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Mindray Medical International Ltd. (NYSE:MR)

Q1 2009 Earnings Call

May 12, 2009 8:00 am ET

Executives

Hang Xu - Chairman and Co-Chief Executive Officer

Xiting Li - President and Co- Chief Executive Officer

Ronald Ede - Chief Financial Officer

Jie Liu - Chief Operating Officer

David Gibson - President of Mahwah Operations

May Li - Head of Investor Relations

Analysts

Bin Li - Morgan Stanley

Shaojing Tong - Merrill Lynch

Hongbo Lu - Piper Jaffray

Wei Du - Goldman Sachs

Jinsong Du - Credit Suisse

Katherine Lu - Oppenheimer & Co.

Yale Jen - Maxim Group

Janet Sun - UBS

Amit Hazan - Oppenheimer & Co.

Operator

Good morning and thank you for standing by for Mindray’s first quarter 2009 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, Ms. May Li, Mindray’s Head of Investor Relations.

May Li

Welcome to Mindray’s first quarter 2009 earnings conference call. Our financial results were released last night and are available on the company’s website as well as on newswire services. In addition, an archived webcast of this conference call will 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; Mr. Ronald Ede, our Chief Financial Officer; Mr. Jie Liu, our Chief Operating Officer; and Mr. David Gibson, our President of Mahwah Operations. Our management team will review the first quarter highlights as well as make comments regarding the current financial and market environment in each of our major sales markets after which 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 US 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. Ronald Ede.

Ronald Ede

Good morning and good evening, ladies and gentlemen. Thank you for joining us today for our first quarter 2009 earnings results conference call. In today’s call, I’d like to provide you an overall operational picture of the company followed by the discussion of detailed financial results. Mr. Jie Liu, our COO, will further explain the operational details to provide better understanding and color. Mr. David Gibson, our President of Mahwah operation will standby for any questions you may have for our developed market business.

In the quarter just ended, Mindray benefited from a relatively strong economic environment in China, and we continued to experience strong sales in the domestic market. Internationally, as expected, our sales were impacted by the global economic crisis, currency fluctuation and devaluation, and uncertainty caused by the recent US healthcare reform proposals. Despite these negative impacts, we focused our effort on our core competencies and continued to better position ourselves for the future. Overall, we ended the quarter with a relatively strong operational result.

With that broad context, here are some key numbers. We are pleased to report that net revenue grew 53.5% over the first quarter of 2008; that is 55.3% in constant dollar terms. Revenue generated in China grew 45.8% or 40.2% in constant dollar terms and revenue generated in international markets increased 60.8% year over year or 69.4% in constant dollar terms.

Our non-GAAP operating income increased 12.6% representing a healthy non-GAAP operating margin of 25.9% compared to 21.6% in the fourth quarter of 2008. The improvement in operating margin sequentially is the result of improved gross margin and reduction in selling, R&D, G&A expenses.

First quarter 2009 fully diluted non-GAAP earnings per share was $0.27 compared to $0.25 in first quarter 2008. We achieved 10.5% growth year over year. Our non-GAAP net income increased 9.6% representing a non-GAAP net margin of 22.7%. The non-GAAP net income growth for the period was achieved despite a much higher interest expenses as a result of the acquisition loan and the lower interest income due to market reduction of interest rates, both of which were in the other income and expenses lines.

Turning to our balance sheet; during the quarter we generated $30.7 million of net cash from operations, and at the end of the quarter, we had $261.2 million of cash, cash equivalents, and restricted cash. Our DSO at the end of the quarter was 60 days or $87.7 million up from 40 days or $89.7 million at the end of the previous quarter. Inventory days were 89 days or $57.9 million in comparison to 60 days or $57.5 million at the end of the previous quarter.

As indicated in the absolute numbers, our total ARR at inventory were in line with our Q4 2008. The jump in DSO and inventory base in Q1 of 2009 was mainly due to the calculation method we have always used since IPO. Calculation of DSO and inventory base used the year-end 2008 working capital numbers as the beginning balance and the beginning balance at the year end 2008 will push up from year end 2007 level as a result of combining the acquired US operations starting from May 2008.

Before I dive into more detail of the finance and business, I’ll first turn to our COO, Mr. Jie Liu, to spend a few minutes to discuss our sales trends by region.

Jie Liu

Good morning and good evening, ladies and gentlemen. In domestic markets, we continue to see strong growth in China sales due to our leading in domestic market industries, comprehensive sales infrastructure, largest R&D platform, and the rollout of the most well-known brands. During the quarter, our government tender sales contributed to 27% of domestic sales, up from 9% during last quarter. The funding of these tender sales was primarily a result of additional government funding from previous quarters and part of their RMB 4.8 billion stimulus package.

Tender sales remain lumpy in nature and are not expected to reach same level of their contribution to domestic sales in the second quarter as we have seen slower tender activities in the market right now. At 2009, government’s healthcare budget is yet to be deployed; however, with the much anticipated healthcare reform and these additional fundings, we are expecting the full year tender sales to be higher than the 2008 level. With regard to the influence of healthcare reform, we anticipate that we may see some of it gradually in the second half of the year, some of which will continue to be in the form of tender sales. The Ministry of Health has announced plans to invest about RMB 1.5 billion to equip 500 new country-level best hospitals with medical devices this year, which could to be beneficial to our mid-end product in these areas.

The non-tender sales for the quarter remained strong, although some of which especially in the rural areas were cannibalized by tenders. These non-tender sales have always been our main driver for sales growth in the domestic market.

Regarding the international market, before moving on to our markets outside of China, I want to clarify that the numbers and the year-over-year comparison I’m going to talk about here, the 2008 financials, as if we had the US operation we acquired last May for the whole year from January to December.

Now, let’s take a closer look at our international markets. We continued to see the operating environment deteriorate from fourth quarter last year in most of the sales geographies. We saw developed market decline as a rate in the middle teens. Net of currency impact, the emerging market sales are flat in the US, our single largest sales country outside China, we encountered a tougher environment during the quarter primarily due to the uncertainty caused by the proposed healthcare reforms, the deteriorated cost with our financial capabilities, and the economic crisis. We experienced much tighter spending controls by hospitals for capital purchase especially during the later part of the quarter and into April. As of today, the US remains the most variable market across all sales geographies for us.

One most recent example of US has been the fastest changing dynamics were the two trading voluntary cost containing plan announced by various healthcare providers. It represented the upcoming demand shift trend in US for better value, low-cost product and service. We’re continuing to work and stay as the world’s most flexible players in the market to tap into such opportunity out there.

For the rest of developed markets, if you look at net of currency impact sales, sales declined in West Europe, it was really just minimal. The euro depreciation played a major role in revenue declines. Outside of US, in West Europe, we saw a mixed concern, we’re encouraged by continuous growth in Latin America and Africa where demand for high-performance priced products remain strong; however, this was partially offset by decline in Eastern Europe in the CIS region. This region continued to suffer from deteriorated demand from currency devaluation and the lack of Western Europe funding in this sector which used to be an important driver in Eastern Europe.

With this, I would like to turn the call back to Ronald to discuss operational trends, Mahwah operation, financials, and the guidance in more detail.

Ronald Ede

Our R&D pipeline remains strong and on track to release the 7 to 9 new products we planned for the year. We have 4 products released yesterday. As many of you know, R&D is one of our core competencies and a key differentiator for Mindray, and despite the slowdown of the worldwide economy, our commitment to R&D investment remains the same. However, as planned we will drive efficiencies this year in our R&D spending and believe we can reduce our total investment as a percentage of the revenue to below 10%. The immediate opportunities for us is to further build operating room solutions and add more models to our color ultrasound product lines.

Let me talk a few things on Mahwah operations or our US operations which we acquired from Datascope last year. Let’s talk about the operation and the integration here. It has been almost a year since we acquired the Datascope Patient Monitor business and we are pleased with the integration and progress which has been moving along in accordance to our expectation. Starting in Q1 of 2009, the Mahwah sales management team has taken over the sales operation of ultrasound products in North America. In addition, we have successfully combined the service and logistic support for all patient monitor and ultrasound product lines for the North American region. The Mahwah operation now managed a variety of Datascope DPM and Mindray branded products for US, and also for Canada, part of Latin America, and European markets.

Such changes will better serve our North American and develop world customers, hasten our new customer penetration, and create synergies in our sale and service network.

Additionally, our R&D and new product development integration is moving along smoothly. That is between our Mahwah and Shenzhen engineering teams. Our first jointly developed product, Accutorr V, was released in the later part of Q1 with good reception from the market. The second co-developed patient monitor product is on track to be released in the second half of 2009.

Now, on margins; our gross margin is seasonally higher, which was reflected in this quarter’s number. Furthermore, during the quarter, in response to the market dynamics, we actively managed down the expense levels with absolute expensed dollar coming down for selling, R&D, and G&A items. G&A expenses in particular came down to 6% as a percentage of sales from last quarter of 8% level. One of the main reductions came from advisory fees, G&A expenses, as well as saving on IT. We will work the entire organization towards the goal of maintaining a steady gross margin and improving operating margin despite a more aggressive ASP erosion track.

We continue to enjoy software value-added tax rebates for the sale of embedded software pursuant to relevant government policies in China. The retroactive portion of the VAT refund has contributed an additional 3% points to our non-GAAP gross margin. We anticipate receiving such tax rebates to continue until at least through 2010.

Now, I would like to discuss our guidance for 2009. Since the beginning of this year especially during the later part of Q1 and into April we have seen the economic crisis continue to impact the healthcare industry outside of China. We anticipate the unpredictability of hospital buying patterns and current fluctuation in some markets to continue throughout the remainder of this year. Thus, we adjusted our guidance for 2009 to reflect the ongoing challenges that the entire industry is facing. We currently believe we can achieve year-over-year sales growth of more than 10% and non-GAAP EPS growth of approximately 10% over 2008. We believe Mindray’s products are generally considered must-haves in the hospital and clinical setting. Thus, the necessity of our products coupled with their high performance to price ratio will make us more attractive to increasingly cost-conscious hospitals.

While hospitals may delay the purchase of such necessary items in the short run, this may lead to a pent-up demand and increase future sales. As a result throughout this year we will continue to focus our sales and services on gaining market share and better positioning the company for future growth to meet potential demand. Internally, we have ongoing programs to continuously improve our efficiency and effectiveness to achieve a better overall cost structure supporting the business.

With this, I would return to the operator to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Bin Li - Morgan Stanley.

Bin Li - Morgan Stanley

My question is really on the regional sales breakdown for the first quarter in the guidance. If you could provide more color on the sales breakdown for the guidance, for example, 10% top line of growth; what does that mean for the China growth and international growth organically, including or excluding Datascope? Also, the similar question for first quarter, if you could let us know the fact.

Ronald Ede

First of all, we have combined all the ex-Datascope operations with our own operations altogether as I explained many times in the past. It is not easy or not even sometimes possible to entirely separate it, but to answer your question, we have seen a very strong China growth; I think we already discussed about that as I said in my prepared remarks, and in terms of the rest of the world, the developed countries actually, we see double-digit decline, in the developed world, that’s including North America and Western Europe, but in the emerging markets, we actually see close to flat. Hopefully, that gave you an idea of what we’re talking about.

Operator

Your next question comes from the line of Shaojing Tong - Merrill Lynch.

Shaojing Tong - Merrill Lynch

Just wanted to understand a little bit more about dynamics of China at China growth; do you still hold the view that the China growth will still be 25% to 30%, and the second part is that the robust growth in China, do you see that happen to each of the three sectors of your business in the first quarter?

Ronald Ede

Let me answer the first part of that question and maybe Jie Liu can give you some more color in terms of the three factors within China. Absolutely, we do still hold China will contribute a substantial growth for this year’s sales and we still believe China will grow around 25% to 30% year over year.

Jie Liu

As far as the different product lines, in each line we have very much opportunity fielding this kind of government funding program, especially as I mentioned before about it where the government will spend 1.5 billion to equip 500 new country-level hospitals which all our product does meet this kind of requirement, to give us additional opportunity to grow our business.

Ronald Ede

Overall what we’re saying is that we will be anticipating gain on each of the lines through the government programs.

Operator

Your next question comes from the line of Hongbo Lu - Piper Jaffray.

Hongbo Lu - Piper Jaffray

I want to put the full year guidance into context with first quarter performance. If we look at China and ex-China, for the first quarter I think excluding VAT, excluding foreign exchange, you probably did 33% year over year, and then for ex-China on a pro forma basis you probably did minus 12%; correct me if I’m wrong here. If we look at your guidance, for China if we assume 25% to 30% of growth, that kind of implies ex-China would be minus 13% to minus 16%; so are we getting it right that China is not going to improve from what you did in the first quarter and also ex-China the worst yet to come for the year?

Ronald Ede

Let me explain it this way. First of all in China market, yes we in the first quarter have some VAT impact in the revenue, but as we move forward you remember through Q3 and Q4, we also have a VAT already included in last year’s revenue, so the impact on VAT alone will be negatively impacting Q3 and Q4, so the overall yearly impact would be smaller; and I would say that the VAT impact year-to-year comparison would be very very small. So, China will grow in our view 25% to 30% in total as I explained to you earlier. That will contribute to somewhere between 10% and 12% of the total growth of the yearly basis. For the developed world, we have some natural growth due to the 4-month inclusion of the ex-Datascope patient monitor business, January to April, which was not included in the previous year. We estimate those kinds of inclusions where the rest of the growth in the developed world will contribute approximately around 2% or so, and the combined emerging markets will give us a slight negative growth for this year. So, combining all those numbers together we probably come out with somewhere between 10% to 11% growth.

Operator

Your next question comes from the line of Wei Du - Goldman Sachs.

Wei Du - Goldman Sachs

I just have a question about the IVD segment. I know that among the other segments, IVD appears to be having disclosed growth rate. As far as I recall I think your IVD segment has a larger exposure in the domestic market. So, can you elaborate the reason why that is happening for the first quarter?

Jie Liu

For the IVD segment, domestic we still have a strong growth, but internationally, our IVD sales was heavily impacted by the current economic situation, mainly because of this model, because of the IVD machines, major sales coming from the machine sales. Our distributors buy the machines through their regional vendor, and this current funding limit and also their tighter credit control, our dealers and distributors are relatively cautious on the future investment. That’s the major reason to impact our international sales. That has improved and still you get about 9% growth rate.

Wei Du - Goldman Sachs

So, would you say the negative impact on IVD segment is much more significant?

Ronald Ede

Naturally, a major portion coming from the international side especially from East Europe and CIS region. We used to be there very strong in this area.

Jie Liu

Certainly, there is impact coming from the Eastern European and the CIS region.

Operator

Your next question comes from the line of Jinsong Du - Credit Suisse.

Jinsong Du - Credit Suisse

Could you comment on the gross margin trend going forward because just now you mentioned that there would be more aggressive ASP decrease, and also related to the gross margin, could you talk about the gross margin difference between the government tenders and the normal sales and exactly how much is the government tenders in the first quarter?

Ronald Ede

Jinsong, let me first answer your question in terms of how we look at overall gross margin impact for the year. As you indicated correctly, this year we do anticipate bigger than normal ASP erosion due to two things; one is of course because the international market was very weak and with that weak market everyone was trying to compete and prices went off the area to be used for competition. So, we did anticipate that we’d have some negative impact. Second to that, you’re also correct, in the China market, with the government’s stimulus package, we do anticipate overall higher tender in comparison with the last year and in the first quarter actually that tender was around 27% of our China sales. With that as a negative impact, we do have a lot of capacity to compete or to maintain our gross margin being that we are very strong in cost reduction of our raw material costs. Second to that, we continue to introduce newer products and usually newer products carry better margins for replacing existing products, and thirdly, in addition to that, we also have cost reduction programs as I reported to all of you before in terms of our Mahwah operations where we have many newly released cost reduction programs. So, with all those positive and negative impacts, we try to maintain our gross margin for the year.

Operator

Your next question comes from the line of Katherine Lu - Oppenheimer & Co.

Katherine Lu - Oppenheimer & Co.

I’d like to get a better sense of the business trends on a sequential basis. I’m wondering if you can share with us about the performance of Datascope in the first quarter versus Q4, and also, what kind of trends did you see in China, Western Europe, and emerging markets in March versus in April?

Ronald Ede

As I said earlier and also Mr. Jie Liu mentioned in his prepared remarks, China sales has remained strong throughout the quarter, and of course our seasonality is naturally happening month by month, but that’s natural, but overall, we do not see China sales impacted year over year. In the other parts of the world, as you mentioned, you asked me about Mahwah, I would like to reframe that more like a developed world, I would like to have David Gibson talk about that developed world so he can give you more color on that area.

David Gibson

Just to add a few points to that, I think looking at the trend, we saw this economic crisis and the Lehman bankruptcy right at the end of Q3, and Q4 had a lot of uncertainty but also a lot of carry-over of programs in process where hospital expansions that were in progress were nearing completion. This is very dynamic as Jie Liu mentioned and a lot of things are changing very fast within the US market, healthcare reform, the green shoots one week in the year, further continued recession next week, so a lot of things are changing, but what we have seen is people moving towards thinking about the future but waiting to find out what’s going to happen, waiting to see where healthcare reform is going to shape and their priorities may need to shift, but nobody is looking at reduction of services or the reduced need to monitor and care for patients, which we think is very good; it’s just a matter of trying to see where this is going to settle in terms of reimbursement schemes, provider schemes, and other reforms, also the role of IT integration and IT programs are warranted going forward.

So, we’re positioning ourselves well for what would be anticipated as Ronald mentioned with pent-up demand within the US market as all of the deferred purchasing and capital restrictions lift sometime in the future as well as improving and focusing on our cost structure of our products and accessories that we’re selling today and gaining the ability to have more price leverage going forward and increase our competitiveness though I feel very good about where we’re at and I think we’ve reached as much as you could in this environment, and also as Jie mentioned, we see we have a congressional initiative moving forward in the US where healthcare reform as well as providers in different parts of the industry coming forward and offering their ways of reducing the rate at which healthcare expenses would increase, but with what we’ve seen so far, we think we’ll be well positioned for it going forward, but we’ve got a very cautious outlook going forward for the next several months.

Europe, however, has been more stable in terms of its healthcare spending and government controls, and the currency situation seems to have stabilized, it is about $1.30 for a euro and $1.50 for a pound, substantially lower than where we were a year ago, but seems to have stabilized at this point and we can work with that moving forward, but our euro and pound price sales have remained stable throughout this period.

Katherine Lu - Oppenheimer & Co.

Just want to confirm with you, according to our calculation, Datascope sales may have declined in the double digits range, sequentially from Q4, is that a correct assumption?

Jie Liu

First of all, I don’t think we have seasonality issues too; so, comparing with Q4, we definitely will have a decline from Q4; however, in year-to-year comparison, assuming we have the same from the beginning of last year, we do have a decline, and as I mentioned earlier, the developed will have around more than double digit decline or even mid-teen decline.

Operator

Your next question comes from the line of Yale Jen - Maxim Group.

Yale Jen - Maxim Group

The question I have is that you mentioned about the pent-up demand, are you specifically only referring to the United States or you have this statement across the board in China as well, and was that part of the things about the cannibalization from the tender versus the non-tender product sales in China?

Jie Liu

The previously referred to pent-up demand is for those markets which have substantially slowed down in their purchases; you’re probably correct that there was a bit of slow down in the US, so the pent-up demand was probably coming from the US and some other countries such as the Eastern European countries which also had a slow down due to the economic crisis, but as we view our products as we move forward and also historical experience told us those kind of delays will create pent-up demand in the future, but this is not related to China market.

Operator

Your next question comes from the line of Janet Sun - UBS.

Janet Sun - UBS

My question is on the industry growth, according to my data, the equivalent market in developed countries had a single-digit growth during the past several years excluding those from service and healthcare and mainly in the past has delivered much higher than industry average sales, and also based on our healthcare and the 9% year-over-year decline in direct marketing in ’09, and if excluding large medical imaging equipment with 6% year-over-year decline for ultrasound and patient monitoring market, you mentioned that in the developed market you continue to see a decline in ’09, just wondering why Mindray cannot continuously outperform the industry average growth and why is this happening?

Jie Liu

I think we’ll have to look at it several different ways. We also as a company very closely monitor what our competitors are doing and what their reported data is to be, and also we got a lot of information in the industry. As you mentioned, companies like Philips and our other major competitors, they are the provider of such a large variety of medical equipments; they have a combination of different equipments from the big TICU items to small TICU items, even their small TICU items are having a lot of varieties, and what we have experienced and we believe that the general industry also experienced approximately the same or even some of the areas are worsening than what we have experienced at this time; but, you’re absolutely correct, it is very difficult to find very accurate industrial data to compare exactly the same product line we provide in the market. So, my comment to your overall question is, I have a little bit reservation to comment directly because I don’t know exactly the combination of the products being included in your average.

Operator

Your next question comes from the line of Bin Li - Morgan Stanley.

Bin Li - Morgan Stanley

My followup question is on the Datascope, if you can comment on whether Datascope currently is making profit, i.e., in the first quarter or what projection of profitability, whether it is going to make money this year, if not, what is the outlook for the Datascope to make profit?

Jie Liu

Ben, I think your question was isolated for the Datascope patient monitoring business; as I said earlier, we have separated the business by region and no longer even internally look at the business by the old Datascope operation alone; however, seeing that we do believe our business can improve overall earnings, we do anticipate much better earnings as we move forward into the latter part of this year and then in comparison with the first quarter’s performance.

Operator

Your next question comes from the line of Hongbo Lu - Piper Jaffray & Co.

Hongbo Lu - Piper Jaffray & Co.

I want to go back to Ronald your comments earlier, you were talking about double-digit decline in North America and Europe and then for emerging markets it’s flat, that’s what is in your guidance, if I remember it correctly, what we’re hearing 2 months ago, I think at that time we’re talking about flat North America and Europe for the developed countries, and for the emerging markets we were looking at something like double-digit decline, so what caused that reversal?

Ronald Ede

I don’t think we changed than much, I think the last time when we talked about it, maybe we broke down the emerging market in different pieces; let me first talk about emerging market and then we’ll talk about North America and other regions. In the emerging market, actually in the past as we discussed the last time I believe, we talked about the Eastern European region which was hit pretty bad and we continue to have the same view of that particular region. However, we’re very lucky to see pretty good growth in the Latin America region; so combining those areas you get close to a flat and almost no decline at all. So, that’s why if you look at the entire emerging markets, we are advising our guidance at this time based on our understanding at this stage we believe we can have maybe very low decline, almost flat. In the North America market, I think you are absolutely correct, in the past we had a pretty good Q4 and as you heard what David just said, in the Q4 timeframe and latter part of Q4, our performance tracked with our expectation and was pretty good. As we move into this quarter, the same condition maintained; however, we see a lot of uncertainty and started to fluctuate in the latter part of the quarter, particularly in latter part of March, and with a lot of uncertainty with Obama’s healthcare reform coupled with certain financial condition of the hospitals deteriorating in the market caused delay with health system purchases and that uncertainty remained the most of April and that made us change our view in terms of North American operation for the rest of this year.

Operator

Your next question comes from the line of Amit Hazan - Oppenheimer & Co.

Amit Hazan - Oppenheimer & Co.

I’m a little bit confused, I wanted to go back and ask about the VAT again, I’m hoping can you explain again during this quarter what was the catch-up payment for VAT in the revenue line this quarter, it sounds like it was retroactive payment, if you can confirm that, and how should we think about modeling VAT going forward?

Ronald Ede

First of all I want to emphasis a couple of things that the VAT rebate policy in China will last all the way through 2010, so it is an ongoing process, ongoing policy; and further to that, that became our normal operating revenue as we move forward as we know this is coming in and we priced this thing in terms of our ASP and also in terms of our overall sales and our forecast; with that I’ll give you more color in terms of what you were asking. In the quarter we just ended, actually we had a retroactive VAT of about $6.5 million and ongoing VAT of about $3.5 million. Moving forward for the rest of this year, as you may recall, last year we had a total of $21 million of VAT altogether, and this year, our expectation is that we would at least receive around $21 million; so, year-over-year that had almost no impact as I mentioned earlier to the questions before.

Operator

Your next question comes from the line of Jinsong Du - Credit Suisse.

Jinsong Du - Credit Suisse

I’d like to understand more about the China dynamics; Ronald, just now you mentioned that the situation in April continued to be weak; for you assumption, do you think that this situation will probably get worse or get better, and also same question for China, you mentioned that you expect the government tenders to increase slightly year-over-year, and that was previously, and do you think that that is the same assumption for this revised guidance as well?

Ronald Ede

In terms of the ex-China world, what I’m talking about is that we continue to see uncertainties. As David gave a lot of color earlier, in the US, for example, we just saw this voluntary program of cost reduction program in the next 10 years proposed by the insurance company and healthcare operators; no one knows what impacted the industry yet or how this will be carried out; as we see more and more new proposals coming out, that made the hospital purchasing department very nervous about what they will spend and how much they can spend. In the short run we believe that could lead to stop spending or reduced spending or maintain just the minimum requirement; but over the long run, we believe that still will create a pent-up demand as we move forward. As I mentioned earlier, we are very well positioned with price and performance ratio, and I think we will gain, possibly with the pent-up demand coming up in the future years or maybe even in the future quarters, it depends on the situation as it unwinds. Jie, do you want to comment a little bit on the China side?

Jie Liu

In China, probably when you look at the tender percentage in the first quarter of 2009 you see that first quarter we got 27% of sales coming from the government tenders, that was coming from the additional stimulus package announced last year 2008; from April, actually we were already looking at the situation and the second quarter we see a little bit of slow down of the tender activities, but the good news is for 2009, budget is still not deployed; so, after we get more detail in the beta plan, we will come back to 2009 tender activities, that’s the reason we anticipate in China domestically we keep the strong growth domestically.

Operator

Your next question comes from the line of Shaojing Tong - Merrill Lynch.

Shaojing Tong - Merrill Lynch

Just want to understand your earlier expectations on Datascope business, I understand that it was in line with your expectation of that acquisition during the last quarter’s performance, going forward because you are looking at about double-digit decline in the US probably, my question is actually related to that goodwill you booked when you acquired the company, is there any risk that should be revised?

Ronald Ede

I think what I was saying is that we are in line with our expectation because there are many many factors of this integration and of the operation, it’s not only one area, it’s not only one month of sales numbers; definitely we’re looking at how we can integrate the overall cost structure, definitely we’re looking at how to integrate the overall R&D operation and the overall platforms, and as I mentioned earlier, how can we integrate all the North American sales which is all coming on board and under our expectation. As we move forward, our sales moving up and down, at this stage, we do not see any of those variations in the short-term will create any impairment to our goodwill at this time.

Operator

Your next question comes from the line of Wei Du - Goldman Sachs.

Wei Du - Goldman Sachs

I just have a question regarding your product line because as far as I understand, the main growth drivers for 2009 as originally we expected will be Ultrasound or Anesthesia machine, I’m just wondering what is the time-line for your new product launch this year and what are they and which one you’re expecting to be the main driver in the next 2 to 3 years given that China’s healthcare reform, and as far as I can understand, right now in the government tender, if I’m wrong correct me, you have a three-part file chemistry analyzer and back light ultrasound, I’m just wondering any other product in your existing product line will be included in those government tenders to the rural or township area, so, can you give me some color on that?

Jie Liu

I think we do have every year 7 to 9 new product launches, but this year we had already launched some products, specifically for the China market and some low-end customers and to target government tender program and also we have some new product in the DR, surgical light, surgical bed, defibrillator; those new products will be contributing to not only this year’s Mindray’s sales revenue but also the next couple of years will contribute a lot in the market, but within our very strong sales infrastructure and very competitive sales team in China domestically and also very strong dealer structure worldwide, we can contribute a lot for the future sales growth because of new products.

Operator

Your next question comes from the line of Yale Jen - Maxim Group.

Yale Jen - Maxim Group

As I understand, for the tender product typically the margin could be lower, so how would you balance out moving forward in this year in terms of controlling the bottom-line and does increased tender ultimately have impact on the bottom-line?

Ronald Ede

Yes, you’re correct. As I think I answered earlier on the same line of questioning, our margin will be negatively impacted with increase of tenders, but we as a company, a lot of the portion of the China sales were tenders and the way we overcome some of those downward pressure is through continuous renegotiation and also reduction of our raw material costs, continuously reducing our cost of our product line, and that means continuous re-engineering of the product; our competencies are being used to maintain a good healthy gross margin. As I mentioned also earlier, with this and other negative impact and positive impact to our price and cost line, we anticipate or we will try very hard to maintain our gross margin for this year.

Operator

Your final question comes from the line of Hongbo Lu - Piper Jaffray & Co.

Hongbo Lu - Piper Jaffray & Co.

Jie or Ronald, since we don’t have power-point presentation at this time, can either of you or both of you comment on whether or not Mindray is gaining market share so far this year in both Chinese market and ex-China market?

May Li

As our routine practice, we’re actually updating China market share pie chart on a biannual basis; so, you will be able to see the market share update in our next quarterly presentation.

Operator

This concludes the question-and-answer session. At this time, I would like to turn the call back to Ronald Ede for closing remarks.

Ronald Ede

At closing, I would like to thank you all for participating in the call. During the past quarter, no doubt we encountered challenges and we anticipate more challenges may come our way in the coming months; however, Mindray will continue to perform optimally in the current market as we continue to provide high-quality and affordable medical devices to the healthcare communities. We are taking steps that we believe will allow us to de-lever our long-term goals in all segments of our business, achieve our status goals, and gain more market share as we move forward. Again, thank you for joining us today, we appreciate your interest and support in Mindray and our business.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

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Source: Mindray Medical International Ltd., Q1 2009 Earnings Call Transcript
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