Mindray Medical International Limited (NYSE:MR)
Q2 2010 Earnings Call Transcript
August 10, 2010 8:00 am ET
May Li – Director and Head, IR
Ronnie Ede – CFO
Jie Liu – COO
David Gibson – President, Mahwa Operations
Xu Hang – Chairman and Co-CEO
Bin Li – Morgan Stanley
Richard Yeh – Citigroup
Hongbo Lu – Piper Jaffray
Benny Huang [ph] – Bank of America
Jinsong Du – Credit Suisse
Caroline Tiu [ph]
Wei Du – Goldman Sachs
Ingrid Yin – Brean Murray, Carret & Co.
Yale Jen – Maxim Group
Jack Yu [ph] – Deutsche Bank
Good morning, and thank you for standing by for Mindray's second quarter 2010 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. 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 call, Ms. May Li, Mindray's director, head of investor relations. Please proceed.
Hi, everyone. And welcome to Mindray's second quarter 2010 earnings conference call. Our financial results were released last night, and available on the company's Web site as well as on Newswire services. In addition, an archived webcast of this conference call will be available on the Investor Relations section of our Web site 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; and, Mr. David Gibson, our president of Mahwa operations.
Our management team will review second quarter and midyear highlights as well as speak to 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 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 obligation 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.
Thank you, May. Good morning and good evening, ladies and gentlemen. Thank you for joining us today for our second quarter 2010 earnings results conference call. On today's call, I will provide a synopsis of the company's operational performance, followed by a discussion of our detailed financial results. Our COO, Mr. Jie Liu; and, president of the Mahwa operations, David Gibson, will then discuss Mindray's operations by region, respectively. After which, our management team will be available to answer questions.
We had good overall performance in the past quarter, with a 12% year-over-year increase on the top line and 28.1% on the bottom line. International revenues were a record $106.8 million, up 27% year-over-year, contributing 60% to worldwide sales.
China revenues declined slightly year-over-year as a result of continued softening in government spending for medical device purchasing as well as a top year-over-year comparison to a strong second quarter '09. Margins expanded significantly mainly due to lower sales contribution from China tender sales and increased synergies for our Mindray operations.
On the product development front, we are close to the final phase of the development of our very first MRI system, and are preparing for an FDA approval for the China market. This is an exciting development for Mindray as it were at a new and strategic settlement to our imaging line.
In detail, let me discuss the revenue composition first. Second quarter revenues were $179.2 million, up 12% over the same period last year and 22.9% higher than last quarter.
Continuing the momentum from recent quarters, we captured exceptional growth in our international markets. International sales were a record $6.8 million for the quarter, compared to $84.1 million for the second quarter of last year, representing an increase of 27%. Growth in international markets came from all regions. Emerging markets were particularly strong, led by Latin America with over 18% growth. Developed markets also recorded double-digit growth, both in Western Europe and North America.
Overall, the realignment of our developed market operations; investment in international channels, especially in the developing countries; and, continued effort and localization of our on-site operations all helped to drive our excellent performance. We are pleased with the substantial progress we have made in the international markets. And we'll continue to build on the growth momentum in emerging markets as well as further penetrate the developed markets. We plan to invest more in the second half of the year in marketing and sales initiatives in key international markets.
The strong international growth was partially offset by a slight decline in our domestic China market. China sales were $72.4 million for the quarter, down 4.6% year-over-year and up 17% quarter-over-quarter. Much like the first quarter, our results reflect continued softness in tender sales, which were down 62% year-over-year.
Non-tender sales for the quarter grew 9% year-over-year on top of a strong 2009 comparables and 19% sequentially. They represented approximately 92.4% of China revenue for the quarter. The non-tender sales growth was not as strong due partially to the fact that a lot of market demand in the second quarter came from the higher end larger cap [ph] product segments where we do not operate and from the Tier 3 hospitals along the coastal areas where our sales penetration has historically been lower.
While we cannot control the timing associated with government tender sales, Mindray is realigning its sales force and other resources to focus more intensely on areas where our penetration has been lower. We will also invest more in building up sales capabilities dedicated to the larger cap product lines, including higher end color ultrasound, digital radiography, and surgical beds and lights. We would some of these initiatives in more details in just a moment.
Now, on to the financials, gross profit for the quarter was up 14.1% year-over-year to $104.1 million, resulting in a consolidated gross margin for the quarter of 58.3%, compared to 57.2% in second quarter '09 and 56.4% in first quarter 2010. Margin expansion is largely a result of continuously improving margin structure in Mahwah as well as the reduction of the lower margin domestic China tender sales.
Operating income was $47.5 million, an increase of 49% from the last quarter of this year, and an increase of 21.9% over the same quarter of last year. This represents an operating margin of 26.5%, a significant improvement from 21.9% in the first quarter of this year and 24.4% from the second quarter of last year. Non-GAAP operating income was $51.2 million. And non-GAAP operating margin was 28.6 %.
The improvement in operating margin is a result of lower selling and R&D expenses. This was a direct result of lower China sales, which led to lower sales expenses, slower and controlled ramp-up in spending for the international area, and timing differences for the R&D investment. We anticipate spending in these areas to increase in the later part of the year as we will increase investment in both our domestic and international sales channels to strengthen our sales network.
And for R&D, we will be releasing more products in the later part of the year, which will lead to hardware testing, system integration, and manufacturing transfers. All these processes will result in an increase of overall R&D spending.
EBITDA was $54.2 million during the quarter, a healthy 16.1% increase over the second quarter of 2009. Our bottom line growth outpaced our top line this quarter as net income grew 28.1% to $42.3 million, and non-GAAP net income increased 21.3% to $45.9 million over the second quarter 2009, resulting in a non-GAAP net margin of 25.6%. In addition to positive contributions from gross margin improvement and operating leverages, we also benefited from higher interest income and lower interest expenses in comparison to the same quarter last year.
We generated $19.8 million of net cash from operations during the first quarter. Total cash equivalents, restricted cash, short term investments, and restricted investments were $370.2 million as compared to $430.6 million at the end of first quarter 2010. Cash outflow during the quarter mainly included dividends payment of $22.8 million, CapEx of $11.3 million, and fulfillment of our $54 million structured finance contract. Fulfillment of this contract also resulted in a $54 million reduction in our liabilities and release of the remaining portion of the restricted investments.
Our DSO in the second quarter was 58 days as compared to 69 days in the first quarter of 2010. Inventory days were 93 days in comparison to 96 days last quarter, while accounts payable days were 59 days in comparison to 60 days for the previous quarter. The improvement in days outstanding was partially due to higher sales for a quarter.
I will now turn the call over to our COO, Mr. Jie Liu; and, president of Mahwa operations, Mr. David Gibson, each of whom will spend a few minutes discussing our sales trends by region. After which, I will provide additional detail on our finances and business trends.
Thank, Ronnie. Good morning and good evening, ladies and gentlemen. I would like to begin with a detailed analysis of China sales. As Ronnie mentioned earlier, our China sales were $72.4 million for the second quarter, down 4.6% from the same period last year, and up 17% from the first quarter of this year. Similar to last quarter, a decline in government purchasing impacted our Chinese margin growth.
Tender sales for the second quarter contributed to a 7.6% of domestic sales, down from 19.3% in the second quarter of 2009. While the Chinese government says it'll remain committed to the completion of the proposed healthcare reform plan and has shown no indication of reducing its estimated budget or slowing down of hospital building, the timing associated with medical device purchasing under the plan remains unclear. At the end of Q2, we are seeing a slight a pick-up in tender activity in Q3. However, we anticipate that government spending in the second half of this year will be less or close to the tender sales achieved in the second half 2009.Therefore, full year tender will likely be less than half of last year.
We will continue to diligently monitor the tender market. And then, we'll take actionable steps where possible to solidify our shares. We are still optimistic about government spending over the long term as the Chinese government had made no change to its steady three-year healthcare reform plan or the associated budgets for each category under the plan.
The decline income in government tender in the first half of this year was not anticipated. And we believe it is only a matter of timing for device purchase deployment. In June, the government announced budget deployment and a midyear update on each category under the healthcare reform plan, and then reiterated its full year budget of $138.9 billion R&D and the target of infrastructure investment in 830 country neighbor hospitals. These are strong signals. And the central government remains committed to healthcare reform. We remain firm in our belief that device purchase activities are due to follow hospital infrastructure buildup.
Despite our tough year-over-year comparison due to a strong 2Q 2009 performance, we grew our non-tender business by 9.1%. In recent quarters, we have seen many growth opportunities in hospital sales funded device purchasing coming from higher ticket terms, Tier 3 hospitals, and the higher end private hospitals along the coastal area, our penetration in these segments, an area having low historically, mainly as a result of limited high end product offering. However, as we continue to build up our high-end product portfolio such as the high-end patient monitors, color ultrasound system, and the high throughput chemistry analyzers, we'll be better equipped to penetrate higher end customers.
In the coming year, this segment will be of special emphasis of China sales (inaudible). We'll continue to build up a dedicated sales force and the delivery system for Tier 3 hospitals and the high-end private hospitals in major cities. We understand the importance of brand awareness for this clientele and are prepared to invest in marketing initiatives that will help strengthen our overall brand units. Finally, we will rule out a more effective customer relationship management system in China in the upcoming quarters to facilitate more efficient marketing intelligent connection and the effective customer retention.
To address the rising competition we are experiencing from domestic players in the lower end segment, we are in the process of instruction of our domestic sales team. This will help slight in the existing lower end management hierarchy and enable us to get to market it faster and to complete it more effectively.
I will now move on to the international markets, specifically more on the emerging markets. Outside of China, Mindray generated strong growth in international markets as sales increased approximately 27% over both the second quarter of 2009 and the first quarter of 2010. Emerging markets performance was again a key growth driver in this quarter, growing over 35% as a whole.
In particular, we delivered over 80% growth in Northern America and 30% growth in the CIS region as we have been making progress towards the gradual enhancement of international sales channels. To reiterate what was communicated during our last quarter call, our strategy is to develop country-specific marketing sales strategies; increase the number of local staff; increase the investment in marketing initiatives, such as organizing in the participating regional and the local industry forum as well as to build a solid service platform.
Looking ahead, we are confident that our strong market demand as well as our competitive position in emerging markets will remain a pillar to the overall growth of the company. However, I want to remind everyone here that the second half will be a tough comparison as emerging markets have a strong recovery in the same period last year. These have been taken to consideration when we guide on full year growth for the region.
Another encouraging sign of recovery in international markets during the quarter was over 20% growth in Western Europe. It is partially attributable to a successful realignment of our Western Europe operation in the past few quarters. However, it is still early to predict continuous strong growth into the second half of the year
Next, I would like to invite David to add more color on the North American operations.
Thank you, Ronnie and Jie. Let me very quickly run through the major achievements we had during the quarter. We are encouraged by the improvement we are seeing in the North American operations. Total US sales continued to recover with 10.2% growth for the second quarter in a year-over-year basis. Ultrasound was the strongest growing segment for North America, with a successful sales expansion in both direct and distributor channels. Although customer demand in the US has not returned to levels prior to the financial crisis, we are seeing a steady, but slow recovery of hospital budgeting and purchasing in the last few quarters.
As I mentioned in our last call, we finalized our global installation of our SAP system in North America, replacing the outdated complex systems we previously used to share with data (inaudible). This new system, when it's fully optimized, will create a single global platform to the company, allowing uniform operational management, efficient data analysis, and timely information flow.
We are also encouraged that transferring most of our existing products in key manufacturing process efficiencies and further improving our margin structure and realizing operating leverage during the quarter. As a result, our synergy progress is well on track. Going forward, as part of Mindray's global expansion strategy, our North American operation will aim to further invest in marketing initiatives and help build a stronger global brand in the hospital customer in the region. We'll build direct sales forces outside of the existing patient Mahwah line as well as lead product development strategies for the markets. Last but not the least, like the rest of the organization, profitability will remain the key focus of our North American operations as we expand our footprint in developed markets worldwide.
I'll now transfer the call back to Ronnie, who will comment on the operational trends and guidance in more detail.
Thanks, David. I have a few additional operational highlights to add. So far this year, Mindray has successfully released a total of four products across its three product lines. As mentioned earlier, our very first MRI system is in the final development phase. 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 to our higher end applications with more advanced product features as we aim to increase our penetration into higher end market segments.
During the quarter, we completed the initial phase of our worldwide upgrade of the Mindray corporate identity. As some of you might have noticed, our local and corporate Web site have taken on a new look. Our Web site has been refined for our visual and content perspective. And navigation has been improved to meet the needs of different users including customers, partners, and investors. This is all part of our continuous effort to build-up a stronger brand name in the industry worldwide. In the coming quarters, our branding team will work closely with the marketing team in improving visibility and perception of the company among our wide audience globally.
Now, I would like to discuss our revised guidance for 2010. Although we have achieved better than anticipated international sales, the lack of government spending in the first half of this year as well as our historically low-penetrating in high-end segments in our domestic markets impacted our planned growth rate, and thus, our planned profit for the year.
Although we realized this could be just a timing issue. Realistically, it will be difficult to increase our sales growth rate for China enough to compensate the lack of government spending within this year alone. As a result, we are lowering our yearly guidance for revenue and non-GAPP net income. This adjustment does not reflect a lack of confidence in the long term growth in China for either our tender or non-tender market. It merely reflects our current view that the timing of when we expect revenues from government spending and the associate net income is driven by factors beyond our control.
Thus, we are revising our annual net revenue's target for 2010 to be $700 million. This also reflects the huge growth in tender sales we achieved in 2009, which made the comparison difficult. Specifically, our new guidance assumes about 50% reduction of tender sales for the full year 2010 in comparison to 2009. In addition, our revised guidance assumes continued strong growth in international markets for the full year, but the growth rate was slowed down in the second half, again as a result of tough comparison year-over-year as we experienced exceptional growth in Q3 and Q4 of last year for the emerging markets last year.
As a result of the revised sales growth target, we are changing our guidance from 17% year-over-year growth in non-GAPP net income to 10%. Despite strong bottom line performance in Q2, we expect to see more normalized growth in the second half of the year.
On the operations side, we have billing margin dilution from expected higher tender sales, heavier investment in sales channel as well as picked up in R&D expenses as a percentage through sales from backend loaded product launches scheduled this year. Additionally, in the second half of last year, we had roughly $10 million of a special other income from government subsidies, which we expect will be much less in the second half of this year.
This guidance excludes the $8.6 million corporate income tax recognized in the first quarter of 2010. Additionally, due to the uncertainty in receiving the key software enterprise award for this year, this growth rate is based on a 15% corporate tax rate for our Shenzhen operation. We expect capital expenditure to remain in the range of $60 million to $70 million for 2010.
With this, we will return to the operator to open the call for questions. Operator?
(Operator instructions) And your first question comes from the line of Bin Li of Morgan Stanley.
Bin Li – Morgan Stanley
Thanks. Hello, everyone. I want to ask a question on your guidance. And clearly, that's the focus for the investors right now. I think it is – you have talked about the weak China sales due to the tender's activities, which I think is well appreciated by the markets. But I think what is surprising – somewhat surprising is the non-tender growth in the second quarter, which slows down to 9%.
And if we plug in your new forecast, we're getting implied growth rate for that business, which is the non-tender China business, it looks to us it will be growing below 10% for the second half, which is a significant slowdown versus your first half number. Also compared to the market, it is slower than the market average growth. And a few reasons could explain that. And you've touched that, one is due to competition, and two is maybe you're conservative, and three is you're facing tough comp versus last year. Can you elaborate in all of these factors and perhaps you have further explanation whether it's one of these or a combination of all these? Thank you.
Li Bin, thanks for the question. Let me first comment on some numbers – assumptions, then I'll let Liu Jie to comment on operational side of the China operations. I think, overall, we're still quite confident about the non-tender sales, which in our internal model, that's over a double-digit growth rate for the year. It's not a single digit. I thought I just want to correct the number moving forward. The major shock came in from the tender side. I'll let Liu Jie comment on the operational side.
Li Bin, this is Jie. With respect to your question about the increased competition landscape, from our perspective in the – after the financial crisis, other (inaudible) company did increase a lot of the investment in China. For us, Mindray, we keep the normal space in investing in the China market, and knowing other Chinese domestic manufacturers increased investment on China market, too. We continue to invest in the China market. But probably the growth rate on the investment to the China market is not so high as our markets – international companies.
The share of the investment to the China market is actually – after the crisis did decline a little bit. That's the reason – one of the reasons we – now, there's no more non-tender sales given the growth and the high speed as we expected. So that's also the reason why we will continue to invest. In the second half of this year, we increased a lot of the investment on our marketing initiatives and also other key strategic investments on our China market. Competition did increase, whether we are – also, we realized the situation and that we are ready to face the competition and we'll be doing something different.
Yes. One more area I think I will comment on this is – actually, our product line is quite good. Right now, it can offer to all different areas of the market. As Jie just mentioned, there are certain areas, which we may be weaker in the past and not penetrating. And we are aligning our sales team to do that so that we should be able to see better performance on that.
Thank you. Your next question comes from the line of Richard Yeh of Citigroup.
Richard Yeh – Citigroup
Thanks for taking my question. I'd like to ask about the market dynamics of the three business segments. Actually, your patient monitoring business actually grew pretty nicely. But the diagnostic – in recent diagnostic and also the medical imaging system actually had much lower estimates. I want to know a little bit market dynamics on that. And did you have a – what would be your strategy to grow there in the China sales? And was that part of your reason that guidance was – some of the assumptions are phased down? And also, what kind of price discount given multi-national competition, are you going to offer price – more steep price discount going forward? And how is that affecting your selling expenses and operating expenses? Thank you.
Hi, Richard. In terms of the different parts – segments from Mindray's three product lines, when you look at the numbers, the patient monitoring side product line, the percentage of the international sales for patient monitoring – this line actually is much larger because of acquisitions. We have the large revenue from Mahwah's operations on the patient monitoring side. So that international – managing international sales on the patient monitoring and life support system, plus North America, the major – the revenue coming from patient monitoring and life support, this segment. All this together, actually is the highest percentage.
Outside China is the higher percentage from this segment – this product line. So it's China – the weakness of the China sales impacted our two-door sales – this product line actually is delayed than the other two lines. That's the major reason – because we are international, we are doing much better. That's the major reason this product line looks much better. That's another two lines.
But for the other two lines, when you really analyze this revenue and also the situation is that we have – the IVD, side we have three parts in the chemical analyzer. That's the percentage coming from tenders. And the medical imaging systems have the same situation, (inaudible). There is large percentage of sales coming from their tender activities. But the tender has declined significantly. That's also the major reason why these two lines actually look not so strong as their patient monitoring and life support line. That's the three differences.
Thank you. Your next question comes from the line of Hongbo Lu, Piper Jaffray.
Hongbo Lu – Piper Jaffray
Thank you so much. (Spoken in foreign language) I want to further go down on the non-tender China business. When I look at through – past four quarters, it's interesting and yet confusing. When I look at year-over-year growth in the third quarter of 2009 and fourth quarter of 2009, you saw a very low similar growth, 9% to 10% in the non-tender part. And the first quarter '10 grew to 46%, excluding radioactivity and 25% on the reported basis, and now in the second quarter of '10, back to 9% year-over-year.
And if you look at non-tender '10, all those four quarters are very different. The third quarter tender was low, and then non-tender was low as well. The fourth quarter tender was strong, and non-tender was low. In the first quarter this year, tender was low, non-tender was very strong. And now, back to similar situation as third quarter of '09.
So my question is how do we – can you explain to us the lumpiness in this non-tender China rough year-over-year growth, if first quarter '10 what we saw is just one quarter event? And then maybe to extend that question, since as Xu Hang and Li Xiting are also on the line, maybe you two can help us to understand outside the China tender business. Is there any – what will it take – what it will take for the China non-tender business to go back to more than 20% of year-over-year growth? Thank you.
Let me, Hongbo, let me first answer your first part of the question in terms of number comparison. I think the first couple of things that I'd like to be clear on, in 2008, we have a lot of retroactive VAT. And that may present some comparison of the tender and non-tender business – comparison with '09 will be a little bit more difficult because our internal numbers shows a pretty strong growth in both quarters. Further to that is that, I don't think there is a very strong co-relationship between the quarter seasonality and current tender-non-tender. There's no definite answer to say tender goes up or non-tender will come down or vice versa. However, there are certain manpower issues maybe in consideration, but that's about it.
[Interpreted] Just to get everyone on the same page, Mr. Xu was commenting on the non-tender side of the business. Historically, non-tender sales in China have been a stronger growth driver for the overall China business. And this is the cornerstone of our sales strategy in China. However, since the last few years, the Chinese government has been pouring a lot of money in the healthcare sector through the healthcare reform plan and other economic stimulus initiatives. Hence, we have been focusing a lot on getting the tender business. But since the – we have seen a lot of lumpiness of tender business in the last two quarters. And this has impacted our overall China sales. We are seeing this as mainly an issue of manpower allocation.
[Interpreted] As many of you here on the call know that historically Mindray has been very strong in the second Tier market, especially in Tier 2 hospitals in China. And we have been a strong player as well in the low end of the market, in both small hospitals as well as the tendering – the tender-focused segments. Going forward, we think our product mix shifting towards more higher end products and our penetration of higher end channel strengthens, we'll be able to compete more effectively in the higher end.
[Interpreted] In the foreseen future, we think Mindray has a real opportunity in competing in the mid-end segments, especially country level hospitals, where under the healthcare reform plan the Chinese government is investing a lot of many in infrastructure build-up and upgrade.
[Interpreted] We will continue to take actionable steps to solidify our share in the low-end tendering markets if we are seeing the government shifting focus away from healthcare spending and tender activity becomes slower, we will then reallocate more manpower to focus more on mid-end and high-end of this market.
[Interpreted] With the Chinese government investing in building new hospitals and upgrading new hospitals, hence, increasing hospitals' purchasing power for higher priced ticket items or higher end products, Mindray will continue to grow as a significant player in the healthcare sector – in the device sector as we shift our product mix towards higher end – higher technology products and build a more solid service platform.
[Interpreted] Okay. Last, but not the least, non-tender business will remain as the cornerstone of our China growth strategy. And we will continue to again invest in R&D to shift our product mix to higher end. And we will be able to – and build up more – build a more solid service platform to be able to compete more effectively in a Tier 2 and Tier 3 markets.
[Interpreted] And we are very confident that we will be able to compete more effectively in a non-tender segment. And I think, if you look at a detailed analysis or breakdown of our – those numbers, you will be able to check our progress on that. Thank you.
Thank you. Your next question comes from the line of Benny Huang [ph], Bank of America.
Benny Huang – Bank of America
Hi, Ronnie and Jie. I'm actually asking a question on behalf of Shaojing Tong. We see strong growth on these China sales in the first half of the year. Can you please help us to understand what are the underlying reasons? And should we expect the 27% strong growth to continue for the rest of the year? Thank you.
Thanks for your question. And the growth in the first half was very strong for the emerging market and for the international market. However, as we do believe for the second half of the year, our growth rate will slow down. It's not because we will do less sales in the second half of the year. It's all because last year, the same quarters – actually we have achieved a second growth year-over-year versus '08. Therefore, the growth rate in the second half of the international market may slow down, slower than the first half of this year in comparison. Operator?
Thank you. (Operator Instructions) And we'll wait a moment to compile questions. (Operator Instructions) And the next question comes from the line of Jinsong Du, Credit Suisse.
Jinsong Du – Credit Suisse
Hi. Thank you for taking my questions. Jie, a follow-up on your comment that you will try to penetrate the higher market, I didn't (inaudible) this in the industrial sense is that Mindray's risk value proposition is to provide similar quality products to market international brands at a lower price. So Mindray has emerged successfully in the low to medium-end because the low to medium-end segment is very sensitive to the pricing. But historically, high-end segment – the high-end hospitals haven't been very sensitive on pricing. They are more concerned about brand image. So from that perspective, could you share with us your strategy in terms of – what is the strength and the key points that you're going to highlight to your high-end customers in order to penetrate more on that market?
Hi, Jinsong. This is Jie.
Jinsong Du – Credit Suisse
I think the way we talked about the high-end market and the low-end market, we really need to define what's the high-end market and what's the low-end market. For us, it's very clear. China and other emerging markets are the high-end market. We have a very good chance for – at this moment for our product lines such as the patient monitor and the life support lines and our ultrasound line in the near future.
That's our current customer is mainly focused in the mid segment – in the lower to mid segment. But we are – our products will really have their high-end product launch, such as our new patient monitor coming out the second half of this year as the high-end – as high-end from our product lines. We will be ready to meet the customer needs in the high-end customer – in their first, of course in China and other emerging markets, and then, good – the developed markets. If you look at – when you see their – look at their value proposition, Mindray was their cost effective solution provider. And they maybe had the image and say, "Maybe it's not proper to really compete on this."
But gradually, we look at the – talk with some – the customers. Two years ago, Mindray was very, very low. But after two years now, after the continuous efforts, we actually moved a little bit. Every year, we moved a little bit to the higher end – higher segment customers, now many Tier 3 hospital customers. Most of them can really use Mindray products – some of Mindray products. And they know that Mindray can really provide a good product, with high-quality products and good performance. And they realized that Mindray could the option. And after they try that, they know that that's the – exactly same as other (inaudible) products.
So that gradually – actually, Mindray gradually already built up some – on the perception on the brand awareness in the high-end customer, especially in China and other emerging markets. And also, Ronnie had mentioned earlier, we – from this year, we built up another brand logo and vision identity that will be matching our progress to the high-end customers by building up the image of Mindray in the high-end customer in the emerging markets. And then gradually, we penetrate these high-end customers for the China and of course in the emerging markets first.
But the developed markets need more time on the high-end customers. So but that's the direction of Mindray. And also, that's our mission to really be at the – Mindray as their 1st Tier solution provider in all of the segments we participate in. Operator?
Thank you. Your next question comes from the line of Katherine Lu.
Hi, everyone. This is Caroline Tiu [ph] calling for Katherine Lu. Thank you for taking my question. My first question – my question is your European and US growth rates are very high for the quarter. Could you please let us know what is your growth rate on a constant currency basis?
Actually, our growth – our US sales on constant currency, it is in US dollars. So there is no difference there. On the European side, actually, we have a negative comparison with the previous year due to the euro devaluation. So if we look at the constant currency, it'll be even higher. However, as I mentioned earlier, we do believe that whatever we're achieving in Europe is just one quarter. It's not a trend, no indication there of a trend of a strong recovery yet.
And for the US side, I can't – I'll ask David to comment on that. David, you want to say something?
Yes. I think the US, the key growth driver was the ultrasound, the build out of the direct channel and continued expansion of our ultrasound line and the distributor markets. Of the new products, the M7, the DC-7 has been very well received, which are more mid-range systems for the US market than we've ever had before, and a great companion to the M5 portable ultrasound, which goes very well with the markets we have.
We do have a slow, but steady recovery going on in the monitoring markets. And I think that will play out over the next couple of years. So our key growth continues to be our expansion of the product line and our ability within the next two – within the second half of the year with new product launches to further expand into the anesthesia monitoring area.
Thank you. Your next question comes from the line of Wei Du, Goldman Sachs.
Wei Du – Goldman Sachs
Hi. This is Wei. I know you normally do not disclose percents of the sales figures in all three segments. I think my question is, which segment do you see the most softness in terms of growth among the domestic sales? And then, I think on top of that, I'd really like to know which segment you think is going to be the biggest growth upside among all three?
Du Wei, are you talking about all three product lines we have? I'm assuming that the question is related to that. As we said, the biggest weakness we have seen for this quarter came from – and also throughout this year, our prediction is it came from the tender market. So the tender market will concentrate on the low-end of ultrasound and low-end of our IVD product.
This also coincides with why you saw medical imaging line and IVD product lines growth rate was much less than the patient monitoring growth rate for the past quarter. So if you want us to pick the two product lines, then probably we'll see the weaker growth rate will be in the IVD product line and medical imaging product line due primarily to the tender impact for the China market throughout the year.
Thank you. And your next call – question comes from Ingrid Yin. Ingrid, your line is open.
Ingrid Yin – Brean Murray, Carret & Co.
Hi. Thank you. Good evening, everyone. My first question is, you have mentioned earlier that in 2Q, most of the revenue opportunity from the China non-tender side came from high ticket segments, where Mindray doesn't have a lot of product offerings. So going forward, do you see that continue or you will see revenue will come from lower or mid-end product demand?
Hi, Ingrid. I think that in general, China will have their good – strong growth in the medical device as an industry in general because of their – the need to really improve their healthcare, and also the government's willingness to invest on this segment as – in general. But in some segments, such as new technology as our high-tech CT and MRIs, that's something worthy to invest heavily in the past couple of years.
And for this trend, I believe their – if it's continuing or not, we are not so sure for the high-end ticket, depending on the – if the government regulates on this segment or not. But some costs and the purchases need to have a special approval from the Ministry of Health on those high ticket items. For the area, we play – we believe that their – all the necessary of their healthcare industry that we played, and we believe that's our – has a good future for this kind of device.
Thank you. Your next question comes from the line of Yale Jen, Maxim Group.
Yale Jen – Maxim Group
Good evening. And thanks for taking the questions. I just want to switch gears a little bit in talking about the MRI product you're in development. Basically, could you shed a little bit more light in terms of how you position your product on this space and in comparison to others? And also, just give us a little bit competitive landscape in China and what we see with the major competitors you're against.
Hi. This MRI system is only the – in the final stage of the development. It's not the – but that's their shoes – or reflects the company's determination to really invest in the play in the imaging line. This is another, really, growth driver for their – for the future platform. That's the direction.
But at the beginning phase, their first MRI system will be the low-end MRI system. This kind of system we are prepared to really train our sales team to get – everything will be developed on this platform. And then gradually, we will move to some other system.
Thank you. The next question comes from the line of Jack Yu [ph], Deutsche Bank.
Jack Yu – Deutsche Bank
Hi. Thank you for taking my question. I have a question for Jie. You talked about a sales force restructuring and the continuous investment to focus more on non-tender sales on the China side. How soon do you expect return on your investment?
For the return on investment, I think that we are continuing to apply with sales first, where you gain the market share, we – you gain the market for the future. We don't say we don't calculate. You have enough money to really pour in the market. What I've said is, in the increased competition, we need to maintain the share of the investment. That means, at least we'll grow the investment at the same percentage as our competitors do. So in the past couple of years, we are a little bit behind. So that's the reason we say we need to invest more, of course, the best way still for us if we want to work more effectively and efficiently to make sure our investments get more returns.
Thank you. At this time, I'd like to hand the call to Ronnie Ede for closing remarks.
Thank you, operator. Again, I would like to thank you all for participating in today's call. Although the unexpected softness in the China tender sales market detracted from an otherwise very strong performance for the quarter and the year so far, we are proactively taking steps to improve our position in key markets, and generate growth from businesses where we have control.
As there has been no change to the Chinese healthcare reform plan, we remain well-positioned to benefit when government spending picks up. In addition, we remain dedicated to provide competitively-priced, high-quality products across all three of our product lines. We are on track to meet our year-end product goals, while significantly expanding our international footprint and market penetration for the none-tender businesses.
As always, we appreciate your support for Mindray. Thank you for joining us today. And we look forward to speaking with you soon. Thanks.
Thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect. Have a great day.