Mindray Medical International Ltd (ADR) CEO Discuses Q1 2013 Results - Earnings Call Transcript

| About: Mindray Medical (MR)

Mindray Medical International Ltd (ADR) (NYSE:MR)

Q1 2013 Earnings Call

May 7, 2013 08:00 AM ET

Executives

Cathy Gao - IR

Jie Liu - COO

Alex Lung - CFO

Li Xiting - President and CEO

Analyst

Jack Hu - Deutsche Bank

Ben Li - Morgan Stanley

Jessica Le - CICC

Richard Yeh - Citigroup

Li- Goldman Sachs (ph)

Paul - Oppenheimer (ph)

Iris Wang - Credit Suisse

Sean Wu - JPMorgan

Serena Chao - BANL

Operator

Good morning everyone. Thank you for standing by and welcome to Mindray's First Quarter 2013 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 replay purposes. 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. Cathy Gao, Mindray's Manager of Investor Relations. Please proceed Ms. Gao.

Cathy Gao

Thank you. Hi everyone, welcome to Mindray's 2013 first quarter earnings conference call, we released our financial results last night and they are now available on the Company's website and Newswire Services. There will also be an archived webcast of this conference call on our Investor Relation's 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, 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. In the first quarter, we reported $242.1 million in total net revenues; growing 10.5% year-over-year. Our top line growth was primarily driven by China's sales, which grew 21.2% year-over-year to $111.3 million and represented 46% of our total net revenues.

We continue to do well in the meeting market segment. We are pleased to see sustainable robust demand of our products in the domestic market particularly in the In Vitro diagnostic segment. Outside of China, our International sales reached $130.8 million. The entire IVD segment recorded 20.7%, sales growth year-over-year this quarter, the highest among our three major product lines.

Reagents sales accounted for 36.4% of total IVD sales, up from 31.5% a year ago and similar to 36.9% in the previous quarter. In this quarter, we recorded around 16% year-over-year gross in Western Europe. We are especially delighted with our strong performance. They are considering the economic work they see in the region. Overall emerging market sales were weaker than expected but we are optimistic about the reagent's growth potential and we are continuing to invest this year.

Looking at other items our non-GAAP gross margin was 58.1%, which is 267 basis points better than the same period last year. Our cash conversion cycle was 110 days, compared to 117 days in the first quarter of 2012. These improvements further demonstrated our ability to enhance efficiency. In addition, during the quarter, we successfully obtained the key software enterprise status for current year 2011 and 2012. As a result, we recorded $19.4 million on tax benefits.

Now let's look at our detailed performance by geography and the segment respectively, starting with our big sales contributing region namely China and the emerging market; now onto developing markets. As mentioned we have another robust quarter for our domestic sales with 21.2 % year over year growth. This was a result of continuing strong performance of our IVD sales, our improved sales program as well as our expanded direct services platform which enabled us to realize more opportunities and provide better customer service.

The sustainable strong domestic sales in the last couple of years reflects the success of our strategy. Our IVD sales in China again generated strong momentum and continue to lead our overall IVD segment in the first quarter. Our high end product, such as BS-800 and BC-6800 continued to ramp up reagent sales. These products also significantly strengthened our competitive position and allowed us to gain market share in the high end segment.

Over the last few quarters we have continued to expand our product offering and integrate other IVD business we have acquired, which should further drive our reagent sales over time. We're optimistic about the gross prospects of this segment based on our increased brand recognition and the tracking product as well as the gradual change in market trend in which service sales were becoming more important source of profit for hospitals.

Overall China's healthcare spending environment continued to be positive, as the government aims to direct more patient visits to country level hospitals and invest in expanding and upgrading these hospitals. As a medical device leader with strong presence in the mid end segment, Mindray's well positioned to benefit. This together with our internal initiatives make us confident about our long term competitive position in the sector. As for our international sales, we recorded 2.8% year over year growth in the first quarter.

Growth from emerging markets as a whole was essentially flat from the same period last year. This is largely due to weak performance in selective countries. In the first quarter the Middle East represents the highest growth region with over 25% sales growth, primarily due to strong sales in Turkey.

In Turkey our sales growth was more than doubled. We also recorded healthy low teen increase in Asia Pacific driven by India with over 50% year over year growth. In selective Latin American countries, our performance were affected by tighter currency and the import policies as well as political instabilities. Venezuela in particular had a bigger impact on us in the first quarter and we are hopeful that the macro environment should gradually improve in the next few quarters.

On a positive note, our sales were also very strong in certain other Latin American countries where the overall environment is relatively stable such as Mexico and Argentina where we recorded over double the sales growth.

In the CIS region we recorded a double digit decline in the sales over these past quarter, primarily due to a tough comparison. Recall that our sales growth was much higher with more than 100% during the same period last year. Our performance this quarter was not entirely unexpected as we had anticipated softer demand after the Russian presidential election and some countries with modernization program in healthcare industry.

Overall as we discussed in the past, we have been taking a cautious stance in lot of these issues and we will continue to closely monitor macro policy movements and react promptly. Looking ahead we will continue to expand our key account coverage in the top emerging countries and enhance our capability in both public and the private sector.

We are optimistic that the overall prospect for emerging markets should improve going forward. However, political and the currency risk will remain as potential headwinds, developed market sales growth is around 6% year-over-year. Western Europe post Iran, 16% growth, while North American sales were flat. Same as last quarter, our growth in the Western Europe market was mainly because of strong sales growth in France, UK, and the Netherlands, thanks to our increased brand recognition, good product and service offerings.

Over the last few years our team has continued to build our presence in West Europe, mainly in the UK France, Germany, Italy and Netherlands; which are the home markets of some reputable companies in our industry. Throughout the past decade we have successfully launched a series of high quality product into these markets, as well as building up solid direct sales and service infrastructures.

Our high quality products, reliable service, and the reasonable pricing have earned great feedback and reference from our customers. These factors are increasingly making a positive impact on our sales growth and the market share gain in the region. Having said that we think that the current weak underlying demand will continue to challenge the industry participants in the possible future.

In North America, as we stated recently the flat growth was largely due to weak hospital demand which had affected our peers and us. We’re encouraged to see the improvement in the first quarter compared, to the sales decline in the previous two quarters.

In addition, we’re confident that our ongoing sales realignment program will help us improve our long term competitive position and efficiency. Having said that, we think the macro hospital spending environment in North America remains uncertain.

In the long run considering government desire to reduce overall healthcare cost, we strongly believe that many opportunities exist for Mindray because of our competitive value proposition, comprehensive sales in the service platform, and increasing brand recognition.

Now let me give you a breakdown of the performance of different business segment in the first quarter. In this quarter, net revenue from the patient monitor and the life support segment grew at a low single digit rate year-over-year. This is largely due to weaker performance in North American region.

Overall, our surgical equipment, defibrillators and high-end monitors performed well for the quarter. The patient monitor and life support is the most mature segment among our three business line. In the last two decades, we have successfully transformed Mindray from a product provider to a total solution provider.

We are now able to provide more total solution for conditions from critic care two sub-acute setting across emergency, OR, ICU and the CCU departments. I would like to highlight some of the unique solution that we offer in the pre-hospital setting with our pre-hospital emergency information system all face (ph), doctors in the hospital can see real-time clinical data in the ambulance. This allows them to prepare appropriate treatment in advance so that patients can be treated in the shortest possible time.

In the patient transportation setting, we have the BeneView T1. The T1 can be used as monitor-parameter module or as a transit monitor. It can provide a continuous monitoring or seamless record from the emergency room to the other departments. Our comprehensive patient monitor and the life support offering can meet almost all end user needs. These allow them to save time on sourcing products and hence improving overall hospital efficiency.

In our IVD segment, sales were robust with year over year growth of more than 20% in this quarter, the reagent, the five part hematology analyzers and the mid end bio chemistry analyzer was best selling products, At the recent China CMEF event, we were excited to showcase our first immunochemistry analyzer, CR2000I. This product received great initial feedback from customers who were impressed by our strong R&D creatively and the capabilities.

As some of you might know, immunoassay is a single largest sub segment within the IVD structure. Up till now, this segment in China had been dominated by multinational companies. Mindray is the first and the only Chinese company to offer product that can compete directly with those international leading players in terms of test speed, product quality et cetera.

In addition to working as a standalone analyzer, the CR2000I can also work together with our biochemistry analyzers to provide the total solution of automatic blood testing and speed up the processing of samples in laboratories. We have high hope for it's the future growth potential.

As we are taping to more areas like immunoassay coagulation microbiology tests, we are excited to provide more competitive and full range lab testing solution for our customers. Overall, we are optimistic about the close prospect of our IVD segments.

For the medical imaging segment, the year-over-year net revenue growth for this quarter was flat, largely because of the sluggish demands for the black white ultrasound product. Over the long run, we anticipate that the black white ultrasound product market will continue to shrink and be replaced by color ultrasound products.

Based on our extensive installation base of black white system, we have long term competitive entry level of portable and cart base color ultrasound system into the selected market last year and they have received very positive feedback. In the particular we are excited to see that our entry level portable ultrasound Z5, Z6 which was priced lower than $10,000 has achieved very good sales performance.

Our cart based color ultrasound DC-3 was also rewarded the 2013 Red Dot Design Award for its outstanding user centric economic design again, after the M7 and 8 and the LED light. Gradually we aim to launch those products globally. With a trend of hospital and technology upgrade together with our existing comprehensive network is low end markets, and the right products, we believe that we will continue to gain a stronger foothold in those markets. For the mid end market, the M7 series, the protocol ultrasound performed a particular way in this quarter.

For the high end segment, we will continue to increase our sales efforts. Overall, we will continue to monitor the market and the technology dynamics to capture various market opportunities. Our other net revenue grew over 50% year-over-year in the first quarter. It was mainly because of sales contribution from hospital bills and we acquired it last year as well as increasing revenue from off sales service.

Now, I will pass the call to Alex to discuss the quarter's financial details and our outlook for 2013.

Alex Lung

In the first quarter, our top line recorded a 10.5% year-over-year increase to $242.1 million. Leading our growth was China's net revenues of $111.3 million, 21.2% year-over-year increase. This is primarily driven by our strong regular sales that made up approximately 95% of China net revenues in the first quarter. International net revenues were 130.8 million, a 2.8% year over year growth. This represents 54% of our total net revenues.

Non-GAAP gross margin was 58.1%, higher than 55.5% in the first quarter of 2012 and compared to 58.5% in the previous quarter. The year over year increase was mainly due to a change of products and geographical mix; lower raw material costs and better discount control.

The sequential decrease was mainly because of seasonality. Our non-GAAP selling expenses were 18.5% of total net revenue compared to last year's level of 17.5% and the previous quarter of 16.2%. Although, we continue to improve our efficiencies in China; the higher percentage to total net revenues in this quarter was due to lower sales base.

Non-GAAP general and administrative expenses were 10% of total net revenues, higher than 8.7% in the year before but lower than 11.4% in the fourth quarter of 2012. The year-over-year increase was primarily a result of foreign exchange loss related to our Euro and RMB exposure. Without this loss, our G&A expenses as a percentage of total net revenues would have been similar to last year’s level. The sequential decrease was a result of seasonality.

We have continued to invest in R&D over the past quarter. Our non-GAAP R&D expenses were 10.5% of total net revenues, compared to 10.7% in the same period last year, and 10.1% in the previous quarter. EBITDA was $49.8 million, a 6.8% increase over the first quarter of 2012.

Non-GAAP operating income grew which is 14.3% year-over-year to $46.3 million. Non-GAAP net income increased 59.9% over the same period last year to $64.6 million. This figure includes the $19.4 million of tax benefits related to the approval of our national key software enterprise status for the calendar years 2011 and 2012.

As a reminder, these status allowed us to enjoy a 10% income tax rates for our Shenzhen subsidiary. Excluding these tax benefits, our non-GAAP net income was $45.2 million, representing growth rate of 11.9% year-over-year. In terms of margins, non-GAAP operating margin was 19.1%, non-GAAP net margin was 26.7% and non-GAAP net margin excluding tax benefit was 18.7% for the first quarter.

Our cash conversion cycle was 110 days in the first quarter, down from 117 days in a year ago and compared to 89 days in the prior quarter. The year-over-year improvement was mainly due to better control on receivable cost of collections, and sequential difference was mostly because of seasonality. Our accounts receivable days were 66 days, versus 79 days in the same period last year and 53 days in the fourth quarter of 2012.

Our inventory turnover days were 103 days compared to 92 days in the first quarter of 2012 and 83 days in the prior quarter. The year-over-year increase was due to higher sales budget for the first quarter. Overall we will continue to adopt cautious credit policies and enforce insurance protection in our key markets worldwide.

Now, I will discuss our financial guidance for full year 2013. At this time, we’re maintaining our guidance of more than 17% year-over-year net revenue growth for 2013. Overall, we think China will have the most favorable prospect for us due to our strong competitive position as well as continued favorable private and government spending trend in the healthcare industry.

In emerging markets, we are optimistic the overall picture should improve going forward. However, as Jie stated, we still expect some risk factors to remain. In the developed markets, we are still cautious about operating environment. However, we will continue to work on expanding our presence and we believe that our long term competitive position remains strong. Overall, we are committed to meeting our goals for the remainder of the year.

This year we plan to further strengthen our international sales, service, and support infrastructure, especially in the emerging markets. Nevertheless, we expect our gross margin and operating margin to remain stable and we’ll continue to strike a balance between making investments and pursuing top line growth and profitability.

Other non-operating figures such as government subsidies and interest income will vary from time to time. At this time, we still anticipate this year’s non-GAAP net income to grow more than 15% year-over-year. This figure excludes any tax benefits and assumes a corporate income tax rate of 15% for out Shenzhen subsidiary. We also maintained our forecast on capital expenditure to be $130 million this year which exclude potential merger and acquisition expenditure.

That’s all I have for now and I will like to turn the call back to Cathy.

Cathy Gao

Thanks Alex. We will now open the lines for questions. Operator, we can start now.

Question-and-Answer Session

Operator

Ladies and gentleman, we will now begin the question and answer session. (Operator Instructions). Your first question from the line comes from Jack Hu from Deutsche Bank. Please ask the question.

Jack Hu - Deutsche Bank

I have one question, it has two different elements. Throughout the activity, you maintained the guidance which actually suggest a really quick and the strong recovery on international side. So my question is what have you seen recently to give you this kind of confidence? Second element of my question is on the regional perspective. Since you allow me to ask rude (ph) questions here, all the reasons you cited for the weak performance in the emerging market, is kind of risk factors. So my question is are there any anything relating to Mindray specifically related to the internal risk factors?

Jie Liu

May be I’ll answer the second part of the question first and probably Alex can give some color on the guidance side. I think for their emergent markets, specifically all their macro environment, it’s the same for everybody.

The other multinational reported it was weaker than expected macro economically; especially for couple of countries, Russia because of the ending of their Presidential program and also Presidential election and also modernization program in the healthcare industry; Venezuela because they have the election and they have their political instability and their import license gated restrictions and the currency; for the foreign currency get a controlled (inaudible).

So that’s two major. I think in the macro-economically was relatively weaker but specifically for the two countries, for Mindray that's specific because I think Russia is effecting everybody similar situation, Venezuela because relatively we have a strong President in the Venezuela. That's also one of the biggest country outside the China and U.S. So that put relatively more impact to us. So that's specific to Mindray. But in terms of North America and West Europe, there's a lot of uncertainty. I believe many other company already discussed but we're still strong in West Europe. That was our helpers (ph) due to the payoff.

Back to the guidance, probably Alex has some colors.

Alex Lung

Hi Jack. While overall after the first quarter and observe the performance of the individual regions, we still believe that right. We wanted to maintain the overall guidance for the year of 70% growth of the top line and then within the performance of the individual segment, after we have seen more of the performance of different regions in Q1, we still have a strong belief that China will be continue to leading the overall growth for the 2013.

With regards to the international aspect Jie also mentioned there are some uncertainties in the certain specific country in emerging market and also the economic factor in Europe and U.S. is still very weak. But overall we believe that for the international business, for emerging market we are still aiming to achieve a mid to high double digit growth, whereas for the developed market like Western Europe, we believe that with our continued building of the local brand presence, so our guidance composed of a low double digit growth in Western Europe. And U.S. we remained the same as we guided at the beginning of the year to have a low single digit growth and China above 20%.

Operator

Your next question comes from Ben Li from Morgan Stanley, please ask the question.

Ben Li - Morgan Stanley

If I can jot down the question a little bit further perhaps Alex or Jie. When we look at the international market or emerging market, rather, Russia certainly I understand has some tough comp, can you remind us whether there was any anomaly in second quarter, third quarter and fourth quarter of last year that will cause a similar type of tough comp for the rest of the year and also housekeeping item, what is FX impact for the international business, if you can quantify for us and if you exclude Russia and Venezuela for this quarter, what would be the growth for the international business or for the emerging market business?

Jie Liu

Probably we can't recall that in the last year, most of the time, in the many quarters. For the Russia this has to be more than 100% growth, that’s 2012. So now this year as I said it’s because of different, election was ended and also their modernization program was already ending. So that did some impact on the Russia but because of the Russia and the Venezuela, that was too largest countries outside behind China and U.S. for total Mindray revenues. These two countries, if you quantify, they are actually, we don’t disclose the exact number but these two country’s sales, if we really exclude these numbers probably, we can increase almost 10% for the emerging market sales.

Ben Li - Morgan Stanley

Okay and FX?

Alex Lung

The foreign exchange of this quarter, we can't possibly quantify the foreign exchange impact in this case, but the issue is that sometimes these foreign exchange impacts will basically slowdown the local economic activity. Maybe I just ask you to repeat the question, are you referring to the….

Ben Li - Morgan Stanley

To the top lines. Yes. So my question is your international business grew 3%. If you were to exclude the foreign exchange appreciation or depreciation impact, would it be 3% would it be 4% or 1% or whatever?

Alex Lung

Actually the ForEx impact of our international sale is very minimal. The bulk of our billing is actually in U.S. dollar.

Operator

Next question comes from Jessica Le from CICC. Please ask the question.

Jessica Le - CICC

First of all, could you please give us your updated growth targets in major geographies? I wonder whether you’ve changed sort of your guidelines on that front. And secondly, on your sales contribution from IVD reagents, it seems that the contribution plateau, that high 30 percentage point, for several quarters, so do you still believe there is an upside from here? If so, what should you do to further increase the reagent contribution?

Alex Lung

Hi, Jessica, this is Alex. Maybe I answered the first part of the question. Well actually we haven’t really changed much about our underlying guidance of the growth rate of the key reagents. As I mentioned earlier, the China we expected in 2013 to contribute a growth rate of over 20% with the emerging market growing as mid to high double digit. In Western Europe in low double digit, and then in the North America growing in a low single digit.

Jie Liu

Hi Jessica, this is Jie, I think it’s for the percentage of reagent sales, IVD segment, we actually got increase from almost 31.9% to 36.4%. So that’s to be quarter-over-quarter; because some time there is some seasonality issues. So we really look at this issues, probably you can see we’re still in the good trend to really grow the reagent sales. Actually internally we see the reagent sales growth rate actually much higher than the instrument sales. That’s the reason, the percentage wise already get it high gross but probably when the IVD, the reagent, percentage get higher and the growth rate will be gradually decreased but still growing.

Operator

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

Richard Yeh - Citigroup

Really took parts of first question, really two parts. The first part is actually for Jie. Jie, if you can talk about a little bit more color on the China sales, what would be the first quarter growth rate for the patient monitor imaging and In-Vitro diagnostic from an industry prospective and what would be Mindray’s growth during the quarter and have we gain market shares in mid to high end market in the IVD segment and then second question is really for Li Xiting.

Li Xiting I just want to ask what would be the; since, actually Mindray has been growing on three key segments and if we were to look at the company in the one to three year prospective, how many more segments that are we get into and in other words what have we done in the past acquisitions and are we going to see more segment expansion and the potential acquisition into the new business segments down the road for the integration were done and we are going to see meaningful contribution from the revenue prospective.

Jie Liu

Maybe I'll answer the first question first and then we ask May to translate question to Ms. Li and then Ms. Li can answer your question. I think the China sales as we’ve said the strongest sales growth coming from IVD segments but we don't disclose the exact number of In Vitro sales. So basically in China domestically we are; IVD is leading as a growth and then the patient monitor and the life support than the imaging system. So that’s in the orders growth.

In terms of market share basically we don’t each probably, quarterly we don’t have the exact number how other people doing but industry prospective, in the industry growth probably 15% to 20% in growth sales, most people estimated the growth for the device. So in that case we gather 21.2% growth I think we are relatively a little bit better than the industry growth in China. So that means we are gaining share overall also.

Unidentified Company Representative

(Foreign Language)

Li Xiting

(Foreign Language)

Cathy Gao

Yes, I’ll just very briefly translate. I think (inaudible) where we have done in terms of acquisitions over the last two years; I think you might very well get the sense that which direction we are heading. Generally speaking, the high value consumables a very interesting area for us and for the last eight acquisitions, we have two acquisitions that do fall into this category which are the orthopedics and endoscopes. And so I will not go into great details about which segment that we are looking at as they will unveil over the next few quarters and over the next few years.

We are obviously looking at many interesting new segments as well as necessary supplementations to the existing products that we already have. Please bear in mind that for tapping new segments is not the only direction we are heading in terms of acquisitions. We are also looking at high end technologies that can supplement the existing technology and technology offering within Mindray, and so we are looking both domestically and internationally. So for us, acquisition is will continue to serve as a very important life boat (ph) and we are looking at many things in many directions.

Operator

Your next question comes from Wei Du from Goldman Sachs. Please ask the question.

Li- Goldman Sachs

This is Li, I'll be asking this question on behalf of Wei. The question's basically on the company's confidence on the visibility of the next three quarters, what are the most visible turnaround that we can see that can bring the overall growth back to a 17% on the top line and also we see that cash and equivalents are measured to $891 million by the end of first quarter. Does the company have any intention or direction of using that cash or if guidance has any implications of the expansion of the cash for external growth?

Alex Lung

This is Alex. With regards to your second part of the question on the cash conversion cycle path and the cash reserve; actually from the company perspective we will like to invest effectively of this cash into growing our business. You have seen in the past two years we have actively looking for merger and acquisition opportunities in China and nonetheless we are also actively seeking for acquisition opportunity in the international space as well. So we believe that right, part of our cash reserve will definitely be using it on the M&A perspective.

And from another perspective as we also will be using our cash effectively in terms of investing into the research and development aspect in order to help us to build a stronger pipeline for our future product offering. And likewise, like what we mentioned about the emerging market and international space, in order to grow further we also need to invest into sales and marketing and service personnel as well. So these are the area we believe that use our cash effectively could help us to further grow our business.

Li- Goldman Sachs

What about the first question?

Cathy Gao

Can you repeat please?

Li- Goldman Sachs

Can you tell me visibility of the next three quarters? What are the most visible aspects that company are confident to bring the overall year-over-year revenue growth back to 17%?

Jie Liu

This is Jie. I think that we have already stated that’s very clearly in the different market situation. In terms of China, we are over 20%, under gross, and that these are micro economically China, their healthcare reform could bring us a lot of alternatives, as a device manufacture leader in this market. We are very well positioned to capture this opportunity of growth. So we have high confidence to deliver the high growth area in China.

For the West Europe in the past few quarters, demonstrated we have our strong capability to deliver the good result, although the macroeconomic situation is not so good. Compared with other peers we think we are on the right track to gain shares in those markets. In terms of the emerging markets, that’s only Russia and Venezuela is only the temporary situation, and after that Venezuela gradually politically will be stabilized then we will be back to normal.

We believe we have better opportunity to catch up a lot of sales in next few quarters. Long term perspective, we strongly believe doesn’t matter which country that you are, all the government has a urgent niche or desire to reduce healthcare cost, simultaneously to increase the healthcare standards, and Mindray is really well positioned because of our competitive product offering, very good value proposition, very comprehensive sales to service network and it helped build up Mindray as a competitive global brand to capture the growth opportunity in the future. So the next few quarters, the thing is that gradually we are in the good situation to grow. We are very confident to capture and still maintain the guidance of 2013.

Operator

Your next question comes from Ingrid Yin from Oppenheimer. Please ask the question.

Paul - Oppenheimer

Hi, everyone, actually this is Paul asking question on behalf of Ingrid, so my question is about the margins. Actually what are the drivers for a gross margin expansion beside the fast growth of reagent sales? And in theory what the highest gross margin level that Mindray could achieve? Besides do you believe that current level gross margin is sustainable in the future? And that’s my question.

Alex Lung

This is Alex, thank you very much for the questions. With regards to your questions on the gross margin, you’re right. This quarter, definitely the IVD segment growth has overall improvement in shifting the margins upwards compared to the same quarter last year. Except for that we also need to be aware that because in the North America region -- because the local situation and also the tightening on the healthcare spending, our North America segment, which principally doing the patient monitor service business has been flat this year.

So there are combined factors together that give rise to the shift in the gross margins to increase and with regards to your question about the highest margin, actually we as a company are trying our very best to improve our overall margin for the business but as Mindray, as value proposition provider we are actually striving our very best to increase market share as well.

So sometimes even though that there are certain products that we can continue to expand in margin, we may choose to take the actions to pricing more competitively in order to accelerate our market share gain. In terms of sustainability on a margin, I think one of the key factors about our gross margin fluctuation is also affected by the mix. So, when different markets that has different key product line, going a different pace we will definitely have some fluctuation in the group’s overall margin as well.

Operator

Your next question comes from the Iris Wang from Credit Suisse. Please ask question.

Iris Wang - Credit Suisse

So I was just wondering if there is any relationship between the ER based (ph) improvement and the ex-China sales weakness.

Jie Liu

Well, actually the overall ER based (ph) improvement is as result of our overall improvement in credit control and tightening our collective actions. It’s not direct relationship with our outside China sales of this quarter.

Iris Wang - Credit Suisse

So it’s across the globe, it’s not specific for any region?

Jie Liu

Yes.

Operator

Your next question comes from Sean Wu from JPMorgan. Please ask the question.

Sean Wu - JPMorgan

I have a question exactly for our (inaudible) of growth in China. I know you do not provide a very specific guidance on the growth but from my perspective, your sales growth for the medical imaging side, it was only 0.7% (ph). If I recall right you derived, most probably your sales of medical imaging products I think from China. So is this growth like anywhere close to your budget and then what are some of the contributing factors, like are you losing market shares to competitors or just like that are little costly like such. Also, I know you are planning some other like a co-products like a DC-9. Can we get any kind of update for you on growth and a purpose?

Alex Lung

Sean I could not clearly hear but I'll try to answer your question. If not right you can come back to ask us a question again. I think in terms of the medical imaging segment, the gross basically; the lower gross, whether it's for China specifically as I said the IVD is a leading in the growth and the patient monitor and life support and then medical images system is the lowest in terms of the market share; gain or loss. Now I don’t know, depending on how other people reported the numbers user. In terms of the market of growth of their 15% to 20% in the gross, I think we most likely, we were losing shares in the first quarter.

Cathy Gao

And just to clarify actually, the international sales contributes more than the China's sale under the medical imaging generally.

Sean Wu - JPMorgan

Can you provide any update on your product line progress?

Jie Liu

We always have the plan to improve the product offering as Ms. Li already stated. We put all of our internal efforts to develop high end products to really provide solutions for the tier I hospitals or some other high end hospitals. So that's our mission, to maintaining our; or even improve the shares for the low to mid end simultaneously, put a lot of efforts to develop the tidy high end products, may be such other product that's DC-9 or some other products in different segment. We do have a plan to develop those kind of products, but in terms of disclose we need to wait. When the time is ready we'd tell everybody how the plan will be.

Sean Wu - JPMorgan

Fair enough. So can you give us a loss breakdown between the color and black/white ultrasound and what's the growth rate for either segment, color versus black/white.

Jie Liu

We don’t disclose the exact numbers, but basically the black/white is declining, color grows. So that's probably imaging.

Operator

Your last question comes from Serena Chao from BANL. Please ask the question.

Serena Chao - BANL

Really appreciate managements' confidence on the sharp turn back on the emerging market. Do we have a more clear view on when that's going to be happen, either it's in Q2, Q3, Q4?

Jie Liu

Hi Serena, I think in general it's going to be back to normal, in terms for Russia, probably know that probably continue to affect next quarter but after Q2, these two countries, especially Venezuela, the impact will be significantly lifted. So for the Venezuela land probably we had better situation, so continue to stay as a challenge for the emerging market but should be better than Q1.

Cathy Gao

Thank you everyone for participating in today's call. As always we appreciate your support of Mindray. The replay of today's webcast will be available later today. Our management team and IR team will be available for questions. Thank you again for joining us and we look forward to speaking with you soon.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating you may all disconnect.

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