Morgan Stanley

Hi, Joyce can you put down the regional sales for the international business was, now we are two months into the first quarter? I know it might be too early for you to talk about the numbers, but I was wondering whether you can share some business trends you are seeing now, for example have you seen international distributors start to restock inventories which regions it doing better, which region is lagging and is the lagging mainly because of a weak currency or weak fundamental demands?

Joyce Hsu

Thank you Ben, I will actually break this question and turn it over for the Mindray legacy sales. I would like to have our COO, Jie Liu to answer the question. For the emerging market trends I would like to have Jie Liu to answer the question and for developed market mainly North America and Western Europe, let me turn it over to Dave Gibson, who is also with us on the call to answer it answering. I’ll first begin with Jie.

Jie Liu

Hi Ben, this is Jie. Specifically for the quarter sales we probably we would not disclose specific number at this time, but for the full year 2009 we see domestic China still keeping the very health and a strong goals because of their many new product reintroduction and also they come in the similar package and the focus on healthcare reform thus bringing a lot of potential growth for Mindray domestically for the next three years from 2009 to 2011.

So that’s very strong in China domestically. For international, currently further probably all you know in some countries such as from Eastern Europe or some other countries had a very serious currency fluctuation issues. The demand is actually affected in some ways. This kind of those affected countries accounted probably 20% of our total sales. Half of them, may be that’s 10% of company sales will be affected in those countries, may be some other countries in another half of the emerging markets may be remaining relatively stronger compared with those countries.

So for the emerging market basically some countries going up steady and there are some other weakening countries because of their currency issues and also less demand and the less funding available that be in total we’re keeping to either flat.

We did invest in the markets by providing more resources to the sales team, that means we have better access to the end users now, we are continue to establish in more reference side and make more communication with our end user to make sure we understand different markets better in the future, when their economy is going back to normal we are in a better situation to grow. For the developed countries Dave Gibson may. Dave are you there?

David Gibson

Ben, I think that one thing that is better now compared to last time on our last earnings call is our markets in the developed world stabilized out quite a bit, both on the exchange rate basis and on the visibility where the market is going, I think everybody has got an adjusted operating in a new environment and the hospitals are purchasing and the governments are involved, its stabilizing and we are moving forward. I can say that we are able to move forward pretty close to our expectations of where we wanted to be pre-crisis we weathered the storm very well.

We have introduced into the U.S. market as Joyce mentioned, a product line which is sold by the Datascope direct sales team that was produced based upon the selections from the Shenzhen Mindray patient monitoring line, which is very well suited for the more price conscious customer, its not looking for the level of connectivity and design specification that we have in the Datascope, Passport 2 Spectrum and Panorama product line, but still wants to achieve a high level of functionally for the dollar and that has allow us to better maintain the price points of our previous Datascope line, while being able to compete in the more price sensitive transactions and deals that are out there.

It’s helping improve our success while the overall market has less activity going on, we are able to increase our success for the net market and live up to the expectations that we had before and I think weather the storm very well. There is always they are still an element among for its ability to still lot of government action in play.

We’ve got to see where the current spending bills and proposed budget layout in terms of any Medicare, Medicaid reimbursements or changes and clearly elected procedures, there is no getting around it. They are down which does impact part of our business, but we have been able to offset that by growing in other areas and Europe follows a very similar story.

We have also been able to integrate our sales team in Europe and we have made some good progress on this in U.S. as well towards selling both brands both product lines together for patient monitoring and we’ve gotten some very good traction in improving the performance of the BeneView in Europe in particular in Q4 to help us, as I said increase our success rate within the current market environment and maintain our ability to meet our expectations.

So, Ben I hope that answers your question and provides a little more color to it.

Operator

Your next question comes from Jinsong Du - Credit Sussie.

Jinsong Du – Credit Sussie

This is a very simply, may be even naive question. Your top line guidance was more than 20% growth and your bottom line which was non-GAAP EPS just 20%. So that doesn’t mean that there is a lack of visibility in terms of expenses in ‘09 or is there for any other reasons?

Joyce Hsu

I think when we went out with the guidance, we wanted to make sure that in terms of the top line growth, we target to grow at least 20% and we are hoping that we can potentially do better. On the EPS line, we believe that we have taken into consideration the gross margin trend as well as the expense trends to arise at a 20% growth assumption. This is only beginning of March; I think there is still a lot of a challenge ahead of us and a lot of variables in the market. The management will do everything we can to try to achieve this target in 2009.

Jinsong Du – Credit Suisse

Yes, but is the bottom line growth low end guidance. Is that the minimum you are achieving is a 20% growth or is it like around, because it’s weird to fined the exact guidance, kind of 20% exact numbers?

Joyce Hsu

It’s around 20%. Our target is to achieve 20%, but as I said and as I think many of us said on the call there is a lot of challenges and variables in the market. We can’t predict what will come out and I think we internally have a target of achieving 20% EPS growth and I think depending on how the market turns out and a lot of it also depends on our internal effort which we are committed to making sure that we keep up the execution and to achieve at the 20% growth at the EPS line.

Operator

Your next question comes from Hongbo Lu - Pipper Jeffery.

Hongbo Lu - Pipper Jeffery

Thank you, actual a follow-up again. What’s the share count assumption Joyce went into your non-GAAP EPS calculation?

Joyce Hsu

The share count this year probably will be around $114 million shares and again this assumption only because it really depends on where the ultimate market price will be through the year as we are using the trigger method to calculate the diluted shares.

Operator

Your next question comes from Yale Jen - Maxim Group.

Yale Jen - Maxim Group

Thank you for taking my questions. Wonder if I had to get to this, little more specify in the U.S that Datascope typically commissioned has getting above approximately $160 million annual revenues in the past. I just wonder whether, what’s your current thoughts in terms of the overall U.S revenue would stay in the similar range or it would be possibility lower that that and what’s the thoughts about the currency. I assume that our RMB is to be weakened and the U.S. dollars. Would that be sort of helpful tailwind in that regard?

Joyce Hsu

I want to make a correction, the Datascope revenue are not 100% from the U.S., so the $161 million that they get in 2007 is probably only 80% is from the U.S and, sorry what was the other question regarding the currency?

Yale Jen - Maxim Group

No. What I’m trying to say, taking the historical U.S. revenue was that resorted for that all in all remain to be there at a similar level and also whether that the currency has any impact between U.S. dollars and --?

Joyce I-Yin Hsu

In ‘09 I think both Dave Gibson and Jie Liu have already provided sort of the qualitative color. In our assumption of 20% sales growth, for the year as I said in the prepared remarks we are assuming 11% to 13% organic growth and that is primarily coming from China.

Outside China we are assuming a potentially flat to single digit down scenario and I think all of you on the phone understand the challenge that we have ahead of us given the weakening economies globally. We are taking a very cautious outlook when it comes to international sales.

Operator

Your next question comes from Shao Jing Tong - Bank of America.

Shao Jing Tong - Bank of America

Hi. I just have a quick question for Joyce, on your receivable balance. If I remember correctly on last quarter we expect that the receivable balance should come down in first quarter versus third quarter, but actually in this quarter we see another $10 million increase. Can you explain what the reason is for that?

Joyce Hsu

The receivable is a function to the sales we did and if you look at the sales in fourth quarter sequentially grew 15% from the third quarter and I think, if you look at the number of days, if you look at all metrics that we monitor, its very healthy receivable days outstanding and the business model remains the same.

I think in China, we continue to ask advance payments or a large percent in deposit before shipment. Outside the China, when it comes to distributor sales, majority of the distributors have to pay 100% upfront or give us LC, Legal of Credit before we ship out goods.

In the developed market, where historically primarily Datascope patient monitoring business, we extend credit anywhere from 60 to 90 days, the underlying trends have not changed.

Shao Jing Tong - Bank of America

Okay. So, may be I understand incorrectly from last time. Okay, thanks for the color.

Joyce Hsu

Yes, and if you look at our cash flow in fourth quarter, we have generated $14 million U.S. dollars in operating cash flow and that in itself a testament of the working capital management that we have put in place to making sure that we continue to generate very healthy operating cash flow.

Operator

Your next question comes from Amit Hazan - Oppenheimer.

Amit Hazan – Oppenheimer

Thanks, good evening guys. Just, I’m sorry if I missed it. Just trying to understand what your operating margin guidance is for 2009 roughly and what your tax-rate assumption is for 2009. Thanks.

Joyce Hsu

The tax-rate assumption, the tax-rate for our Shenzhen subsidiary, which is majority of the legacy business, will continue to be rough 15%, given our high-tech enterprise status. We expect there would be minimal tax outside of our China this year given the majority of activity will be surrounding the Shenzhen subsidiary.

For operating margin, I think at this time, we are not giving specific guidance, but as I said earlier we are expecting a higher EPS growth versus higher organic EPS growth versus the sales growth and that should be a indication that the management is working very hard to the target and also to achieve, hopefully improving operating margin in 2009.

Amit Hazan – Oppenheimer

And just to clarify then, what’s the blended tax-rate that we should use in ‘09 on the P&L?

Joyce Hsu

I think at this point of time, we are assuming around 15%.

Amit Hazan – Oppenheimer

For the entire company, 15%

Joyce Hsu

Right.

Operator

Your next question comes from Hoki Luk - Citigroup.

Hoki Luk – Citigroup

I just want to clarify a little bit on your guidance again. You said that the organic growth was about 11% to 12%, so that implies four months of additional Datascope sales with account for another 8%.

Joyce Hsu

That’s right.

Hoki Luk – Citigroup

For the growth, okay. So to achieve 20% basically for rest of the world it has to be flat.

Joyce Hsu

Well, for China we’re assuming 25% to 30% growth, so if China falls on the high ends then I think the rest of the world could be down year-over-year.

Hoki Luk – Citigroup

Then on for the Datascope this quarter, can you tell us what was the sales related Datascope in this quarter?

Joyce I-Yin Hsu

We don’t disclose the Datascope number.

Hoki Luk – Citigroup

Could you just tell us if it was flat or was it down versus last year?

Ronald Eit

Hi, Hoki, this is Ronny. We actually, as David has put up a very colorful remark earlier in terms of how his confidence and our confidence as a company in terms of selling in the develop world and I think that should give some indication. Further to that as we move forward as you have seen we integrated a lot of Shenzhen product line with the Mawa product line and vise versa and that the differentiation between the two product line or separation of those things becomes less and less important and I think overall we are quite confident in terms of overall guidance for this year.

Operator

Your next question comes from Ben Li - Morgan Stanley.

Ben Li - Morgan Stanley

I have a question on the government stimulus package. Can you show us how much of the $4.8 billion RMB you understand will be allocated to device purchases? We heard the government orders have increased recently. What are you seeing so far this year and can you remind as your guidance for the government tender for this year and are you changing guidance up or down or flat because of recent trend or also can you remind us the historical margin for this business.

Jie Liu

Hi Ben this is Jai. For 2008 we really looked at tender activities 2008, the first half of the year is relative higher and the third quarter came down to 7% of our domestic sales then fourth quarter picked up to the 9% of the domestic sales coming from tender activities, but as I said earlier, they are down more investment more investment on their stimulus package on the front scale and the tender we had expected, a slightly higher than the 2008, the percentage of the 2008 sales coming from to negativity.

So, in term of the margin, the tender price is relatively lower than the regular sales. As we said earlier every time we try our best to decrease the cost of the material and then to maintain the margins for 2009, so given the sales we have achieve the profit.

Joyce Hsu

Ben let me add a little bit. The tender business typically is lower in terms of gross margin and I think as we said earlier the associated selling expenses with tender given that bulk sales will be lower in percentage and so hopefully the operating margin level is quite profitable business for us.

Operator

Your next question comes from Jinsong Du - Credit Sussie.

Jinsong Du - Credit Sussie

Yes, just to follow up on the government tenders. So for your current China sales guidance of 25% to 30% growth in ‘09, does that still assume a government tender absolute amount in ‘09 is about the same as ‘08 amount or are you assuming a slightly high amount in ‘09?

Joyce Hsu

We are assuming a slightly higher amount in ‘09 than ‘08.

Jinsong Du - Credit Sussie

And then how is slightly higher, like 10%, below 10% or 10%. Could you quantify that may be a little bit?

David Gibson

As they said, it’s slightly higher I think it’s the way you are going to their tender. You get more tenders in specific region regular sales. Probably the growth will be a little bit lower too. Where you get more tenders and then the regular sales is constant, adding together we have maintaining a strong growth.

Jinsong Du - Credit Sussie

You mean, actually that there was kind of cannibalization between the regular sales and tenders?

David Gibson

A little bit, because some tenders equipped in the County level hospitals. That’s kind of their all these hospitals, if they don’t get the equipment from the government they are going through their regular sales, but if we get something from the government for their stimulus package and then regular sales probably decrease -- its not decreases, may be not so high growth from the strong growth but even with adding the tenders into the regular sales total as we maintain 25% to 30% growth domestic.

Jinsong Du – Credit Sussie

Alright. Thank you.

Joyce I-Yin Hsu

Yes and Jinsong, as we have mentioned earlier. Government spending manifests itself, in more than once from. So, it’s not just tender government also gives subsidize to hospital. So, hospitals if they have increasing total fund to purchase devices, the overall purchasing power increase as well.

Operator

At this time we are showing no further questions, May Li you may proceed.

May Li

Thank you all for joining us today to share another quarter of excellence execution and a consistent delivery of strong results. We look forward to speaking with you all soon. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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