Mindray Medical International Ltd. Q1 2010 Earnings Call Transcript

May.11.10 | About: Mindray Medical (MR)

Mindray Medical International Ltd. (NYSE:MR)

Q1 2010 Earnings Call

May 11, 2010 8:00 am ET


May Li – Director of Investor Relations

Ronald Ede – Chief Financial Officer

Xu Hang – Chairman, co-CEO

Li Xiting – President, co-CEO

Jie Liu – Chief Operating Officer


Ding Ding – SIG

Wei Du – Goldman Sachs

Hongbo Lu – Piper Jaffray

Jinsong Du – Credit Suisse

Bin Li – Morgan Stanley

Richard Yeh – Citigroup

[Bennie Wong – Merrill Lynch]

Katherine Lu – Oppenheimer & Company

Yale Gen – Maxim Group

[Amy Zu – UBS]


Thank you for standing by for Mindray first quarter 2010 earnings conference call. (Operator Instructions) I would now like to turn the call over to your host for today’s conference, Miss May Li, Mindray’s Director of Investor Relations.

May Li

Hi everyone and welcome to Mindray’s first quarter 2010 earnings conference call. Our financial results were released last night and are available on the company’s website as well as newswire services. In addition, an archived webcast of this conference call will available on the investor relations section of our website at www.mindray.com.

Joining today’s call are 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. Gibson, our President of Mindray Operations.

Our management team will review first quarter highlights as well as provide additional detail on the current financial and micro 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 U.S. 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 obligation to update any forward-looking statements except as required under applicable law.

I will now turn the call over to Mindray’s CFO, Ronnie Ede.

Ronald Ede

Good morning and good evening ladies and gentlemen. Thank you for joining us today for our first quarter 2010 earnings results conference call. Again, I will follow the usual format by first providing an overview of the company’s overall operational performance, followed by a discussion of the detailed financial results. Mr. Jie Liu, our COO will then discuss our operations by region, after which management will be available to answer your questions.

The quarter just passed, reinforced some of our original assumptions when we first formulated the company’s sales and profit guidance for 2010 back in January. We saw very strong China non tender sales and substantial growth in the emerging market including Eastern European countries as well as the CIS region.

We also are very happy to report positive revenue growth and stronger bookings. Running counter to these strongly performing area we’re experiencing a slowdown of Chinese Government tender sales and continued weaknesses in the western European regions.

In particular, we reported our net revenue growth of 8.7% to $145.8 million for the first quarter of 2010. Before I go any further, I would like to remind you that for comparison purposes, in Q1 of 2009, we recorded a total of $6.5 million in retroactive refunds, which has impacted our year over year comparison percentages. Excluding this refund, our total sales growth would have been 14.2% for Q1 2010.

Domestic China sales were flat year over year. Excluding the retroactive refund from Q1 2009, overall China sales would have increased 11.3%. Our domestic sales were impacted by the lingering effect of the Chinese New Year, which came late in the quarter this year, and by a drop in Government tender sales due to slower government spending.

But as I mentioned, our non tender sales were very strong with growth over 45% year over year, excluding last year’s retroactive portion of the refund.

Internationally, our sales increased 16.6% driven by continuous robust growth in emerging markets with about 30% year over year sales growth in most territories. We are particularly encouraged by the return to growth in Eastern Europe and the CIS region. We are also seeing signs indicative of a market recovery, as hospitals in more international markets begin to return to a more normal spending pattern.

Another encouraging sign is the 2.4% year over year growth in the North American market and the order intake is increasing at an even faster pace. Our company’s net income demonstrated excellent year over year growth of 42.8% to $36.2 million from $25.3 million in Q1 of 2009, including $8.6 million of tax reduction leading to a net margin of 24.8%.

Gross profit for the quarter was up 10% year over year to $32.3 million resulting in a consolidated gross margin for the quarter of 56.4%. Our operating margin was 21.9%.

Non-GAAP net income increased 31.6% to $40.1 million over the first quarter of 2009, resulting in a non-GAAP net margin of 27.5%. This past quarter non-GAAP gross margin was 57.5%, up from 56.9% a year ago. The margin improvement was mainly due to reduced tender sales, lower products costs and product mix changes. EBITDA was $38.8 million during the quarter, a 9% increase over the first quarter of 2009.

Moving on to our balance sheet, during the quarter we successfully raised approximately $149.7 million net of related costs through an offering of four million newly issued ADS shares. In order to balance our future cash needs against our interest payments and other banking expenses, we paid down the short and long term loans we had with Bank of China, and Hong Kong Shanghai Bank.

Now we are in the process of replacing the loan with a stand by line of credit that will have similar terms and conditions, interest arrangement and low fee for unutilized portion of the credit line. This substitution of credit lines for the debt will enable us to maintain our strategic options and our investment needs while lowering our overall interest expenses.

We generated $32.8 million of net cash from operations during the first quarter. After paying off the loan, we had $255.1 million in cash and cash equivalents at the end of the quarter. This is in comparison to $204.2 million at the end of last quarter.

Total cash, cash equivalents, restricted cash, short term investment and restricted investments were $43.6 million as compared to $372.5 million at the end of the fourth quarter 2009.

Our total receivables were $106.9 million at the end of Q1 2010, down from $113.3 million at the end of Q3 2009. Our inventory level at the end of Q1, was $69.2 million versus $64.5 million at the end of Q4. The reduction in our accounts receivable level was due to normal seasonality pattern while the increase in inventory was the result of our overseas stop shipment increases in preparation for SAP system implementation in Europe and in the U.S.

The company is evaluating its inventory needs to systematically reduce the inventory level. We are aiming for a better balance between customer needs and appropriate level of overall inventory while taking into consideration various other issues such as SAP implementation.

As first quarter sales are typically lower than fourth quarter sales, reflecting normal seasonality, our DSO in the first quarter was 69 days as compared to 53 days in the fourth quarter of 2009. Our inventory days were 96 days in comparison to 74 days in the fourth quarter, while accounts payable days were 60 days in comparison to 43 days in the fourth quarter of 2009.

As a reminder, for comparison purposes for this quarter, in 2009 we changed our method of calculating DSO, inventory turnover days and AP turnover days. We now use the average of beginning and ending balances of each quarter to calculate the AR, inventory and AP turnover days, rather than using the average of beginning of the year and the end of the quarter balances.

Such calculations will inevitably magnify the quarterly fluctuation of each of the DSO, inventory turnover days and the AP turnover days, but will be more reflective of the current status of the operation.

I will now turn the call over to our COO, Mr. Jie Liu who will spend a few minutes discussing our sales trend by region, after which I will provide additional detail on our finances and business trends.

Jie Liu

Good morning. Good evening, ladies and gentlemen. Let’s talk about China domestic first. Mindray’s domestic China sales were flat at $62.2 million U.S. dollars for the first quarter as compared to $62.4 million in the first quarter 2009.

As Ronnie mentioned earlier, our year over year growth comparison was impacted by the $6.5 million U.S. of refund received in Q1 2009. Net of this refund, China sales actually grew 11.3% over the same quarter last year.

Declining government purchases over the quarter also affected Chinese market growth. Again, we reiterate that while Mindray’s common fee quarterly fluctuation in government tender activity, such fluctuation doesn’t always follow a fixed seasonality pattern. Furthermore, this year’s Chinese New Year falling in the middle of February, making an even slower quarter in execution of government tenders.

Tender sales for the first quarter contributed to 9.5% of domestic sales, significantly down from the first quarter 2009. As we discussed a year ago, the reason behind the higher tender sales of 2009 was the government’s focus on accelerating spending to stimulate the economy. By the first quarter of 2010, the government has taken a more balanced approach to spending.

However, we still remain firm in our belief that the Chinese government will continue to invest heavily in the health care sector. Recently, the Chinese State Council issued an implementation guideline for 2010 on health care spending which clearly stated the government investment in health care infrastructure by building more county hospitals in the community health care centers.

Despite quarterly fluctuations in government spending, we believe we demonstrated the Chinese government commitment to health care spending which will boost demand for health care products in medical device in long term perspective.

Obviously, non tender sales were very strong this quarter. Net of the software refund impact, non tender sales in China grew 46.5% over Q1 2009 primarily driven by the continuous strong demand and the purchasing power of China hospitals.

In this area of the business where Mindray can utilize the space of the sales capacity, and to effectively compete and to gain market share, we remain very confident that our brand and sales channel will continue to see strong non tender sales, particularly among out high end products.

We also anticipate that overall economic growth, government commitment to expanding health care coverage and the private sector investment will maintain a healthy growth rate in the non tender market.

Now come to international. We will take a closer look at the growth picture in our international markets. Outside of China, our international sales were $83.7 million U.S. dollars, a 16.6% increase over the first quarter 2009. Overall, our international performance was strong in comparison with Q1 2009.

We experienced solid double digit growth that was mainly led by exceptional performance in all emerging markets including Eastern Europe, and the CIS region. During the past quarter, all these regions recorded growth rates close to or greater than 30%.

Sales momentum remains strong. Since the second half of last year, we have seen some positive recovery signs in certain Eastern Europe countries. Again, we believe we are very well positioned in this region to ride through the economic recovery and benefit from health care expansions.

We’re also encouraged by further signs of stabilization in the North American market. For the first quarter we recorded a low single digit sales increase in North America, the first positive growth in sales we have seen since the beginning of the economic crisis a year ago.

We also saw our all in take giving an even faster rate in our quarterly sales with the recent passage of the U.S. Health Care Reform Bill. We anticipate the health care market will further stabilize and we may even see some recovery during the later part of 2010. Again, this is in line with our overall expectation for the year.

Additionally, our newly established Mindray team in North America continues to demonstrate success by expanding sales through both our direct and indirect channels. We have also achieved some initial success with our drug sales to hospitals through the U.S. sales team.

Over the last quarter, Western Europe was the only region that continued to exhibit weakness. Sales continue to decline and we will closely monitor the various economic developments in the territory as well as its currency fluctuation.

As discussed during past conference calls, we have been gradually enhancing our investment in international channels. We believe these investments can help the company penetrate the international markets. Although we will maintain our [inaudible] we now have placed added emphasis on both regional responsibility and the management.

We have also increased our percentage of local staff, organized to participate in regional and local center and develop more country specific market strategies. We believe that all of these efforts will improve our access to international markets.

Ronnie will now take over the call to discuss other operational trends and the guidance in more details.

Ronald Ede

Our R&D pipeline continues to grow into 2010. So far this year, we released our higher end portable ultra sound M7. It just received the C mark this quarter and we are in the process of applying for FDA and SFDA approval.

We are on track both in meeting this year’s development goals of launching seven to nine new products as well as in shifting our product mix toward our higher end applications and more advanced product features as we aim to increase our penetration into higher end market segments.

At a recent Chinese medical equipment exhibition, we showcased our first 800 test per hour throughput biochemistry analyzer BS800 which will enhance our product mix and increase penetration into higher end markets when it is released later part of this year.

During the first quarter, we also installed the SAP system in our North America operations, replacing the outdated and complex systems previously shared with the remaining data operations. The installation solidifies the finalization of our overall SAP implementation project throughout the world and created a single platform to allow for uniform worldwide management, data analysis and timely information flow.

After we fully optimized the entire system, we anticipate seeing improvement of our overall operational efficiency and enhancement of information flow to better manage sales, working capital and cash management.

Now I would like to discuss our guidance for 2010. We remain our overall guidance of 17% year over year sales growth for 2010. The sales growth target has already factored in unfavorable year over year comparison in the first quarter 2010 resulting from the $6.5 million of retroactive software VAT rebates in the first quarter of 2009.

Please note since Q1 2009, represents the last quarter we recorded the retroactive software VAT refund. Thus, moving forward, we will not have past year impact to distort year over year comparisons.

We also will maintain our guidance of 17% year over year growth in non-GAAP net income excluding the $8.6 million of corporate income tax refund recognized in the first quarter of 2010 as a reward for our receiving key software enterprise awards.

Due to the uncertainty in receiving the key software enterprise award again for this year, this growth rate guidance is based on a 15% tax rate for our central operation. As announced at the beginning of this year, we obtained a nationwide key software enterprise status for 2009, which allows us to enjoy a 10% income tax rate for our Shenzhen subsidiary for calendar year 2009. The related tax savings as a result of this change in corporate income tax rate for the Shenzhen subsidiary was $8.6 million.

U.S. GAAP requires the company to recognize the related financial impact as a result of the change in the tax rate when substantive approval is received. As we were notified about the award in January of 2010, the related adjustment to our corporate income tax provision was recorded in Q1 of 2010.

As a result, the applicable corporate income tax rate for our Shenzhen as reported in the 2009 financial statements remain at 15%. The granting of the nationwide key software enterprise status is subject to approval each year. There is no reliable indication that Mindray will be granted this status in 2010 or in any future years. Again, the company’s 2010 guidance is based on the assumption that corporate income tax rate of the Shenzhen subsidiary will remain at 15%.

We expect capital expenditure to be in the range of $60 million to $70 million for 2010 and again, regarding to R&D, we intend to invest 10% of revenues back into R&D while meeting our 2010 goals of launching another seven to nine new products.

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

Question-and-Answer Session


(Operator Instructions) Your first question comes from Ding Ding – SIG.

Ding Ding – SIG

Two questions on your China revenue. Given the infrastructure spending on lower tier clinics in China started really back in 2006 and some of our industry contacts suggested that most of the infrastructure spending was completed in 2009 and device purchase is not a big portion of the spending in terms of building lower tier medical infrastructure. Is that consistent with what you are seeing? Secondly, the growth of your non tender China revenue clearly accelerated this quarter. What are the key factors? Can you rank them by relevance?

Jie Liu

From the 2006 to 2009, even the next five years, China continues to spend on equipping their infrastructure and also equip the different hospitals. Given the time period, they have different priority. At the beginning of the year, probably you know from a few years in 2008 and 2009 the government put a lot of focus on their tenders for building their country side hospitals.

They put a lot of effort on this, but in April this year, we have some other plans to move the focus to their country hospitals and also their health care centers so from the government perspective, we always have different perfects to put more equipment on the different hospitals.

You already know that in the east coast of the country, most of the hospitals are self funding, not depending on the government. For the self funding hospitals, the demand actually is very natural. If they need this, they will buy it buy themselves. But the hospitals that rely on government spending, there is a lot of impact given the government don’t spend. The total market will be changed a little bit.

So that’s the situation. This is in line with our tender sales, we can say from the first quarter we see there is a little bit surprise to us too. We didn’t anticipate government like this way. The government has the plan to continue to invest on their countryside also the country hospitals, but the information that we got, they will continue to invest on their country hospitals and the community health care centers.

Ronald Ede

To add on to what Jie just gave you an overall picture, I think a couple things which are very obvious. First of all the government is operating on an annual basis and this year as you can tell from the directives from the government, they even mentioned in early April, they’re coming out with a plan to spend from April all the way to March of next year.

Clearly the government has their own timetable of spending and I will believe because of their investment in health care is still very strong, and they indicated of how many hospitals on the country level and the community level they will be investing.

We also believe that commitment is definitely there. They are investing in those hospitals. There will be some incremental investment because we cannot just build an infrastructure without investment in equipment, that’s one thing.

Second of course, we have seen this past year, compared with a year ago, was a very tough comparison. A year ago the government was focusing on stimulation of the economy and this year obviously will be more balancing increases of spending and are looking to balance inflation, overall growth versus the health care overall increases. So the slowdown in comparison with Q1 of last year should not be totally a surprise because of the stimulation packages happening in the last year.

In regard to your question of the non tender portion, as we have discussed many times, Mindray as a company has about 1,000 sales teams out there covering the entire country. Those sales teams are more effective in the non tender way to sell our products.

A lot of times when tender is not strong, the non tender sales come back up as the hospitals still decide they need the equipment.


You're next question comes from Wei Du – Goldman Sachs.

Wei Du – Goldman Sachs

I have a follow up question on the government tender side as well. I think looking at the first quarter results, among a lot of domestic peers, we notice there is a huge variation on the government tender side. Sometimes you see 50% growth and sometimes you see a slower growth. Is that what happened in the last year. My key question is number one, if you look at the variations on the government, your interpretation is this slowing down in the overall government expenditure on the equipment purchasing or the second one is do you see any price additional, or substantial price erosion this year versus last year, because we do see a lot of gross margin difference among the domestic peers when they participate in the tender. Can you comment on that?

Ronald Ede

I think you first question to say whether any slowdown of government spending purposely for the government tender portion, all the indications of what government has been saying and what they have earmarked in terms of overall budget and what they have publicly talked about the spending they earmarked for the three years period since last year.

There should not be an overall slowdown. Being that China’s overall health care still has a huge demand, demanding from both the private sector and also the government sector to invest. However, as I answered earlier, the overall timing of spending and how they will spend the money and the timeframe of spending the money is less clear than last year due to the stimulus packages we had last year and the comparison becomes a little bit more tough.,

Jie Liu

I think there are further government tenders always difficult to predict. Whether what they said and what they planned and even more stronger confident on the willingness and have the desire to really improve their health care standard. But how we can do this is not only building more infrastructure, but also put more high technology equipment and putting more patient care, have their access.

So that’s the overall picture. We’re confident the government will continue to invest in this sector. That’s the reason we believe we will benefit from the product offers.

Ronald Ede

In terms of the second question on price erosion, that’s not a major issue at this time.


You're next question comes from Hongbo Lu – Piper Jaffray.

Hongbo Lu – Piper Jaffray

On your guidance, you maintain your 17% of guidance. Is there any change on the line assumption in terms of how are you going to get there especially I think the question in everybody’s mind is, are you still going to share your 20% to 25% of China growth guidance. If you do, what are the underlying assumptions there? How much tender revenue growth or non growth you build into that expectation. And in the tender market, are you seeing increasing competition from other nationals, i.e., in the first quarter are you losing market share or are you still maintaining that 45% of total government tender that the percentage you gave out before in terms of Mindray win rates.

Ronald Ede

Yes, we maintain our 17% gross year over year on sales despite some unfavorable comparative based on Q1 2009 number. The underlying assumption is we always communicate out very clearly is we will not stick to exactly the same assumption we have. We know there are certain areas which will be more aggressively set at the beginning of the year, and certain areas unknown to us, so we set a little bit more soft.

As we have seen right now, the international growth are faster than our domestic growth has been experiencing. Therefore the underlying growth will be shifting a little bit, but our overall confidence level of achieving 17% has remained the same.

As far as the tender market you are asking whether we are losing tender market to the multinational that is not the case we have been experiencing. We have been experiencing just because there’s less tender to be able to participate. Therefore, the overall tender sales was dropped substantially.


You're next question comes from Jinsong Du – Credit Suisse.

Jinsong Du – Credit Suisse

Back on the China sales again, the comparisons of Mindray’s sales growth in the first quarter was similar to GE, so you could comment, is the experience with non tender sales was that good or is the total [inaudible]. Last year and this year, from your marketing intelligence, how was the GE’s China sales compared to Mindray sales, if you have that information.

Ronald Ede

I think first of all, it would be very unprofessional to talk about other companies’ objectives other than I noticed that both GE and Phillips reported their first quarter of earnings and both companies did mention their first quarter in China sales was quite good.

In comparison with that, we also analyze our internal sales. We believe that most of our sales, not everything that they sold should be in the area of non tender sales. Further to that, they actually do not have any comparative issues like where we had in Q1 of last year for the retroactive software VAT refund.

So therefore, I think in proper apple to apple comparison, without knowing all the detail of what product line they have been selling, I think the rough comparison to look at is the non tender sale with selling gross numbers.

In fact, the second question you asked me about the impact of the Euro. Yes, the Euro does have some impact anywhere in the 5% to 10% fluctuation, I may have a slightly 1% to 1.5% impact.


You're next question comes from Bin Li – Morgan Stanley.

Bin Li – Morgan Stanley

I have a question on accounts receivable due in the quarter, but I just want to have more color because it did rise about 30% versus last year to 69 days and I’d like to have more color on this perhaps to isolate the different factors that caused the rise of accounts receivable days. For example, which part, is it from international, China or within China is it coming from the fact that you have lower tender business. Anything on that would be great. And more importantly, if you could give us a little more color on your accounts receivable dates.

Ronald Ede

A couple of things. I think I explained this where you have a very interesting clear picture. First of all as you noticed, my accounts receivable from Q4 to Q1 was dropped by $7 million. That increase actually reduced from $113 million to $106.9 million.

Yes, my accounts receivable days turnover was increased from 53 days to 69 days but if you look at the same period happening in a year ago. From December 2008 to end of the first quarter 2009, the DSO days also jumped around 30%.

The reason primarily is because our overall sales number dropped. As the sales number dropped the average daily receivable number would drop down so you divide that by the total receivable, the total DSO number will be increased. So the overall receivable performance is about the same as what we have in Q4. However, due to the calculation methodology, you see a DSO jump but absolute dollars dropped.


You're next question comes from Richard Yeh – Citigroup.

Richard Yeh – Citigroup

Just a question on emerging market sales. I just wanted to follow up. With regards to emerging market sales, in terms of comparing with the multi-national what kind of competition have you seen in international markets. If you look at GE, Philips and Siemens discussion, they have also seen a substantial increase in emerging market sales. I just wanted to get some color. What kind of competition you’re actually seeing in those emerging markets because particularly in the F20 you have broken down the Latin America sales. It sounds like that’s going to be a very large sales number, so I want to see some kind of a competition you have actually seen. Also, can you give us some color on your outlook on U.S. sales.

Ronald Ede

In terms of the numbers, I think the emerging market as we reported just now, is all about reaching over 30% growth. That’s a very significant growth for each of the markets and I’m not following up with all our competitor’s details, but in any case, I think that increase was very significant.

Jie Liu

Actually the emerging markets, the first thing is the economy is stable and the needs now become, all the government has the willingness to really promote the health care standard. So that’s the big picture and the company has the opportunity to really grow it’s emerging markets.

As far as competition wise, I believe because of their not so good situation, the North American, the Western Europe, all the multi-national companies moved to invest a lot on their emerging markets. But when you really look at the numbers of Phillips or some other companies, they say their China, India, is a driving force for emerging markets.

But the definition of emerging market for us, we put China separate. China we talk about separately. But outside China, emerging markets we still keep 30% growth. From our information, we are doing actually much better than the multi-national companies.

Of course there are still some other local players in different countries and also some other China companies trying to export to some other countries. But in terms of their scaled economies and potential growth, I think we are still in the very competitive position to build future growth in emerging markets.

Ronald Ede

In terms of U.S. operations, we have seen U.S. operations seems to be over the last year to at least positive growth. I would like to ask David Gibson, who is on the line to give you a little more color of our U.S. operations.

David Gibson

As Ronnie mentioned, last quarter, Q1 we returned to slightly positive growth with orders stronger coming in the door than the revenues which is a good sign for the second half of the year and better certainly than our experience last year within the market.

As many of you probably know, a lot of U.S. hospitals will go into new budget calendar starting July 1. They’re in the capital budgeting and allocation processes now for that time, so we’ll see where the not only spending levels which will probably be stronger than what we’ve seen in the past are going to arrive, but also where they’re going to prioritize their capital projects.

But we do see the market getting slightly more favorable in the second half of the year than the first half, but we’re not going to quantify it at this point.

The other thing I will highlight is, we will do two significant U.S. market launches, one in Q3 and one in Q4 which will also expand our served market for the U.S. market and we’ll start to see results probably in the latter half of the year and definitely into 2011.


You're next question comes from [Bennie Wong – Merrill Lynch]

[Bennie Wong – Merrill Lynch]

With regards to the recent Europe turmoil, I just wanted to see how managements foresees the potential impact to Mindray on both the demand side and also what the potential could be to the P&L. If I remember correctly, the Europe sales is roughly about 5% to 10% of the total sales. Is that correct?

Ronald Ede

I think approximately you’re right in that range. We’re just like everyone else, closely monitoring what’s going on in the European nations, especially also monitoring what’s going on with the various fiscal policies and fiscal budgets of the different countries; countries like U.K., France and all those countries are really making different directions, and as the elections in the U.K. settling down and other things going on in the European nations, will all impact our health care policies and spending.

In terms of the nervousness in regard to the EU and the currency fluctuation, we’re definitely also a subject we are closely monitoring. I don’t think we have a very clear picture in terms of what’s going to happen next. As you can tell from the U.S., the market goes up and down daily basis due to a different news being released. I don’t think we have foresight at this time to foresee that.

As an overall business we remain very much committed into the market. We are working very hard to hope to entrench into the market, but we’ll be very closely monitoring what’s going on with all the events coming up in that region.


You're next question comes from Katherine Lu – Oppenheimer & Company.

Katherine Lu – Oppenheimer & Company

My question is regarding R&D. In last quarter’s earnings call as well as today’s call, you talked about your plan to increase R&D investment to boost the Mindray competitiveness and then last quarter you also did a secondary offering for that purpose. I’m just wondering if you can provide us with an update on that front specifically which areas would be your acquisition interest and how transferrable would be those technology among different geographic regions and the size that you would be interest. And also wondering if you have accounted for such investment in your guidance.

Ronald Ede

First of all, we are very much committed to around 10% of our total sales would be reinvested in R&D and you saw the last quarter we had around 9.9% but it’s not exactly the percent, but close to that. That is where we have been committed.

Yes, we are continuously looking into different opportunities which can enhance our overall strategic intent to grow in the future for other investments. But we do not have anything close to fruition or need to be reported at this time.

The overall guidance at this stage are based on our current operation and current organic operation for the company, so therefore this is our overall guidance and we do not have any intended target that can be reported at this time.


You're next question comes from Yale Gen – Maxim Group.

Yale Gen – Maxim Group

Could you give us an update regarding the effort in international channels for enhancement. You indicated last quarter, could you give us a breakdown in terms of international sales of this quarter based on different regions.

Ronald Ede

In terms of number, we do provide numbers by different geographical locations, but I’ll let Jie comment on your question in terms of overall channel enhancement.

Jie Liu

I think as we talked last year, even though the economy was not good, Mindray continued to develop and invest in the international market which is including many local subsidiaries in different countries. We have a subsidiary in Mexico and Brazil and India and Tunisia and some subsidiaries in the Western Europe countries.

The key concept is still the same. We keep a very strong presence in the key countries and by recruiting more local people and developing more penetrated channels and develop some more country specific marketing strategies, we continue to do. What we did last year and we continue to do this year too, and probably this year we continue to expand some other subsidiaries including some other countries. By the end of this year, we should have more overseas subsidiaries.

In short, we try to build up more channels, but we are more depending on ourselves. We are building more sales employees and service engineers. We have more infrastructure to support the future sales growth. That’s the overall strategy for the international right now.


You're next question comes from [Amy Zu – UBS]

[Amy Zu – UBS]

My first question is about SG&A expense. I remember you mentioned last quarter that we may see SG&A expense as a percentage of revenue increase because we invest more on sales and marketing. Why is the SG&A as a percentage of revenue may be stable if I’m correct, but actually we saw a significant increase of the ratio in the first quarter and your expense is quite stable. What’s the reason behind that? Is your main expense increased due to the installment of SAP and what’s the G&A ratio and expense ratio we should see for the full year.

Ronald Ede

I think overall, we’re very much in line with our spending and you can compare with our overall spending in Q3 and Q4 last year. The overall spending as a percentage of sales is around 8.2%, 8.6% and of course our absolute spending is even lower than Q3 and Q4 for G&A.

It is only compared with Q1 of last year we have a little bit more higher spending. This was due primarily to some legal and also accounting fees we’ve been paying for and other miscellaneous operational fees in the oversea area expenditure for offices and various other operations including a $600,000 of FX charges.


You're next question comes from Hongbo Lu – Piper Jaffray.

Hongbo Lu – Piper Jaffray

This question is for gross margin. I think in this quarter, you clearly demonstrated margin improvement given especially on the comparable basis. However your guidance, you’re not assuming any operating leverage. Is there any particular reason for it? And can you tell us how you improved gross margin? Based on my calculation you’re close to almost 3% and whether or not you expect to maintain that for the full year. I do think the revenue mix change from reduced China tender revenue will be able to explain that gross margin improvement.

Ronald Ede

I think yes, the margin did increase. If you consider last year Q1 we have a $6.5 million retroactive VAT, so the jump off in Q1 margin of last year to the Q1 margin of this year will be even bigger.

You’re also correct in comparison with our Q4 margin, we were also higher, but a couple of things. First of all, as I reminded everyone always in Q4 we usually reflect the lowest margin of the year due to revaluation of inventories and Q1 after revaluation of inventory, our raw materials cost is lower.

Second to that is as I mentioned in the prepared remarks, the overall tender sales obviously is much much lower this year in comparison with last year and even comparison with Q4 of last year.

The third thing is the product mix actually helped and we have been selling a lot more higher profit products and a lot of our model was higher end, of the newly introduced patient monitor for Mindray market was all introduced after Q1. So one is in Q2 and one is in Q4 timeframe.

So in Q1 we did not have any of those benefits. If you look at our older announcement, I think Q2 last year, we talked about Mindray support and help to increase the margin as we’re realizing better margins after replacing some of the product lines.


There are no further questions, I would now like to turn the call over to Mr. Ronnie Ede for any closing remarks.

Ronald Ede

Again, I would like you all for participating in today’s call. I know that certain people are still waiting on the line, but we like to cut off at our one hour range.

This past quarter has shown as you all know, some encouraging signs of growth, especially in China’s non tender sales and within the emerging market territories. We will closely monitor for any progress in the Chinese tender market as well as our Western European sales.

Our financial results indicated the progress we continue to make in penetrating into the higher end markets while continuing to build a global brand that represents high quality, cost effective products and services, and we will continue to maintain our focus on gaining market share in all geographic locations.

As always, we appreciate your interest and support in Mindray and our business. Thank you for joining us today and we look forward to speaking with you all soon.

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