Mindray Medical International Ltd. Q2 2009 Earnings Call Transcript

Aug.11.09 | About: Mindray Medical (MR)

Mindray Medical International Ltd. (NYSE:MR)

Q2 2009 Earnings Call

August 11, 2009; 08:00 am ET

Executives

Hang Xu - Chairman & Co-Chief Executive Officer

Xiting Li - President & 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

Jinsong Du - Credit Suisse

Ding Ding - SIG

Wei Du - Goldman Sachs

Hongbo Lu - Piper Jaffray & Co.

Bin Li - Morgan Stanley

Jake Lynch - Macquarie Securities

Shaojing Tong - Merrill Lynch

Katherine Lu - Oppenheimer & Co.

Yale Jen - Maxim Group

Operator

Good morning and thank you for standing by for Mindray’s second quarter 2009 earnings conference call. At this time all participants are in 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, Mindaray’s Director, Head of Investor Relations, please proceed.

May Li

Hello everyone and welcome to Mindray’s second quarter 2009 earnings conference call. Our financial results were released last night and 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 at our website at www.ir.mindray.com.

Joining today’s call are Mr. Xu Hang, our Chairman and Co-CEO; Mr. Li Xiting, our President and Co-CEO; Mr. Ronnie 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 second quarter and mid year highlights, as well as comment on our 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 will now turn the call over to Mindray’s CFO, Mr. Ronnie Ede.

Ronald Ede

Thank you May. Good morning and good evening ladies and gentlemen. Thank you for joining us today for our second quarter 2009 earnings result conference call. On today’s call, I will provide an operational overview of the company, followed by a discussion of the detailed financial results.

Mr. Jie Liu, our COO, will further explain the operational details of each region. Before opening the lines to questions, I would provide an update on the integration progress of our Mahwah, New Jersey operation, and the company’s overall 2009 outlook. Mr. David Gibson, the President of our Mahwah operation is present and will stand by for any questions you may have about our US business and other European markets.

For the quarter just ended, we achieved strong sales growth and market share gains in the domestic Chinese market, resulting from continuous growth in market demand and favorable government policy.

Despite the current macro-economic involvement, especially currency fluctuation and uncertainty in international markets, we achieved better results in almost all aspects of our business and geographical locations in comparison to last quarter. We were able to achieve these results by increasing our focus on realigning our core competencies to best leverage the strength of each of our business geographies.

For the quarter just ended, we achieved $160.1 million of sales, an increase of 19.3% from $134.2 million in the first quarter this year, and a 9.9% increase from $145.7 million in the same quarter last year.

China sales for the quarter were $76 million, representing a 21.8% increase from the first quarter of this year and a 31.3% increase from the same quarter of last year. International sales were $84.1 million for the quarter, representing an increase of 17.1% from the first quarter of this year, and a 4.2% decline compared to Q2, 2008.

Operating income was $39 million, an increase of 32.6% from the last quarter of this year, and an increase of 40.2% over the same quarter of last year. This represents a healthy operating margin of 24.4%, a significant improvement from 21.9% in the first quarter of this year, and 19.1% from the same quarter of last year.

Non-GAAP operating income was $43.9 million, and non-GAAP operating margin was 27.4%. The improvement in operating margin is a result of gross margin improvement due to increasing contributions from synergies, higher margins for new products sold from Mahwah, a heavier concentration of higher margin products sold in international markets, Euro appreciation and growing contributions from reagent sales. Our reagent sales accounted for 20% of the In-Vitro Diagnostic line during the quarter.

Fully diluted earnings per share was $0.29 per share, an increase of 29.8% from $0.23 a share in the first quarter of this year, and an increase of 38.8% from $0.21 a share in the same quarter of last year. The fully diluted non-GAAP EPS was $0.34, an increase of 23.5% from $0.27 a share in the first quarter of this year, and an increase of 8.7% from $0.31 a share in the same quarter of last year.

Starting from this quarter, we will be providing EBITDA data. We believe that EBITDA can better communicate our company’s operational performance, and help our investors better understand our overall income generated from operations. EBITDA was $46.7 million during the quarter, representing a 31.1% increase from the first quarter of this year, and an increase of 38.8% from the same quarter of last year. Significant improvement of underlying operations contributed to strong EBITDA growth during the quarter.

During the quarter, we generated $34.5 million of net cash from operations. At the end of the quarter we had $284.5 million in cash, cash equivalents and restricted cash. This is an increase from $261.2 at the end of the first quarter. Our DSO in the second quarter was 54 days, down from 60 days in the previous quarter. Inventory days were 82 days in comparison to 88 days in the previous quarter, and accounts payable days were 59 days in comparison to 58 days in the previous quarter.

During this quarter, we also changed our method of calculating DSO, inventory days and AP days. Rather than using the average of the beginning of the year and the end of the quarter balance of the AR inventory and AP, we now use the average of our beginning and ending balances of each quarter to calculate the AR, inventory and AP turnover days. We believe this method better reflects our underlying performance.

Let me first turn it to our COO, Mr. Jie Liu, who will spend a few minutes discussing our sales trends by region, before I discuss other operational details with you.

Jie Liu

Thanks Ronnie, good morning, good evening ladies and gentlemen. We continue to see strong growth in China, driven by growing market demand, favorable government policies, and Mindray’s comprehensive product offering. We continue to leverage our industry’s leading infrastructure, and the brand recognition, the gaining market share in most key product categories.

During the quarter, our government tender sales contributed to 19.3% of domestic sales. Tender sales for the first half of these represented 22.8% of metric sales, and I expect it to remain strong throughout the second half of 2009, as the government executes more tenders under various reforms and the stimulus package. This promising market aspect and our effective execution, lead us to believe that we are on track to achieve our targets in China for the year.

Internationally, we achieved over 17.1% gross outside of China, in comparison to Q1 of 2009, as we bedded macro market share win in various international markets. In comparison with Q2 of 2008, our international sales dropped 4.2%.

Before moving on to details, I want to clarify that the numbers, and the year-over-year comparison I’m going to talk about here treat our 2008 financials, as we had the US operation we acquired last May for the whole year, from January to December. Just to be clear, if we relax this assumption you would see higher rates of growth, due to the additional revenue from the acquisition, which we continued in the May of 2008.

During the quarter, we continue to see developed markets decline and the rates in the mid teens year-over-year, net of the currency impact, although at a slower rate compared to the first quarter. The rest of the word comprised primarily of emerging markets, and basically held flat.

In the US, our single largest sales country outside China, we continue to experience a difficulty in the environment during the quarter primarily caused by a continued slowdown in the US capital spending, and the uncertainties caused by proposed healthcare reform. Tighter spending controls by hospital for capital purchase continued, and many hospitals are freezing or greatly reducing their capital spending. Those that do choose to spend are leaning more towards leasing and other financing options.

Also the financial conditions are declining, which makes credit more difficult for them to get. Additionally, the capital purchase approval process now is more complex, requiring higher level management approval with the hospital organization, and hence slowing down the sales process.

Despite these challenges, our North American team remained focused on pursing all opportunities, competing effectively on all deals in delivering on our integrating goals. We also saw encouraging initial market of substance of our DPM line and the continued fast sales ramp up in the fixed line, as well as year-over-year growth in both our office and the [Inaudible] of sale, through our distributor channel in US.

Looking ahead, the US hospital market remains difficult to predict through the reminder of 2009. When possible result of continued market strain is our potential demand shift training in the US for value products and the more efficient service. As a result, we will continue to invest in positioning our products and our prices to take full advantage of the potential recovery along these lines.

Regarding Western Europe, depreciation of the Euro over the dollar year-over-year, continued to play a major role in this regions double digit decline. Outside of the developed market, the picture is still mixed, however, every Mindray market has increased sales over the first quarter of this year via Eastern Europe and the CIS region are still suffering from currency devaluation and the lack of funding. Africa, Asia and the Middle East were the best performing regions for the quarter, with healthy year-over-year growth.

Lastly, I would like to briefly touch upon some of our products that experienced exceptional growth during the quarter. Our BeneView monitor, Datascope Patient Monitor segment growth and our Accutorr line sales remained strong. Our In-Vitro Diagnostic line plus Hematology analyzer, coupled with Reagent sales topped segment growth too. Finally in Mahwah, we saw ultrasound sales and the distributor channel experience strong recovery during this quarter.

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

Ronald Ede

Thanks Jie. Our R&D pipeline remained strong through the first half of 2009 and we remain on track in releasing the seven to nine new products we planned for this year. This provides assurance for our sales team to better position the company and help to maintain solid overall profitability during this difficult economic environment.

We released five products in the first half of 2009, four of which are in our patient monitor and life support line; and the other one is an upgrade to one of our medical imaging products. We are on track to achieve our new product introduction target for this year. This provides assurance for our sales team to better position the company, as well as helping to maintain good overall profitability.

Next, I would like to give everyone an update on our Mahwah, New Jersey operations and integration. It has been over a year since we acquired a Datascope Patient Monitor business. Despite the challenging business environment in the US and other developed markets in Western Europe, we are pleased with the integration progress, which has been moving along in accordance with our overall objectives.

As previously reported, the Mahwah operation now manages a variety of Datascope DPM and Mindray branded products of the US, Canada, parts of Latin America, and Western European markets. Over the quarter, Mindray USA expanded its GPO account base to include all DPM branded products in its GPO account. This expansion provides the GPOs with access to the DPM product line, and these contracts cover over 85% of the US hospitals and surgery centers.

Additionally, our R&D and new product development integration is moving along well between our Mahwah and Shenzhen engineering team. Our second co-developed patient monitor product is on track to be released in the second half of 2009.

Since the acquisition, as you may recall, we have cost reduced various existing Datascope products, released new products such as the AS3000 and Accutorr V; introduced a new product line under the DPM brand and enhanced our sales effort on Mindray branded Ultrasound and patient monitors. As a result, the Mahwah team achieved better than expected quarterly margin level improvement, and it was a major force behind the quarterly margin increase of the overall organization.

In Mindray’s continued effort to better leverage its resources and become a unifying global entity, the company implemented a realignment plan, affecting a limited number of staffs in its Mahwah, New Jersey operations in July. This move is in line with Mindray’s overall objective to better position itself within the global market place. The ongoing integration effort allows Mindray to best utilize its core competencies within each of its geographies.

During the quarter, we continued to enjoy software value added tax rebates for the sale of embedded software, pursuant to relevant government policies in China. We anticipate the receipt of such tax rebates to continue through at least 2010. It is worth mentioning here, that starting from the past quarter, there was no retroactive embedded software rebates being included.

Now, I would like to discuss our guidance for 2009. Considering the quarter’s result and where we stand as of the first half of the year, we have better confidence in our ability to achieve the yearly guidance we provided in the last quarter. To reiterate, we maintained our belief, achieving year-over-year sales growth of more than 10% and non-GAAP EPS growth of approximately 10% over 2008.

We have narrowed our range of our projected capital expenditures. We are now guiding to arrange between $50 million to $60 million for a year. Throughout the remainder of 2009, we will continue to focus our sales and service efforts 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 in achieving a better overall cost structure for supporting the business.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jinsong Du - Credit Suisse.

Jinsong Du - Credit Suisse

I have a question regarding the margins based on your estimation. Could you quantify the impact from the Mahwah operation and also the impact of the current VAT rebates. Also you mentioned that the Mahwah, if I remember correctly, the Mahwah operation has started selling ultrasound product as well. Could you elaborate on that as well? Thank you.

Ronald Ede

Jinsong, yes. I think to answer your question, there’s several parts you asked. First of all, I think you were asking me regarding the VAT portion of that. As I mentioned in my prepared remarks, we no longer have anymore retroactive VATs included in the quarter. As you may recall, in the Q1 timeframe we have $6 million of retroactive VAT included, and for this quarter we have zero. Total VAT rebate included in the Q2 timeframe is only $4.9 million.

Second to that is, to answer your question in regard to the Mahwah product line, yes, Mahwah is starting to distribute the ultrasound product line and the same management, starting from basically last quarter. We have seen good improvement in that area and further to that, since last quarter we also introduced the new product Accutorr V and also a new product line called DPM as you recall.

We started to see sales coming in on all those product lines, plus the cost reduction we have in Mahwah that help us to significantly improve our overall Mahwah gross margins, but I’m not going to discuss a particular margin per se.

Operator

Your next question comes from Ding Ding - SIG.

Ding Ding - SIG

My question is, given the performance of the first half so far, those in China and internationally, for the full year ‘09, where do you expect to see most top-line upside or downside by geographic regions, compared to your current or previous expectation? Also, can you give us a little color on the year-over-year growth for Eastern Europe, Latin America and India and Africa for the second quarter ‘09? Thanks.

Ronald Ede

Ding Ding, thanks for the question. First of all as we reiterated, our overall growth for this year remained to be above 10% growth when compared with last year’s revenue. In that scenario as you know, in the first half of this year, we picked up four months of additional sales from Mahwah, which was not included in last year.

In terms of our overall sales, we do believe we will see continuous strong growth in China, remain to be as we advised the screen to past 25% to 30%, and international sales will be slightly negative, so that will give us a total of 10% or a little bit above 10%.

Let me turn it to our COO Mr. Jie Liu to give you more answers in terms of different regions.

Jie Liu

Further, regional forecast for the 2009, I think that for the first half of 2009, in the emerging market, the revenue is actually year-over-year flat, but in some markets we do have better performance, especially in the Africa, Asia and the Middle-East that we are getting a healthy growth.

For the Eastern Europe, due to their currency devaluation and lack of funding, we do decline, but India, including the Asia area, we do have a very promising 2009 Indian market, that’s the area you look at. China, domestically of course we remain strong for the 2009.

Operator

Your next question comes from Wei Du - Goldman Sachs.

Wei Du - Goldman Sachs

I do have a follow-up question on the growth margin. Can we understand the way of the margin expansions mainly due to cost reduction on those new product launch. Of course, these two product mix change, but is that cost reduction mainly because of the outsourcing of DPM line or can you sort of elaborate on that?

Ronald Ede

Du Wei, thanks for the question and let me further explain on the gross margin issue. I think I talked about the Mahwah product mix improvement and also the product gross margin improvement. In addition to that, actually our international market also have an improved product mix.

In addition to that also, we have a Euro currency appreciation when compared with the last quarter, and another area of improvement is the increase of our reagent sales, as I mentioned in our prepared remarks. All those factors help us to improve our quarter-to-quarter increases of our gross margins, while we were seeing less than anticipated ASP erosion for the last quarter.

Operator

Your next question comes from Hongbo Lu - Piper Jaffray.

Hongbo Lu - Piper Jaffray & Co.

Ronnie, I have a question for you. I’m going to press you on the guidance a little bit more. So we are maintaining our guidance, and then you just said, well ex-China we do expect probably a flat, slightly down for the full year, but you did so much better in the second quarter, only minus 4% down. If we assume full year flat or slightly down, you would have to do close to 20% down year-over-year for the second half as kind of revenue. Can you give us some color on how this is possible?

Ronald Ede

I think there are a couple of building collective factors in the first half of this year. One of the part of the factor is as you know, the first half of this year we do not have a Mahwah fulfillment of sales. So although you see a substantial gross in Q1, and a very good growth in Q2, but that is adding four months of sales which was not comparable with last year as a major factor for the first half of this year.

Second to that is also, in the first half of this year we have a so called software VAT refund. In that, we have a total cumulative of around $14.9 million of total VAT refund for the first half of this year. That was not comparable with last year, so that also helped us to increase our revenues in the first half of this year. This factor helped us in the first half of this year, but it’s going to be hurting us on the second half of this year, because last year if you recall, all our VAT software refund came in the second half of last year.

So in comparative basis, we would see less VAT refund for Q3 and Q4, and with all those factors combined, with all the international markets uncertainty which is a lot of downside risk, still there in the US and the other Western European countries, we see a 10% growth or approximately at least 10% growth on revenue is something we have to work hard to achieve. It’s not something like a given number that we can easily pick.

Operator

Your next question comes from Bin Li - Morgan Stanley.

Bin Li - Morgan Stanley

I have a question on the gross margin again, and just to clarify, and Ronnie you said the VAT this quarter was $4.9 million. I recall in the past, we were thinking about something like $3.5 million. So am I correct on that? Is the $4.9 million the new run rate going forward?

Also another data point if you can clarify, what is the government tender as a percentage of domestic sales in this quarter. In also another point you mentioned the effects, benefits on the gross margin; can you quantify that for us?

Ronald Ede

Few points Bin; first of all, the VAT refund last quarter was approximately around $4 million, and this is a 4.9% higher, but every quarter this number could be different due to the different product lines we are selling in China. It cannot be a straightforward calculation as a percent of China sales, but it’s a detailed calculation based on what product line we are selling in China. So straight line calculation could be dangerous in terms of the estimation.

Second to that, I believe you was asking me in regard to what was the tender sales as a percentage of China sales. It is approximately 19%, and I think that answers most of your questions, right?

Operator

Your next question comes from Jake Lynch - Macquarie Securities.

Jake Lynch - Macquarie Securities

I wonder if you could help us walk through, on the EBITDA growth, you are reporting a 38% growth on the EDITDA, versus a only 10% on the non-GAAP EBIT effectively. So I was wondering if you can just walk through kind of what’s going on there. It appears that there was a big surge in the depreciation cost, is that correct?

Ronald Ede

A lot of those costs associate with our purchase of the Mahwah operation last year, and some of them are one-time cost. So like last year we have $6.6 million of one-time in-progress R&D we have to write off for the quarter. So that makes the EBITDA number, which is a loss figure.

Operator

Your next question comes from Shaojing Tong - Merrill Lynch.

Shaojing Tong - Merrill Lynch

The question is regarding the pent-up demand that you mentioned last quarter. Is this still something that you are expecting or is it actually already happening. I just want to get some clarity on that.

Ronald Ede

I think last time I talked about pent-up demand is regarding to the uncertainty in the US, and we are still seeing uncertainty there. The issue is not yet totally resolved, but I can ask David to give you a little bit more color on the US operations, maybe it’s more helpful.

David Gibson

Thank you, Ronnie. I think just the point of pent-up demand is that we are not seeing within the US a drop off in the number of patients visiting hospitals, there is a drop in the amount that are being reimbursed for, because the overall economic condition is happening, but what we are seeing is there’s deferred spending and deferred replacement of product that’s happening, which will have to come back into the market sometime in the future.

I think the question we all are looking at is when that is going to come, and we are taking the appropriate action with the operation to streamline now, but be ready for the time when the pent-up demand returns.

Operator

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

Katherine Lu - Oppenheimer & Co.

As we are standing in the middle of 2009, I’m just wondering if you can remind us the assumptions that you built into your guidance. For example, I remember you were assuming China’s device market to grow 20% this year, and some of the industry data we’ve collected actually showed the market is growing much faster than that.

Then I remember back in May, you mentioned there’s a slowdown in government tender in April, which I guess contributed to less tender contribution for your China sales, but as government is pushing the healthcare reform with full force, do you see anything upside for the second half.

Then finally, your Euro dollar exchange rates, are they still standing at the level at the beginning of the year?

Ronald Ede

Let me ask our COO Mr. Jie Liu to answer your question regarding to China.

Jie Liu

Again, I’ll answer China first regarding the China tender activities. As we probably can recall in the first two quarters, we say the tender for 2009 has still not yet began, but we anticipate by the end of this Q3, the tender will gradually pick up, and from all the signal we’ve had to come, we are continuing the stimulus package and healthcare reform policy and we are very confident on Chinese government and we are very confident that we can tender too.

So that we say for the tender percentage of the China domestic sales for the second half 2009, we are remaining strong, same as the first half of 2009. Ronnie, can answer the other…

Ronald Ede

Katherine, in regard to the FX question assumption I was asked earlier. First of all, our assumptions remain about the same as we provided in the last quarter’s earning release, and we do anticipate on a yearly basis R&D may have a little bit more positive impact to us, may be 1% to 2%, but the Euro and Euro zones, comparative to the last year’s same quarter, same period, will still have may be 13% negative impact as we had last quarter. We do now believe the Euro impact will less for us in the future quarters to go.

Operator

Your next question comes from Yale Jen - Maxim Group.

Yale Jen - Maxim Group

My question is that first of all, in terms of the operating expenses, I noticed that your R&D expenditure, the absolute number was flat compared to the previous quarter, so the percentage is lower. So going forward, do we anticipate this type of operating expenditure or you would increase that, as well as whether in the marketing and sales side, did the expenditure increase proportionately or will it stay at similar levels, as we’ve seen for the last two quarters?

Ronald Ede

First of all, we as a company are very much concentrated in R&D investment. R&D is a very important and a core competency of the company. We would try to invest in the area for the future, and our spending in the quarter has been improving as a percentage to the total revenues. As we are improving our efficiency and improving our synergies, all different parties are locations of our operations.

Moving forward, we believe we will be hovering around 10% or slightly below 10%, it would be our overall R&D spending and we will continue to have this kind of pattern over the long run, to ensure we will have a future growth for new products. As filed for the other expenses, it will be more inline in percentage growth with our revenue growth.

Operator

Your next question comes from Jinsong Du - Credit Suisse.

Jinsong Du - Credit Suisse

My question is regarding this IVD Reagent kits. Can you verify that for the second quarter it is 100% of your total IVD sales or it’s only 20% of the IVD sales in China. If it’s the total, then it’s really a big jump, could you explain the reason and also the ongoing trend in the next few quarters?

Ronald Ede

Jinsong, first of all we can verify, the reagent sales is 20% of our total IVD sales in the company and it has increased from the previous quarter but it’s only about a 2% to 3% increase.

Operator

Your next question comes from Ding Ding - SIG

Ding Ding - SIG

The question is on the China tender sales, Mr. Liu Jie mentioned earlier that the China tender sales for the first half has not benefited from the funding allocation for 2009, but the second quarter tender sale in China actually came in better than what we expected. So the tender sales this quarter benefited from which trench of government funding to your best knowledge; is that still the RMB 4.8 billion from late November last year.

Secondly, out of the government funding for medical infrastructure building and public health for this year, what percentage do you expect will go to device tender this year, and out of the two tender sales of device, what percentage is relevant to Mindray? Thanks.

Jie Liu

I think the tender sales of the first half of the China domestically, some of them are coming from the 2009, but most of them are coming from the budget of 2008, because remember, the second quarter of 2008 China gets some stimulus package and initially get a lot of funding for their hospital, and put some money on the healthcare reform, then put the funding on there.

Some of them have not finished execution, some of them are left to the 2009, but most of the 2009 budget would be the second half of the year. So that’s a natural state; just that some of 2009 budget will be moving to the 2010, the same, but irrationally, the second half of 2009 will be the same size of the first half of 2009. That’s our current estimation.

Ronald Ede

Sorry, I just wanted to make one correction to Jinsong’s question in regard to our reagent sales as a percentage of our total IVD sales. When compared with Q2 of ‘08, our total reagent sale as a percentage of our IVD sale increased around 2%. When compare with the previous quarter, maybe only it’s 1%, okay? Thanks.

Operator

Your next question comes from Hongbo Lu - Piper Jaffray,

Hongbo Lu - Piper Jaffray

Actually Ronnie I’m going to go back to the guidance again. So when you talk about VAT refund that’s for China, and we were talking about ex China, because of the trends in the quarter, then I understand the proforma and also the first half had four actual months.

The calculation I did fully considered that, and then if we want to keep ex China as flat to slightly down guidance, I assume my number for the third quarter and fourth quarter basically for the second half, for ex China will have to come down 20% year-over-year down, which is not very likely in my mind for the second quarter, which is only 4% down.

Then the second question is I think for Jie very quickly, what’s the last time between government tender activities and Mindray revenue recognition, and how should we think about the third quarter government tender revenue, thank you.

Ronald Ede

Hongbo let me answer your first follow-up question. Our assumption for this year’s guidance does include the second half of this year. Our China sale will continue to grow from last year, and the percentage could be growing around 25% to 30%. We would not anticipate any decline that area. However, the international sales will continue to be depressed and will continue and will have a decline year-over-year when compared with the last year same quarter, especially in the US and the Western European countries.

Recording last year in the Q3, Q4 timeframe, after the acquisition of the Datascope Patient Monitor, the Mahwah portion of the sales was very strong in Q3 and Q4, and this year we see the same kind of market condition can allow us to make the same assumption, that’s why we feel combining all those regions, we would see approximately 10% or at least 10% growth for the entire year of this year. I’ll let Mr. Jie Lu to answer your second part of the question.

Jie Lu

Hongbo, regarding the tender cycle time, it’s hard to say, but some specific tenders for you regionally, aided tenders, but you have to get the information properly for some period of time. Some tenders may be one week, some tender could be one month, but if that’s the case that is relatively easier, but sometimes some losers could appear during the tender activities. If that’s the case, the government has to deal with this kind of activity, maybe wait a longer time for the tender activities.

So roughly, most of the case, if there is no clear case, they’ll be relatively shorter, but if that’s the case happening, that could be much longer than expected. The question is for their second half of 2009, because the government budget is on a yearly basis. Sometimes you want to spend the money by the end of 2009, that probably helps us to expedite the process during the second half of 2009.

Operator

Your next question comes from Bin Li - Morgan Stanley.

Bin Li - Morgan Stanley

I wanted to understand a bit more about the upside for your international business, and obviously, if you take upside of one international, I’m trying to figure out where that upside is coming from, from which region. Because I remember, your last quarter’s remarks on different regions; for example, you said US is down mid teens and emerging market is flattish,.

This quarter I think you are saying the same thing, so where is the upside, which region is it coming from, and if there is any specific reason or it is a function of currency benefit.

Ronald Ede

Bin, we actually see a strong Q2 in comparison with Q1, but you are looking at Q2 to Q2 comparison as we stated. We actually see a 4.2% reduction year-over-year in sales, despite additional one month of sales in Mahwah. So I think that our original guidance and our understanding of the markets still holds true for the performance in Q2, however, we do not see Q2 going anything worse, in fact Q2 was doing better than Q1.

Operator

Our next question comes from Katherine Lu - Oppenheimer & Co.

Katherine Lu - Oppenheimer & Co

I’m just wondering if we can look a little bit further, what kind of opportunities and I’m trying to just see for mind reading in 2010, and in terms of China domestic growth, do you feel it will be increasing from this year’s level due to the healthcare reform and the funding related to that; and how about product pricing?

Jie Liu

Katherine this is Jie, I think that for China domestically, from the information we got is from 2009 to 2011, the Chinese Government will continue to invest on their healthcare reform and to make sure more people will have quality access to healthcare, that’s our major mission for these three years, but we talked with some government officials. The information is that the Chinese government will continue to invest on these area beyond 2011.

That gives us more confident and we have a better position in this sector, because we have a very well funded infrastructure, very good sales team, and a very good platform too. That gives us a leading position to really compete in these healthcare segment. For the future, China will builds up on the healthcare infrastructure in the next five to ten years maybe, that’s a good thing for us.

Of course there are some challenges; maybe we don’t have enough talent to really capture this opportunity, that’s the reason the company always invests the money on R&D and also invests on some others on the talent recruiting in the different programs. So that’s our upside in China for next few years, even beyond 2010.

Internationally, so far we still have a lot of uncertainty in different countries, because we don’t really know what the economy will be, but we do our best to prepare for the future, including building up the future infrastructure in different countries to really compete in the differently emerging markets, especially in the Indian, Brazil and some other good potential countries.

For the developing countries as Ronnie already pointed out, because of the acquisition of Datascope Monitor division, we did get out some platform in the past. What we can do is integrate the two company’s operations platform, and to make sure after the recovery of the economy, we can really capture the potential opportunities.

I think that’s the overall opportunity for Mindray in the future, but regarding 2010 for the developed countries, there is still some uncertainty we are seeing, but we are prepared for that.

Operator

Your next question comes from Shaojing Tong - Merrill Lynch.

Shaojing Tong - Merrill Lynch

This is a question for Ronnie. I think as other people have asked several times about foreign exchange impact, I just want to ask you again, what kind of foreign exchange impact is on your top and bottom line second quarter?

Ronald Ede

The second quarter in comparison with the last year same quarter; on the R&D side we probably have around 2% improvement and in the Euro zone, we probably see a negative impact of around 13%, which I think basically you can calculate comparatively was this year’s average exchange rate versus last year the same period.

Operator

Your next question comes from Ding Ding - SIG.

Ding Ding - SIG

Just one more question on the US environment. You mentioned the difficulty of the US hospital purchasing environment continues. I’m wondering if that has benefited Mindray in terms of penetrating the US and Western Europe markets, that traditionally has not been the most price sensitive. Secondly in terms of export ASP as average selling price, how is the trend over the past few months, particularly for Mindray’s product? Thanks.

Ronald Ede

David, you want to answer that?

David Gibson

Yes, I’ll talk to the US market and then Liu Jie will kind of address the export ASP issues for Mindray.

I do think it is a very tough hospital environment. We positioned ourselves with launching a couple of new products and new product that was jointly developed with the Shenzhen team, the Accutorr V, which continues our non-evasive blood pressure, vital signs monitoring line, along with the launch of the DPM line of monitors which are value oriented play, that are allowing us to compete where price is more of a factor.

You are correct, the US market is not as price sensitive. So additionally we are working on adding increased connectivity into our traditional Datascope line, along with the DPM line, and other product enhancements for the end of the year that will address both the connectivity, HRS related side of the market, as well as being able to better address the price sensitive side of the US market.

So we combine those two things together, we are building a better stronger portfolio, a stronger competitive position to be there when the number of transactions, the deal volume and replacement cycle starts to accelerate in the US, we’ll have a complete product portfolio to deal with that.

We are I think better off than several of our competitors who do not have a stronger value proposition as we do. I think we are also gaining leverage as we are expanding into ultrasound sales in conjunction with the distribution channel we have, that’s focused on the non-hospital environment, the doctor’s offices and veterinary markets.

We have recently started the launch with our hand carried Ultrasound into the expanding markets of anesthesiology, emergency and ultrasound within critical care with the hand carried market in play, and it has some parallels to what our monitoring sales force has been doing, so we get good synergy out of that. So, we think a reposition for this market but it is a very tough market condition and that will continue. So I’ll let Jie answer the ASPs.

Jie Liu

Regarding the export ASP, we see a little bit of declining, but also in most shares, we expected at the beginning of the year and that’s the reason we’ve had actually margin improvement for the export products.

Operator

Your next question comes from Yale Jen - Maxim Group.

Yale Jen - Maxim Group

Just wanted to talk a little bit on the guidance again, particularly in the international market. As I said, if you compare quarter over quarter, the second quarter definitely is a great improvement compared with the first one and so going forward, according to the guidance, should we anticipate even some decline in the international sales over the next two quarters or am I reading it rather incorrectly?

Ronald Ede

We do anticipate the developed market will continue to be depressed. As a result of that, year-over-year comparison will probably be seeing a mid-team type of a decline. Especially as I said earlier, last year Q3, Q4, we actually had a pretty good quarter from the Datascope patient monitor operations in US, in western European countries. So that situation is in line with the market condition and overall involvement.

For the rest of the emerging market we anticipate with all the uncertainty and the changes, if we can hold it approximately flat, it will be okay.

Operator

Your next question comes from Hongbo Lu - Piper Jaffray.

Hongbo Lu - Piper Jaffray

Just one little question on the VAT receivables. Ronnie, why VAT receivable on balance sheet was down sequentially if there was no active VAT recognized for the quarter?

Ronald Ede

Our VAT receivable is a function of many factors; that includes also VAT of other VAT items, but in terms of VAT receivable, we record this VAT based on accrual basis, and as we receive the funding from the government, then we will reverse that; that’s a pure accounting process. As I discussed last quarter, during the last quarter we took over all the retroactive VATs, there’s no more retroactive VATs available for us.

So moving forward, as I said in the conference call for Q1, starting in Q2, we only will have ongoing normal VAT for the quarter and moving forward, we probably would not even discuss specifically about a VAT, because that is a part of our revenues moving forward.

Operator

Thank you. Ladies and gentlemen this concludes our question-and-answer period for today. I would now like to turn the call back over to Mr. Ronnie Ede for any closing remarks.

Ronald Ede

Thank you operator, and thank you again for everyone participating in today’s call.

During the past quarter, we maintained our leadership position in China and benefited from market demand, as well as government policy driven initiatives in the China healthcare industry. We also continue to make progress to our international strategic targets, despite a very difficult market economy. For the remainder of this year, we will still closely monitor development in the global healthcare industry to better position our products and services.

Again, as we stated earlier, we are cautiously optimistic in our ability to achieve our stated goals for this year, and we maintain our long term objectives in all geographical locations. We appreciate your long term interest in supporting Mindray and our business. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes your presentation, you may now disconnect. Good day everyone.

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