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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

Bin Li - Morgan Stanley

Ding Ding - SIG

Hongbo Lu - Piper Jaffray & Co.

Justin - Credit Suisse

Katherine Lu - Oppenheimer

Yale Jen – Maxim Group

Shaojing Tong - Merrill Lynch

Mindray Medical International Ltd. (MR) Q3 2009 Earnings Call November 10, 2009 8:00 AM ET

Operator

Good morning, and thank you for standing by for Mindray’s third quarter 2009 earnings conference call. At this time all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session.

I would now like to turn the call over to your host for today’s conference, Ms. May Li, Mindray’s Director of Investor Relations; you may proceed.

May Li

Hi everyone, and welcome to Mindray’s third quarter 2009 earnings conference call. Our financial results were released last night and are available on the company’s website as well as on Newswire Services. In addition, an archived webcast of this conference call can be available on the Investor Relations section of our website at www.mindray.com.

Joining today’s call are Mr. Xu Hang, our Chairman and Co-CEO; Mr. Li Xiting, our President and Co-CEO; Mr. Ronnie Ede, our Chief Financial Officer; Mr. Jie Liu, our Chief Operating Officer; Mr. Ming Ha Chen, our Executive Vice President of Strategic and Business Development; and Mr. David Gibson, our President of Mahwah operations.

Our management team will review third quarter and nine months highlights, as well as comments on the current financial and the 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. Mindraay does not undertake any obligations to update any forward-looking statements, except as 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 third quarter 2009 earnings results conference call.

First I will provide an overview of the company’s performance, followed by a discussion of the detailed financial results. Mr. Jie Liu, our COO, will discuss our operations by regions. Before opening the call to questions, I will provide an update on the company’s 2009 outlook. Mr. David Gibson, the President of our Mahwah operations is present and will standby for any questions you may have about our North American business and other developed market performance.

We achieved strong quarterly results in a difficult environment for the last quarter, particularly in the following areas. Despite lingering hospital spending weakness due to healthcare reform in the US market, our sales for the region were down only 1% in comparison with the same quarter last year. The company’s total international sales were only down 1.3% year-over-year. Gross margin for the quarter remains high at 56.6%, a jump of 240 basis points year-over-year.

Mindray recorded a special one time income of $14 million resulting from a mutually agreed upon termination of a joint development, an OEM chemical analyzer project between Beckman Coulter Inc. and Mindray. The agreement resulted from changes in business strategy by Beckman Coulter, after it acquired the Olympus Diagnostic Divisions. Non-GAAP EPS was up 12.2% year-over-year, which allows us to raise our original yearly guidance.

Now, in detail. For the quarter just ended, we achieved $151.1 million in sales, an increase of 3.1% from $146.5 million in the same quarter last year. China sales for the quarter were $66.8 million, an increase of 9.3% over the same quarter of last year. We had a $7.3 million of retroactive embedded software VAT refund in the third quarter of last year, making it a tougher year-over-year comparison for China sales for this quarter.

China sales for this quarter were relatively low and it accounted for 5.9% of China sales, down from 19.3% in the last quarter. This slow down on tender sales was partially offset by the increased revenue from non-tender business.

International sales were $84.3 million for the quarter, representing only a 1.3% decline from Q3 2008, and slightly up from the last quarter. A much more improved performance in comparison with the previous quarter during this year. This also reflects the result of our continuous effort in building up our international operation.

Operating income was $34.2 million, an increase of 13.5% over the same quarter of last year. This represents a healthy operating margin of 22.6% and improvement over 20.6% from the same quarter last year. Non-GAAP operating income was $14 million, an increase of 6.7% over the same quarter last year. The non-GAAP operating margin was 26.5%.

Fully diluted earnings per share were $0.38 per share, an increase of 56.9% from $0.24 a share in the same quarter of last year. The fully diluted EPS includes $0.10 from one time other income related to the project cancellation agreements with Beckman Coulter. The fully diluted non-GAAP EPS was $0.33 a share, an increase of 12.2% from the $0.29 in the same quarter of last year.

EBITDA was $60.1 million during the quarter, representing a 28.7% increase from the second quarter of this year and a 51.6% increase over the same quarter of last year. During the quarter we generated $20.9 of net cash flow operations. At the end of the quarter we had $299.3 in cash, cash equivalents, restricted cash and restricted investments. This compares to $286.7 at the end of the second quarter.

Our DSO in the second quarter was 62 days, up from 54 days in the previous quarter. Inventory days were 98 days in comparison to 82 days in the previous quarter, and accounts of payable days were 62 days in comparison to 59 days in the previous quarter.

As a reminder, last quarter we 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 balances of AP AR and inventory. We now use the average of the 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.

Since 2008, the company has been adjusting its policy and procedures to balance the needs of controlling working capital and offering credit to some distributors. Since the acquisition of the Datascope Patient Monitor Operation, which was primarily operated under our direct sales model, we have maintained the original credit control and implemented a credit policy in these markets with tight credit review and approval processes.

Currently the credit performance was good. For the rest of the international market, which primarily operates under the distributors sales model, we began providing credits to selective key distributors in recent quarters, and concurrently introduced the requirement that customers who take credit also taken on China export insurance policies to minimize our credit risk. Today, a substantial majority of our international sales with credit are covered by this insurance program.

Regarding inventory control, we are focusing on better control of our inventory levels. The company’s inventory level increased upon acquiring the Datascope Patient Monitor division in Mahwah operations last year. Since then there has been some increase of inventory level for the combined company due to the combination of a field operational factors. Among these is the need to maintain a higher level of inventory on an income basis as we transfer manufacturing out of Mahwah.

We continue to introduce new products to replace the existing product lines at the Mahwah location, and particularly for the third quarter we also bill inventory for certain anticipated tender sales in China that didn’t shift within the quarter. Nevertheless the company is actively looking into ways to manage down the inventory level by more closely linking inventories levels with sales forecast.

Using hightened controls over raw material and spare parts reserves, and enhancing vendor relationships to shorten delivery time among others. We are committed to delivering working capital improvement while meeting the needs of overall operational growth.

Before I go into more detail, let me first turn to our COO Mr. Jie Liu who will spend a few minutes discussing our sales trends by region.

Jie Liu

Thanks Ronnie. Good morning and good evening ladies and gentlemen. We will talk about domestic market and the international market separately; first, domestic markets. During the quarter despite stronger growth coming from normal distributor sales, compared to last quarter our China sales was negatively impacted by slower terms of business which is a result of a prolonged budget deployment process.

As we all know, China’s government has demonstrated its commitment to the healthcare sector by increasing healthcare related investment over the last few years. Earlier this year, the government also announced an ambitious three year budget for healthcare reform. However, the historical timing of government spending has not been smooth or fairly predictable.

For example, during the past quarter despite the last month of preparation was done by the government. Before that, the tendering activity labor was relatively low. However, our channel checks show that the tenders were delayed rather than cancelled, and we expect in the upcoming quarter to have a larger amount of tender activities, relatively to our third quarter.

China sales continued to show signs of strong growth boosted by increasing healthcare expenditure from both private paying individuals and the government. Hence, we remain confident about achieving good growth for China sales this year.

Now, on to international markets. We achieved slight quarter-over-quarter growth outside of China in comparison with Q2, while our year-over-year comparison was slightly down. In the US and other developed markets, we continue to face headwinds as a result of the uncertainties both by healthcare reform and economic crisis. However, this hospital funding and the government spending is slowly recovering our progress in achieving synergies.

In the new product introduction, we are seeing a strong improvement in the rate of decline in revenue, with only slight digit year-over-year drop, much narrower than the mid teen decline during the last quarter. Our emerging markets continue its momentum from the last quarter and demonstrated positive growth.

In the US our single largest sales country outside China, we continue to see uncertainties in hospital spending spurred by the continued debate in congress on healthcare reform bearers. However as the debate pushes forward, we see hospitals adapting to the current environment, and then slowly picking up purchasing activities in order to maintain normal hours of operation.

Some hospitals have started to consider system replacement. The internal approval process on processes, those deal type has also become more predictable. The previously frozen capital purchase policy seems to be fine and allowing for critical placement for some equipment.

Total US sales were consistent with the international market trends and declined only 1% during the quarter in a year-over-year comparison from the same period last year. This is a much more lateral decline in comparison with the earlier quarter of 2009. We are cautiously optimistic about this sign of market stabilization; however, maintaining the view that the market is not yet into its recovery phase, and that hospital purchasing may continue to follow irregular patterns in upcoming quarters.

Outside of US, Western Europe saw much more narrower decline as well. Year-over-year decline was narrowed into single digits. However, the region is suffering from lack of government funding on healthcare related investment. We anticipate this will last for at least a few quarters.

Outside of the developed markets we saw continued strong performance in Latin America, Asia Pacific and Africa. Each of this region recorded strong double digit growth, while the Eastern Europe and the CIS region continue to suffer from lack of funding and they experience double digit decline.

With this I would like to turn the call back to Ronnie to discuss other operational tradings and the guidance in more detail.

Ronald Ede

Thanks Jie. Our R&D pipeline was very strong through the first nine months of 2009. To achieve our full year target of introducing nine new products ahead of schedule, by releasing another four products during the third quarter. Among the four new products introduced during the quarter were DC 7, a higher end digital color ultrasound system with Full D and other new features.

BC 5800, a more sophisticated five part hematology analyzer and Passport V, an upgraded version of the Passport 2 patient monitor product for the North American markets. The Passport V is the second patient monitor co-developed by the Mahwah and the Shenzhen engineering teams.

These new products further demonstrate the consistent long term commitment of the company toward the research and development of the better products to drive sales and improve profits of the company. The introduction of new products, together with our over 70 existing products will further assist the company’s goal to expand market reach, achieve long term growth and generate better return for investors for the years to come.

Now, I would like to discuss our guidance for the remaining of this year. This quarter’s results and the first nine months of achievements made us more confident in our ability to achieve the yearly guidance we provided back in May of this year. We continue to have strong confidence in the China market and feel cautiously optimistic about our stabilizing developed country market. We feel we are in a good position to update our yearly guidance.

We anticipate to achieve year-over-year sales growth between 10% to 13% and non-GAAP EPS growth of slightly more than 10% over 2008. We maintain our previous projection of the capital expenditure to be in the range of $50 million to $60 million for the year. We will be closely tracking the various healthcare reform proposals currently underway and government spending situations in the market where we are competing.

Throughout the remainder of 2009, we will continue to focus our effort on increasing both of our domestic and our international sales capabilities, utilizing our working capital resources effectively, and adjusting our overall strategy to better compete in the uncertain and challenging economic environment.

With this we will return to the operator to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ben Li - Morgan Stanley.

Bin Li - Morgan Stanley

On the China business, can you remind us what was the VAT for this quarter? You said it was about 7.6 about a year ago, and in China you said in your press release that you are maintaining growth expectation for China for this year which I recall, if I recall correctly, it was 25% to 30% year on year. Are you still comfortable with this range? And for the ex-China business if you can just give us the growth rate on constant currency in each region. Thanks.

Ronald Ede

Hi Bin, thanks for the question, and first thing you was asking what is the amount of VAT software refund we received for the quarter. I think I want to remind everyone and as we set it from Q2 onwards we only have VAT refund for that particular quarter being recorded and its ongoing event and partially we are affecting our price. But for the clarity sake the amount of VAT we received in the Q3 timeframe was 4.2 million dollars.

Second question Bin, you were asking me about the strong growth of China sales. As we have stated here, first let me answer the question in general and then I will give our COO to give you more color on this thing.

First of all, I think the China business has been strong throughout this year and the Chinese government has continued to spend quite heavily for this year. And we have seen some fluctuations during the quarter, however we remain our confidence to believe that the spending will resume in the Q4 timeframe.

And in general, we probably see the range close what we have been talking about in the past, and however the tender business may come in entirely this year or some of them may fall a little bit outside. So we remain very confident to achieving the overall guidance’s for this year and feel strong about our China spending continuously.

I’ll let Mr. Jie Liu to give you more colors on this question.

Jie Liu

Hi Bin, this is Jie. Actually probably already know that the Chinese government has been spending a lot on the healthcare reform especially for their community hospital and western region hospital upgrading facilities and that’s the opportunity for us and also for some other manufacturers.

But during their different preparation of what need to be done, actually Q3 is relatively a weak, it actually was very weak, and the government had their target to finish their job too. And, from the information we have got we are very confident on the Q4 as there are much bigger tender sales. And that’s also the reason we say that the full year we are very confident on the China sales.

Bin Li - Morgan Stanley

And the international on constant currency?

Ronald Ede

Yes Bin, for the international side as you can anticipate biggest impact in the past for us is in the Euro zone and with Euro appreciating almost to the constant dollar, the same level in comparison to the US dollar as of last year the impact is very minimal.

Operator

Your next question comes from Ding Ding - SIG.

Ding Ding - SIG

So Ron, I wanted to just make sure that I have the correct number. So you indicated that tender sales for third quarter is about 5.9% of China revenue, is that correct?

Ronald Ede

That’s correct.

Ding Ding – SIG

So, if my calculation is correct here, that would imply your non-tender sales, obviously you don’t the retroactive VAT, the non-tender sale this quarter actually for China grew over 27% year-over-year compared to 20.5% last quarter on a year-over-year basis. So you’re non-tender China sale growth actually accelerated this quarter, is that fair, is that correct?

Ronald Ede

In terms of non-China, you said, non-tender sales in China actually accelerated when compare with the last year in the last quarter, that’s correct.

Ding Ding – SIG

Okay, great. The question I have is on the year-over-year decline of Patient Monitor and particularly other revenues in the quarter, and also we saw the slower growth for the IVP and medical imaging segments in the third quarter, can you provide some color as to what are the reasons behind it?

Ronald Ede

One of the reasons for the patient monitor gross rate is almost flat year-over-year. First of all, as also you can tell, in China sales you do have this VAT impact, last year we have a retroactive larger VATs being attributed to each of the category, this year is less.

Second to that is as you know although our international sales has been almost close to last year’s level and especially in the developed countries we are actually being much better than last few quarters, but a decline still is concentrated in the patient monitor area. As you know our largest exposure in the US and other places are patient monitor. Thus when we add everything together you see almost flat for patient monitor growth.

Ding Ding – SIG

That’s helpful. How about other revenues? I know that’s relatively small contribution, but any particular reason that resulted in the decline?

Ronald Ede

First of all, like the first reason I talk about, the negative impact of comparing VAT number from last year to this year impacted our China gross rate for each of the three segments. Second thing is in terms of IVD and also in terms of ultrasound, the lack of tender business in China also have a negative impact to or gross rate for the quarter.

Ding Ding – SIG

And lastly if I may, last quarter you provided some very good insight on various factors that contributed to the increase of gross margin in the second quarter, the gross margin for third quarter is still very attractive, but sequentially decline versus second quarter ‘09, can you share with us what are the factors that supported the gross margin for this quarter and how are they different from the factors that you listed for second quarter ‘09?

Ronald Ede

Ding Ding, I think as I mentioned in my last quarter although last quarter the gross margin was high, but we said it very clearly in our earning release call that the company is not trying to maintain the same level of gross margin, we try very hard to maintain a higher gross margin dollars. And we have seen in the last quarter a slight decline in ASP, very slight decline in ASP due to competition, and which resulted in a very good sales volume and sales result.

As a result of that I think our gross margin has a slight decline in total and also you can tell from the last quarter we also have a more international sales or less domestic China sales, usually domestic China sales carries a better margin. So that’s why combining all of those factors we have a slight decline, but not very significant from Q2 timeframe.

Operator

(Operator Instructions) Your next question comes from Hongbo Lu - Piper Jaffray.

Hongbo Lu - Piper Jaffray & Co.

I guess my question will move to inventory and accounts receivable. Ronnie, so when did you change the calculation methodology, and also if I use the beginning of the year similar methodology as before, then sales outstanding will be probably instead of 52 move to 59 inventory will move to from 98 days to 93 days, it’s much better, but still on the high end of your historical level, so I want to gather a sense from you in terms of account receivable and inventory outlook going forward.

Ronald Ede

Hi Hongbo, thanks for the question. In terms of those calculations I think we have communicated to everyone in our last quarter and in the first quarter of course make no differences for whichever the method you use because that’s the same method you use the beginning of the year, which is also beginning of the quarter. In the second quarter instead of maintaining the old methodology we thought we need to use a better methodology to more reflect the actual operations for everyone to see.

That’s why we changed the methodology in Q2, using the beginning of the quarter and end of the quarter calculation. You are absolutely correct in terms of, if we use the old method, the number shows a little bit better but that may or may not correspond to the actual fluctuation of our inventory level and accounts receivable and accounts payable levels. Thus we believe the changes of this method actually provides a better transparency to our investors.

Hongbo Lu - Piper Jaffray & Co.

Outlook Ronnie.

Ronald Ede

Outlook on these things, I believe on the accounts receivable we probably maintained the same level. Of course there will be some fluctuation depends on the actual sales of the quarter as you understand that the DSO calculations always depend on the size of the sales. The sales goes up your DSO goes down. But in range it would be about the same range.

In terms of inventory, we are actively managing the inventory level, as I mentioned in my prepared remarks in terms of several methodologies we will employ, although we do understand the reason why we have to increase inventory to overcome some of the operational factors to allow the company to migrate to a much more efficient operations over in a long run but in the interim we might have this kind of negative impact.

But a company is very aggressively looking into ways to managing our overall inventory level to reduce the inventory level to a way that will more effectively utilize our working capital.

Operator

Your next question comes from Jinsong Du - Credit Suisse.

Justin - Credit Suisse

Hi this is actually Justin on behalf of Jinsong. Got a question on your emerging market. So we can see relatively stronger sales in second quarter in emerging market and we can see momentum build up in the circle there. So can I ask what fundamentally happened in this market and what’s your sales on marketing strategy in those markets?

Ronald Ede

Thanks Justin. I think we are actually seeing very strong in emerging market as well as in developed market in comparison with the previous quarters. I would like to leave it to Mr. Jie Liu our COO to give you a highlight of our emerging market.

Jie Liu

Hi Justin, this is Jie. For the emerging markets I would say Latin America, Asia Pacific, and Africa we achieved a very strong double digit growth, actually much more than 20%, some of it even much more than this one. But those regions we think we achieved a very good result. Why we achieved this one, because for us our analysis shows they have the demand there.

In the past we start buying because of the confidence, and now after the economy has stabilized and the people are getting more confidence, and they are willing to invest, they need to upgrade their facility they need better health care that’s the major drivers for those emerging markets.

But not every emerging market show very good results. Some of the emerging markets such as Eastern Europe and CIS region still continue to decline that’s because of the lack of funding and also property limited budgets for the 2009. That’s the fundamental for the emerging markets.

One of the strategy we use, I think that we still need, as we said earlier for the emerging markets the people are actually more cautious on pricing performance ratio, they are more price sensitive. For us it’s a very good customer for us. And that’s a very good field for the company like Mindray can play well in this ground.

So, we can leverage our advantage on the price performance ratio and also by building up more efficient distributing channel provide a better service and then gaining more shares in emerging markets that’s our current strategy.

Operator

Your next question comes from Katherine Lu – Oppenheimer.

Katherine Lu - Oppenheimer

Ronnie, I just has two line item questions. You had $18.7 million of income for this quarter. So excluding the 14 related to the Beckman contract, I am just wondering what’s embedded or what’s included in that other $4.7 million of the income? Also your tax rate seems higher than usual, could you also help us to understand that?

Ronald Ede

Hi Katherine, yes, in the other income line is catch all line for all incomes we receive non-related to direct operations, and you are absolutely correct we did record the one time earning which represents the profit we have earned on this Beckman Coulter termination contract.

In addition to that we have many items included in that line, they are ranging from government subsidies and other R&D funding programs, incomes and other various items, included in that line. Most of those incomes are actually ranging for a period of time, just had been concluded and it would just be recorded into one quarter. So it is not all happening within one quarter, it’s over the period whether being recorded once that contract is being finalized.

Katherine Lu - Oppenheimer

Okay, how should we be thinking about this line going forward maybe?

Ronald Ede

This line has always been fluctuating a little bit, and then you can see in the past we have actually received OEM manufacturing incomes after we acquired the Datascope Patient Monitor operation we actually helped the other part of the company to produce products for them, and there were other incomes always recorded in that. It fluctuates a little bit, it’s not that much in the past.

Katherine Lu - Oppenheimer

And how about the tax rate?

Ronald Ede

The tax rate this quarter was recorded in general as around, I think a year to date tax rate, effective tax rate of around 16, a little bit over 16% higher, but, this particular quarter we actually recorded a catch up tax rate in our Mahwah operation.

Although our Mahwah operation has not made a lot of earning yet, but we cannot take system goodwill credits due to accounting related issues, and these are not real expenses, however under accounting rule, I have to record it as a payable accounting tax payable on by account, and once the profitability in Mahwah improves we can utilize the losses in the past and we would be able to cover, recover some of those expenses. Thus, I would like to say over long run, our effective tax rate is remaining, remain at around 16%.

Operator

Your next question comes from Yale Jen - Maxim Group.

Yale Jen – Maxim Group

As you mentioned in your script that you are going to offer credit lines going forward or intends that activity, could you comment on data going forward was there any impact on your balance sheets, and how would you manage…

Ronald Ede

Yes, we are not saying that going forward we will increasing our credit facility, what we are saying is that in the past several quarters we started to provide selective credit aligns for selective distributors as you know in the international sales operation, it is customary for major manufacturers to provide system credits, however in order to provide those credit along with security and control, we actually require all our distributor to enter being approved by China Export Insurance before we will allow any open credit line to be given.

So thus it is a very control open credit policies which does not have too much risk to other company’s overall performance and we do not anticipate to substantially increase that amounts as a percentage of sales.

Operator

Your next question comes from Bin Li - Morgan Stanley.

Bin Li - Morgan Stanley

One follow up question is still back to China, I’m trying to strip out the VAT and our ND government tender, which I understand with lots of caveat, but what I’m getting is, if I strip out those two line items in this quarter and for the quarter a year ago, I’m getting growth rate of close to 19%, 20% for the China business, and please let me know whether I’m on the right track or right ballpark for the China growth.

On the flipside, for your US business, you mentioned you couldn’t have launched a second jointly developed product Passport V, and maybe Ron or David, if you can comment on what is the improvement for the margin, for the gross margin for this product. I wonder weather you can disclose the specific improvement if you cannot, at least if you can comment whether the improvement is along the same line as we saw with previously launched Mahwah product from Shenzhen.

Ronald Ede

Yes I think the calculation you have done, first of all I would like to remind you and everyone, it is not really fair to strip out everything to calculate the China sales because they are all interrelated pieces. However, I think you are pretty much I think on the right track in terms of percentage. I do not want to confirm exactly the numbers. But I think you are on the right track. In terms of the second question I think I would let David answer that question for you.

David Gibson

Thank you. Yes, the launching of Passport V has given us, we won’t discuss the specifics but we are consistent with what the targets we had both in the acquisitions timeframe and throughout the product development cycle and consistent with what we achieve with the Accutorr V in terms of the margin enhancements and improvement as well as the ability to include more features at the price point we are at with the previous generation Passport 2 product.

So both of those were allowing us to be more effective and contributing to our ability to perform well within the great challenging North American market this past quarter comparatively to our peer group.

Operator

Your next question comes from Ding Ding - SIG.

Ding Ding - SIG

Ronnie, can you talk about your US growth strategy for 2010 or more broadly US and developed market including Western Europe. Specifically on new product launch and also the growth of ultrasound business in the developed markets, thank you.

Ronald Ede

Ding Ding, first of all we have not yet formally going to provide any guidance for 2010 yet. But I do think maybe I can let David talk about how he view about the US markets and including the Ultrasound markets for you, David.

David Gibson

Okay. Yes, the overall strategy with the US market and really it marries into all of the markets next year, we are going to expand our product offering with more jointly developed products coming from Shenzhen-Mahwah collaboration and the full integration of our global monitoring R&D platform for both anesthesia and patient monitoring products.

So we expect within the next year, we are not only launching existing enhancements on to the current product platform that have been jointly developed with the Mindray’s BeneView platform which is marking as an NDPN in the US, as well as in addition introduction of a significant new monitoring products around the mid point of next year. We will also introduce new products in anesthesia category as well as Ultrasound.

We are moving to a direct sales structure within certain market segments in ultrasound that leverages our existing Datascope sales force but is truly a market expansion and a new direct selling arm aimed at the procedural markets in ultrasound and particularly with the hand cared units that Mindray has developed which we see as having good ability to penetrate the market in US and expand our presence within the procedural ultrasound market.

Ding Ding - SIG

Hand carried ultrasound, is that color or black and white?

David Gibson

Its color, the US market is predominantly color and the end pipe product is the start and we will be expanding upon that product line.

Ding Ding - SIG

Do you have any expectation that for how many, how big is the direct sales force that you will have included in those Ultrasound and patient monitor in the US and in Western Europe?

David Gibson

That’s not a number we are going to disclose I think that’s something all our competitor would love to know right now. We will just, it’s going to be significant in terms of our ability to start to penetrate the market but we will be prudent in the level of investments and always have an eye on the bottom line returns that we generate.

Operator

Your next question comes from Hongbo Lu - Piper Jaffray.

Hongbo Lu - Piper Jaffray

Thank you so much for taking my follow up. One question is actually honestly the change in developing markets in the US actually is not quite the same as I would have imagined from other company’s result in overall take of the potential market recovery in each region.

So I’m just curious on what did you do in the third quarter in the US so that the sales was only down 1% year over year. Because we know third quarter last year was a quite strong quarter, and then secondly housekeeping item on the other receivables, Ronnie, what is that and then it increases quite substantially this quarter.

Ronald Ede

Yes, Hongbo thanks for the question again. I think you are absolutely correct. The US market has not yet fully recovered. As I think in the prepared remark, Mr. Jie Liu has mentioned that we feel we see some stabilization but we don’t see quick recovery. In terms of how we have done in the US I think I will let David answer that question for you.

David Gibson

Yes. I have got to give a lot of credit to our US sales team who persist with a lot of focus on fundamentals and blocking and tackling in the downturn. We had to expand our prospecting.

We had introduced some new products, we have been able to put more features in it at the same price points and improve our competitiveness which is a direct result of the merger of the two engineering groups. But really it comes down to fundamentals blocking and prospecting and really working the opportunities, and we have a great product structure and pricing capability and that’s paid off.

The two strong points for us this past quarter ultrasound and anesthesia allowed us to make up for gaps in the monitoring market, and other strong results with growth in those product categories. So, and we think that we really built a good opportunity for building into the future.

There is still a lot of uncertainty, I don’t think anybody is going to tell you that the US market is back on stable ground, its better, healthcare reform is taking shape in a way that will give people better visibility in prediction towards the future. But, I think we will know more as we go forward, and there are still lot of uncertainty, but that is more predictable than it was, and by continuing to execute the game plan we think we are going to continue to have better results in our peer group.

Hongbo Lu - Piper Jaffray

And then Ronnie can you answer the other of the questions?

Ronald Ede

Sorry, I couldn’t catch your second question, can you repeat it?

Hongbo Lu - Piper Jaffray

Yes, there is a line item called other receivables, increase from $6.6 million in the second quarter to $22 million in the third quarter, and I don’t quite understand what that is?

Ronald Ede

In that quarter end we did not receive the BCI’s $14 million. But since we have already received the money.

Hongbo Lu - Piper Jaffray

Got it, and the last one probably on gross margin, it actually is also better than I expected based on your last quarter’s guidance, because last quarter you said looking for the full year non-GAAP gross margin similar to fourth quarter of ‘08, one are we still maintaining that.

Second, what’s changed from last time when you give out that outlook. Is that just due to the favorable revenue mix that you mentioned or is there any improved gross margin in each revenue segment such as tender, non-tender, Datascope in developing countries.

Ronald Ede

Of course, there is always a combination of factors. It is product mix improvement and also lesser erosion of our ASP. However, I do want to caution everyone in terms of, overall we are still maintaining our overall strategy, and also in terms of in Q4 due to the reevaluation of certain inventories we will see some impact to our gross margin percentages.

Operator

Your next question comes from Shaojing Tong - Merrill Lynch.

Shaojing Tong - Merrill Lynch

This question is related to the extension of credit to international clients, Ronnie can you help to somewhat quantify what percentage of international clients are your extending credit to, who know, compared to say, two quarters before, and this have some impact to positively reimpact in helping your international sales growth?

Jie Liu

We actually started to provide credit since the late part of the last year. Although that fluctuates the opening, the percentage of that up and down for the [Cinton] intentional operations, and it does not really have a major impact because of the credit issue to impact our sales. However, I can assure you large or substantial amount of that outstanding credit covered under the export insurance program, and it is very secure and we are receiving payments on time, and we feel very comfortable of all that at the stages.

Operator

Your next question comes from Katherine Lu - Oppenheimer.

Katherine Lu – Oppenheimer & Co

I would like to get a little bit of more color on the pricing front. Ronnie you mentioned there was just a slight decline in ASP, but the pricing erosion was better than expected. I’m just wondering going into 2010, how do you think the pricing should trend versus a volume mix.

Ronald Ede

As I said, we are not yet fully ready to provide any guidance for 2010. But in terms of overall market, we do believe the normal erosion of ASP was due to taste in the 2010 environment, and I don’t think our erosion of ASP will be substantially larger than in the past experience. However, given that of course the market has become more and more competitive and with that I do believe what price will coming as one of the weapon to win the market.

Katherine Lu – Oppenheimer & Co

Then on the sales center marketing expense side, it looks like sale center marketing expense as a percentage of sales was higher than we expected. Was this a good normalized run rate we should be thinking about going forward?

Ronald Ede

I think this rate is approximately at our normal rate. However, if you compare it with the last year and before then you may see some differences because of the VAT impact. If you table VAT inside the sales everything else was, all percentage will be lower. And this quarter our VAT refund in the quarter was lower than last year due to the retroactive portion of it. Thus the percentage of our expenses to our sale naturally will be higher.

Operator

Your next question comes from Yale Jen - Maxim Group.

Yale Jen - Maxim Group

Thanks for taking the follow-up question. The first is just housekeeping items in terms of both an R&D expenditure and SG&A expenditure. If you look at quarter-over-quarter it seems trending, overall trending down a little bit, that will be the trend for next quarter, presumably overall sort of heading into the 2010 as well.

Ronald Ede

Thanks for the question. I think first of all in terms of R&D, we as a company has always been very much committed to Research and Development. We don’t think we will purposefully reduce our R&D as the overall percentage to generate profit.

So, overall R&D, I think year-over-year we are investing approximately 10% and that is the strength of the company. And as of other expenses, SG&A expenses we were looking at ways to reduce it, however SG&A expenses sometimes we’ll have some fluctuation due to, for example, special activities like merger-acquisition and other particular activities like that will fluctuate SG&A expenses sometimes.

Yale Jen - Maxim Group

Okay, great. And it’s a quick follow-up on different questions. According to the GE Healthcare, one of their goals this year and going forward is expanding the China market, the effort in China market. As far as you can see from your sales force and on the field, do you feel any sort of these pressure or more intense competition in China or what’s your pick on that?

Ronald Ede

I think all the major competitors has been in China for many, many decades and they have never been giving up the China market at all. I don’t think any changes but we welcome any competitions and I think it is more healthy to have more competitions in the field. But we do not see any level of incremental level increases or decreases during the last quarter or so.

Yale Jen - Maxim Group

Okay. What I mean by that is they were heading for the government tender business and that’s the focus of that question.

Ronald Ede

Some of the product line they have are not similar to us, and we maybe targeting different markets at this stages. And they have always been in the high end market and we have been seeing them remaining in that market, but of course we will be monitoring the market very closely.

Operator

I would now like to turn the call over to Ronnie Ede, CFO of Mindray for closing remarks.

Ronald Ede

Thank you operator. And again, I would like to thank you all for participating in today’s call. During the past quarter just by a continued difficult global economic uncertainties caused by healthcare reform proposals, we continue to see encouraging signs and more stable sales activities in comparison with last year in the international bucket.

Within China although the tender sales was slower in Q3 compared to the first two quarters of this year, non-tender sales have been strong and the government has expressed a firm commitment to invest in healthcare reform for the remainder of 2009 going into 2010. We will continue to closely monitor developments in the global healthcare industry especially in regard to hospital spending trends and healthcare reform proposals to better position our products and services.

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

Operator

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

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Source: Mindray Medical International Ltd. Q3 2009 Earnings Call Transcript
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