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Mindray Medical International Limited (NYSE:MR)

Acquisition of ZONARE Medical Systems Conference Call

June 13, 2013 8:00 am ET

Executives

Cathy Gao – Investor Relations

Alex Lung – Chief Financial Officer

Li Xiting – President and Co-Chief Executive Officer

Cheng Minghe – Chief Strategic Officer and Co-Chief Executive Officer

May Li – Chief Investment Officer

Jie Liu – Chief Operating Officer

Analysts

Bin Li – Morgan Stanley Asia Ltd.

Richard Yeh – Citigroup Global Markets Asia Ltd.

Jessica Li – China International Capital Corporation Limited

Jinsong Du – Credit Suisse

Sean Wu – JPMorgan Securities Ltd.

Operator

Good day and welcome to Mindray Medical International Limited Investor Conference Call. Please note that today’s call is being recorded. At this time I would like to turn the call over to Ms. Cathy Gao, Mindray’s Manager of Investor Relations. Please go ahead, Ms. Gao.

Cathy Gao

Thanks. Good morning and good evening everyone. Thank you for joining today’s call. As you know Mindray today announced the acquisition of ZONARE, a U.S. high-end ultrasound company for $105 million. We hope that you have chance to read the press release issued earlier today.

Joining us today on the call we have Mr. Li Xiting, our President and the co-CEO; Mr. Minghe Cheng, our co-CEO and the CSO; Mr. Jie Liu, our COO; Mr. Wang Jianxin our CAO; Mr. Alex Lung our CFO and Ms. May Li, our CIO. They will answer your questions regarding the transaction after my opening remarks.

As you know the discussion today 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 maybe 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 obligation to update any forward-looking statements except as required under applicable law.

Now we will open up the conference call for Q&A. Operator please go ahead. Thanks.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Bin Li from Morgan Stanley. Please ask your question now.

Bin Li – Morgan Stanley Asia Ltd.

Hi, everyone. Thanks for taking my questions. I’ve a pretty simple question. Basically if you can tell us the market dynamics for the high-end ultrasound business by telling us the market size globally and the split between high-end and low-end? And in terms of the application we understand ZONARE’s machine is very much used in some areas such as radiology cardiovascular ICU emergency places, and can you tell us in China how big these potential markets are for those specific use and what’s the price difference in, between GE’s machine and your machine going forward, and any plan and timeline in a market launch in China in these markets?

Alex Lung

I think for the high-end market worldwide is different situation in different countries. Specifically we talk about high-end here, it’s not there is not only, ultrasound category we have there low-end, mid-end, high-end, then go into the premium. Here the high-end are relatively higher than the mid segment. So in terms of our high-end plus premium segment in China probably more than 50% total size coming from the high-end premium segment. In the U.S. and the West Europe pretty much the larger percentage more than 50% coming from the high-end in the premium segment but the emerging markets are relatively lower percentage because they’re more cost cautious and they are more price sensitive market. There is larger amount of the revenue coming from low to mid segment market.

In terms of other market in terms of taking radiology, cardiology and also the OB/GYN this some other, much application, property pretty much worldwide 30% is coming from the radiology, 30% from their cardiology and other 30% from the OB/GYN probably roughly a 10% from you might have applications that’s general. But it could be changing every year, but that’s a rough numbers.

Bin Li – Morgan Stanley Asia Ltd.

Sorry, your definition of high-end in China does that mean it’s above $0.5 million per unit. What’s your definition of high-end in China?

Alex Lung

It’s not the $0.5 million that had probably the 0.5 million in Chinese Yuan.

Bin Li – Morgan Stanley Asia Ltd.

RMB, sorry, sorry my mistake sorry. RMB, yeah and you have no penetration in that market so far, and so with this machine you can get into this market and you said that market is about 60% of the Chinese market, which you are not tapping to now.

Alex Lung

I think the price in China is different from the price worldwide. In the worldwide there definition is more than 60,000K to 120K that’s the high-end that’s there that definition. But, in China basically the pricing and the user pricing roughly the higher pricing, so it is typically we want to calculate this kind of market size of the user the model to match the worldwide definition, than calculate at the high-end of the premium segment.

Cheng Minghe

This is Cheng Minghe to clarify, what we the ZONARE products what we are most interested also they are existing products for U.S. market and developed countries market, it’s very fit for that market. They’re target already average and the high-end traditional those kind of market. And – but for the developing country and the Chinese market properly, we were used technology to launch our next generation top target to the China market and the developing countries market, this is our consideration. I’m not just sale short-term, yes, we will sell them their products in China and the other developing market, but the long-term we will make new next generation high-end market, high-end products for the emerging market.

Bin Li – Morgan Stanley Asia Ltd.

Okay. And do you have timeline for the launch in China for the next generation is it too early to talk about this?

Cheng Minghe

Yes, yes too early.

Bin Li – Morgan Stanley Asia Ltd.

Okay, all right. Okay, thanks.

Operator

Thank you for the questions. The next question comes from the line of Richard Yeh from Citi. Please ask your question.

Richard Yeh – Citigroup Global Markets Asia Ltd.

Oh, hi, this is Richard from Citi, and thanks for taking my question. I have a couple of questions. First question is, can you talked about post acquisition integration plan for recession, sales marketing in the U.S. and in particular how would it be possible that you can integrate acquired companies technology into your existing product line in ultrasound business.

And also if you can talk about the competitive advantage versus GE and Philips ultrasound and also in the third question relates to the deal could be a bit of a dilutive, and how much loss are we, should we target for this year and what’s the expectation for the 2014 timeline. So, if you can give us some guidance would be great, thanks?

Cheng Minghe

Thank you for the question. First, the post acquisition we have integrated work people and we’re working together with the ZONARE engineering that and the team.

As we said they are high-end imaging technology, will help us to make our next generation product and also we will work together to finish their exist, they just launched ZS3, their new platform high-end of products just last year. We’re still working on this new product to finish. They are functioning to launch their several models, and also we will have people worked together with their cost down solution and because they are manufactured totally outsource. Today we will find what is the better solution for the cost down and the efficiency.

Richard Yeh – Citigroup Global Markets Asia Ltd.

Which you’re putting bring that back to China if that’s the case.

Cheng Minghe

Maybe some components and to look at what is the better solution for them, and also for the existing marketing sales team in U.S., they have a very good sales team. They are more than half revenue from U.S. market. They have 40 more people in U.S. (inaudible) direct sales team. They were independent, operated because what we also have now in our team they focus on the operation alone, only for the operation alone this specific market. So, it will not integrate in the shutdown, and also we plan to locate that the outside sales team, they also have nearly half probably more percentage outside sales especially in developed country Europe, German, Canada and a lot of country including China, also we’ll time over independent operated, because this different brand name will keep two brand name, also their sales team will independent.

Richard Yeh – Citigroup Global Markets Asia Ltd.

And, how much loss we could expect this year.

Alex Lung

Hi, Richard, this is Alex, hi…

Richard Yeh – Citigroup Global Markets Asia Ltd.

Hi, Alex, how are you?

Alex Lung

Hi, thanks, as we mentioned in our press release there will be a slight dilution to the Group as a result of this organized acquisition, but, I mean it’s at the moment it’s too early for us to discuss, what’s the overall impact because they are still in the second half of this year more to go. And secondly, we have to see the progress of our integration as well. So we’ll most obviously update more when we have more certainty about how our plans are getting on.

Richard Yeh – Citigroup Global Markets Asia Ltd.

Right, right, I have another follow-up question is that, the Company actually had it seems like from the website that it has $70 million of revenue the year before. And this year, it looks like it only has $64 million, is that because the revenue is actually what happened to the U.S. revenue, is that because the revenue is declining or it was a growing business, or what was the discrepancy on the revenue growth part?

May Li

Hi, Richard, it’s May.

Richard Yeh – Citigroup Global Markets Asia Ltd.

Hey.

May Li

Hi. I think you are referring to the total revenues of the company not the…

Richard Yeh – Citigroup Global Markets Asia Ltd.

Yeah.

May Li

I think in 2012 there was a disruption in the Japan market as a result of contract discontinuation, was one of the key distributors there. So it is a one-time event. We don’t expect such disruption to continue going into 2013, 2014.

Richard Yeh – Citigroup Global Markets Asia Ltd.

Okay. So the market, what kind of a growth rate we should forecast in our model?

May Li

Sorry. You’re referring to…

Richard Yeh – Citigroup Global Markets Asia Ltd.

In the growth model, starting from like say US$64 million base, what will be a reasonable assumption for us, should we model like 10% or 15% or 20% growth?

May Li

Thanks, Richard. Again like Alex pointed out earlier, we are still very early on into the integration process. We just signed a deal just a day ago. So let’s work out the details of the financials later on into the process.

Richard Yeh – Citigroup Global Markets Asia Ltd.

Okay. Thank you very much.

May Li

Obviously, when did out financial dilutions and I know that evaluated the deal, we had our internal calculations and internal synergy’s target, but I don’t think we at a point to share such an information with industry yet.

Richard Yeh – Citigroup Global Markets Asia Ltd.

Okay. Thank you. Thank you for answering the question and also congratulations for the promotion.

May Li

Thank you.

Operator

Thank you for your questions. (Operator Instructions) The next question comes from the line of Jessica Li from CICC. Please ask your question.

Jessica Li – China International Capital Corporation Limited

Thank you. Thank you for taking my questions. And if I may I would like to ask two quick questions. One is, what kind of incentives do you have available for employee retention? And then second, I would like to actually know a little bit better about the intellectual property, status on their technology. Thank you.

May Li

Hi, Jessica, this is May Li again.

Jessica Li – China International Capital Corporation Limited

Hey.

May Li

We have designed a specific and attractive retention plan for the employees and the management team and so we have a high confidence that this plan together with a more attractive Korea development plans for the ZONARE employees. We’ll make sure that the team will remain stable after the acquisition. The second quarter question is on the IP. ZONARE has secured 70 plus patents in the broad ultrasound technology area. In particular they have secured the IPs for the core imaging technologies what they call ZONE-Sonography. So this is core asset that lead to this transaction and we do value the IP portfolio very highly.

Jessica Li – China International Capital Corporation Limited

Do we currently have IP in China, what are your plans for China after the acquisition if they don’t already have the intellectual property?

May Li

Right. That’s a very good question. They currently do not have IPs in China, because their China sales is still very, very limited as they have only one distributor, dedicated distributor. But going forward with us, trying to bring that product to the Chinese as well as the emerging markets, we’ll make sure that we have built a good IP portfolio, not just in the U.S., but in relevant markets. So that’s the current plan.

Jessica Li – China International Capital Corporation Limited

Great, thank you.

Operator

Thank you for your questions. Next question comes from the line of Jinsong Du from Credit Suisse. Please ask your question.

Jinsong Du – Credit Suisse

Hello. Hi. Thanks for taking the time for the questions. Just like to understand what do you see as the key challenges for the post-acquisition and integration. This is because of the R&D’s integration between China and U.S. Is it the transferring of the manufacturing or is it, basically what are the key aspects you think will be the most challenging part for the post-acquisition and integration.

Jie Liu

Hi, this is Jie. I think the…

Jinsong Du – Credit Suisse

Hi.

Jie Liu

I think the purpose of the acquisition it is carrying the technology what we need getting the talented people for the next generation and getting those people working with us to develop the world class R&D team that’s a major purpose. So as May described earlier, we did designed our efficient incentive plan to really retain those people to make sure we can work to together with our those, they are first probably that in the biggest challenge, it’s how we can really retain those people.

I know another why there, Datascope acquisition we need to develop the environment to make sure we can work in there, efficient way and also work together with our London team and Seattle team we can developed our one single direction, and then get a world class products, and also the getting the world class R&D team that’s our purpose. And also we truly believe under their efficient sales plan, our incentive plan we can achieve this goal.

Jinsong Du – Credit Suisse

Right. And what do you begin to started to Datascope acquisition than you think you’ll do something differently to make this portfolio a better success and make this acquisition better success than Datascope one.

Jie Liu

I think Datascope acquisition was give years ago then Mindray was much smaller. We didn’t have so much experience in their internationally integration, we didn’t have so much resources to really integrate, but now we have seen obviously already changed. Bringing a much bigger platform, much better branding and there are much more resources, and we do have many more worldwide talent people to help to integrate.

The most important thing, we accumulated the experience by integrating and adjusting in the past five years and then we know what we need to be done in the beginning. If not, Datascope we learned by doing, right. Now we plan first and then do what we need to be done.

Jinsong Du – Credit Suisse

All right. Thank you.

Operator

Thank you for your questions. Next question comes from the line of Sean Wu from JPMorgan. Please ask your question.

Sean Wu – JPMorgan Securities Ltd.

Sean Wu, thank you for taking my question. I have two very quick questions. Number one is about evolution. You’ve said that this is going to be like relatively dilutive for this year, next year. So the company is already ready doing $64 million. So is it now profitable and they for not like, how do you plan to make it more profitable? This question may also likely lead to the second question.

I know it’s still early stage, but imagine you have done lot of thinking before making this acquisition. So they have sales people in the U.S. You have sales people based on (inaudible) eventually, I want to integrate those people together and now you are now leading them operating as an independent like subsidiary but, it eventually be integrated into your family and also it sometimes you often feel because it’s has been like a slow growing a bit, so how do you manage try to leverage in the R&D pause over there to split up your profit developed in China and now I’d like to thank you for being for bearing with me.

Alex Lung

Hi, Sean, this is Alex, maybe I’ll respond to your first part of the question first about the dilution. Well actually in the longer run, we actually see the contribution of this technology right is not just apply to the North America market, where by the ZONARE currently is (inaudible). We’ll try to basically leverage on the synergy capability. Such that we can develop suitable products that can be so in most of the world for China emerging market as well as that, we’ll a lot more synergy to bring benefit to the group as a whole.

So, we are currently the target that we acquire is not profitable so that’s why it’s contributed to some dilution to us as what we now our current Chinese plan. But as Jie also mentioned earlier and I mentioned earlier also having the longer run, we are going to benefit from the technology platform that we acquire.

Cheng Minghe

And for the how to make it profitable, and existed that what we learned is that gross margin is very low. Because, they also see all the manufacturer even the final assembly, all the parts they also including the (inaudible) so probably we have plan to make this kind of outsourcing manufacturer to what is the best of price and also we will graduate to place some parts and to increase their gross margin probably up to three years. We have a plan to lead their gross margin close to our Company’s level.

The second I think is the R&D team. They have a very good R&D team, very talented world-class people, but not many. They only have 30 more R&D team to make the new product combined since then rest all engineering team, we can fast the process, fast the launch there. Either they are exist new product or work together to launch our next generation that will faster launch the product. And they still expect we think in next three years, so we can create a lot of synergy.

And for the sales team for the time being because we mentioned a target in U.S. targeted different section market. Also the ASP is part different. So we don’t think short term we’ll combine this. They have limited synergy and but for the maybe Western Europe, we have been to look at, if we have their synergy together in the long-time, because they’ve a very good, they are a sales team for the high-end mid-tier section, which we don’t have. So, we believe we can make it profitable in the future.

Sean Wu – JPMorgan Securities Ltd.

Great, thanks.

Operator

Thank you for your questions. Your next question, the final question comes from the line of (inaudible) from Goldman Sachs, please ask your question.

Unidentified Analyst

Hello, this is (inaudible) from Goldman Sachs, thank you for taking our question. My question is how much profit lot is it, so we can have estimate when that it is expected to be profitable in the next three years.

Alex Lung

Hi [Tina] this is Alex, thank you for your question.

Unidentified Analyst

Hi.

Alex Lung

There are different ways of qualities still it’s going to benefit us, I mean I think the key point that we discussed earlier on is that for the, as Mr. Cheng mentioned in the near-term we will work on looking at cost perspective to see is there any opportunity for us such that we can leverage on the Mindray, a good engineering platform, maybe to do something about the manufacturing side, we improved overall profitability that’s for existing business, but the most important part is actually how we can leverage on the technology platform to help us to step up our products in the high-end segment that is going to serve the China and also the emerging markets. That is actually the bigger synergy that we are trying to achieve from this transaction and this is going to take a slightly longer time to achieve that.

Unidentified Analyst

Okay. Thank you.

Alex Lung

Hello?

Operator

Thank you for your question. With that, I’ll now like to hand the call back to Miss May Li, Mindray’s CIO, for closing remarks.

May Li

Thank you everyone for joining us today on the call. Both management of Mindray and ZONARE are extremely excited about this transaction. We see a lot of synergies in R&D sales and service channels between the two companies to say the least. With this transaction we have quickly stepped up our high-end R&D capability and ultrasound, which otherwise would have taken us much longer to develop internally. Moreover, ZONARE strong sales and service network in the U.S. will further our U.S. expansion.

We also expect significant cost reductions from reengineering, centralized purchasing and supply chain management over time. Both Mindray and ZONARE are committed to working together to ensure a smooth transaction. Thank you again and we look forward to speaking with you in the future.

Operator

Thank you, ladies and gentlemen. That does conclude our conference for today. You may now disconnect your lines. Thank you.

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