Mindray Medical International Limited (NYSE:MR)
Q3 2010 Earnings Call
November 9, 2010 8:00 am ET
May Li - Director of IR
Xu Hang - Chairman and Co-CEO
Li Xiting - President and Co-CEO
Ronnie Ede - CFO
Jie Liu - COO
David Gibson - President of Mahwa Operations
Chris Lui - Morgan Stanley
Jack Hu - Deutsche Bank
Katherine Lu - Oppenheimer
Richard Yeh - Citigroup
Shaojing Tong - Bank of America-Merrill Lynch
Wei Du - Goldman Sachs
Ingrid Yin - Brean Murray
Hongbo Lu - Piper Jaffray
Jinsong Du - Credit Suisse
Good day, ladies and gentlemen, and thank you for standing by for Mindray's third quarter 2010 earnings conference call. (Operator Instructions)
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.
Hi, everyone, and welcome to Mindray's third quarter 2010 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 will 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; and Mr. David Gibson, our President of Mahwa Operations.
Our management team will review third quarter and nine months highlights as well as speak to the current financial and market environment in each of our major sales markets, after which management will be available to answer your questions.
Before we continue, please note that this call will contain forward-looking statements made under the Safe Harbor provisions of the 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, Mr. Ronnie Ede.
Thank you, May. Good morning and good evening, ladies and gentlemen. Thank you for joining us today for our third 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 separately, after which our management team will be available to answer your questions.
First, let me provide some operational highlights. Our overall performance in the first quarter achieved an 11.3% year-over-year increase on the topline for a total of $158.3 million. International revenue was strong at $99.2 million, up 17.7% year-over-year, contributing 59% of worldwide sales.
China revenues grew 3.3% year-over-year, not as strong as the prior year largely as a result of continued softening in overall government spending for our medical device purchasing as well as the tier-2 and below hospitals continuing to lack in self-funded purchases.
Gross margin expanded further, primarily reflecting increased synergies by our U.S. and Western European operations.
Operating expenses picked up over last quarter, largely as a result of increased investment in the sales channel. We view it as a necessary investment to accelerate topline growth in the future.
The company recorded limited other income this quarter. Therefore, non-GAAP net income grew 5.8% to $39.5 million, slower than revenue growth. GAAP net income was down year-over-year due to one-time income of $14 million in the third quarter of last year resulting from the termination of the Beckman Coulter project.
Now, let me discuss the revenue position in detail. Continuing the momentum from recent quarters, we captured robust growth in our international markets. International sales were strong at $99.2 million for the quarter compared to $84.3 million for the third quarter of last year, representing an increasing of 17.7%.
Growth in international markets came from all regions. Emerging markets were particularly strong with Latin America and the CIS region growing over 30% and the Middle East doubling its sales compared to the same period last year. Developed markets again recorded double-digit growth.
Overall, consistent execution of expense and strategy in international channels, especially in the developing countries the new product line contribution also mattered, and continued efforts at localization of our onsite operations all helped to drive our excellent performance.
We are encouraged by the continued strong sales trend we are seeing in the international markets, and we intend to invest further in marketing and sales initiatives for the key regions.
Moving on to domestic sales, China sales were $69.1 million for the quarter, up 3.3% year-over-year. Tender sales came in lighter than expected again, growing 40.1% over a soft Q3 last year and stayed flat from last quarter.
We'd like to remind investors that the tender sales remain a small portion of our domestic sales, representing 8% of our total China sales this quarter. Non-tender sales grew 1% year-over-year, and down 5.1% sequentially, representing 92% of China's revenues for the quarter.
Much like the second quarter, the non-tender sales growth was not as strong, due partially to the fact that mid-to-low end segments was not as active as the high end segment. In particular, some of the tier two and below hospitals are still digesting allocation from last year's tenders.
While the timing of government tender sales is not something we can control, Mindray is realigning its sales force and other resources to focus more intensely on areas where we can improve our penetration as well as operational efficiency. Of course, these are multi-quarter investment and adjustment.
We anticipate seeing gradual improvement in the coming quarters, and we will discuss some of these initiatives in more detail in just a moment.
Now on to the financials. For the past quarter, our gross margin reached 58.8% compared to 56.6% in Q3 '09, and 58.3% in second quarter 2010. As mentioned earlier, synergies from our U.S. and Western European operations were the main reason.
However, we want to again remind investors of the seasonality pattern of our margin, which will likely lead to a lower margin quarter for Q4. Furthermore, as we view our low end presence in domestic China market in the future, our revenue mix might shift toward a higher contribution from lower margin products.
Operating income was $38.7 million, an increase of 13.2% over the same quarter of last year. This represents an operating margin of 23% compared to 22.6% in Q3 '09 and 26.5% in Q2 2010.
Non-GAAP operating income was $42.4 million, and non-GAAP operating margins were 25.2%. Our gross margin improvement is partially offset by higher operating expenses as we have increased our investment in both our domestic and international sales channels to strengthen our network as well as rolling out more aggressive marketing initiatives resulting in higher selling expenses.
EBITDA was $35.8 million during the quarter, a decline of 23.8% over the third quarter of 2009. Again, this was primarily due to the one-time income of $14 million from Beckman Coulter last year.
Non-GAAP net income increased 5.8% to $39.5 million over the third quarter of 2009, resulting in a non-GAAP net margin of 23.5%. The moderated growth rate reflects both higher expenses this quarter and more than $4.7 million of government subsidies and tax benefits we received in the third quarter of last year, but not repeated this past quarter.
GAAP net income was impacted by this income last year, declining by 17.2% year-over-year at $35.9 million. During the third quarter, we generated $27.9 million of net cash for operations.
CapEx net cash outflow was $17 million. Total cash, cash equivalents and short term investments were $381.9 million as compared to $370.2 million at the end of the second quarter 2010.
Our DSO in the third quarter was 69 days as compared to 58 days in the second quarter of 2010. Inventory days were 116 days in comparison to 93 days last quarter, while accounts payable days were 66 days in comparison to 59 days for the previous quarter. The increase of receivable compared to Q2 of this year was a result of increased contribution from direct sales both internationally and domestically. We are actively monitoring our AR base and expect managing it within an optimal range.
Inventory balance increased during the quarter, actually moderated from Q2, but inventory base were negatively impacted by sequentially lower sales. Another factor is the shipment method change from air to sea for our Mahwah operation, as well as some forecasting methodology changes during the quarter, which caused some unbudgeted inventory increase.
New methods are being reviewed and some are in place to reduce the inventory days for the coming quarter and beyond. We are confident that we will be able to shorten the working capital cycle in the coming quarters.
I will now turn the call over to our COO, Mr. Jie Liu, and President of Mahwah 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 financials and business trends.
Thank, Ronnie. Good morning and good evening, ladies and gentlemen. I would like to give more color on a few initiatives we are taking to improve the operational performance of the entire organization.
Since last quarter, we have been working on domestic sales restructuring program, and aim to achieve real time and a comprehensive monitoring of hospital demand at the company level. This will eventually improve our visibility of end-user demand and help our distributors identify and capture sales opportunities in the market in a more comprehensive manner. Unchanged of structure efforts, is to add a key and call management team and we will focus on driving big orders from top ranking hospital customers with larger sales potential.
We are leveraging outside consultants to implement the program. We expect a nationwide completion in the first quarter of 2011. And at the same time, we continue to work on more effective customer relationship management system for both domestic and international business managed by (inaudible) to facilitate more effective potential order assessment and customer retention.
This system will be installed in second quarter of 2011. With regards to R&D development, we are pleased to announce and we plan to establish another three new R&D centers in China by the end of this year, which will be in Chengdu, Shenzhen and Shanghai. With this three new R&D centers, we're entering a new phase of R&D expansion. R&D expansion is an important step, to support our longer-term growth.
On the price development front, we have received China's SFDA approval for our first MRI system in November. This is an exciting development for Mindray to add a new and a strategic segment to our image line.
Now on to the Q3 results in the domestic China market. As Ronnie mentioned earlier, our China sales were $69.1 million for third quarter, up 3.3% from same period last year, and down 4.7% sequentially similar to last quarter, and as we have expected, government purchase continue to be slow in the third quarter. Tender sales this quarter contributed to 8% of domestic sales or $5.5 million, similar to last quarter and a slightly higher than 5.9% in third quarter 2009.
We continue to inspect at a full year tender, where it likely be less than half of last year. While we've been interruptionally, the Chinese government remains committed to the healthcare reform budget. The timing associated with medical device purchasing under the plan remains unchanged. We will continue to diligently monitor the tender market as it remains optimistic about government spending the low-to-mid market in the coming quarter and beyond.
Non-tender sales grow 1% year-over-year. The above mentioned sales restructuring program and the CRM systems will help initiate a more effective more demand driving sales model. And it lays a foundation for our long-term sustainable growth in the China market. In light of increased government spending, as a part of recently announced new initiative focusing on country level hospital in the next three years by Ministry of Health.
We have prepared ourselves to be in a better shape to embrace the growth opportunities in the middle end market segment, our traditional strength area. And the same time, we are taking aggressive measures to deepen our penetration in both high end and the low end segments.
Overall investment in high end product development and the delivery system continue to increase. We have several high end products across different product lines in the pipeline for the next twelve months. We are also ramping our delivery system, targeting high volume hospitals with increased headcount in sales, marketing and service.
Low end and the D feature of the product, particularly in the image line, also lining up to prepare for the tender business. The regular sales in the lower end market together with more aggressive expansion of low end distribution network in the coming quarters we believe will benefit more in China's basic healthcare infrastructure buildup for many years to come.
In summary, we are adopting multiple strategies to address challenges in different segments of domestic market. We remain confident, and Mindray is in a strong position in the domestic market based on our brand recognition, our competitive advantages and our R&D strength.
I will now move on to the international market, specifically the emerging markets. Outside of China, Mindray generated robust growth in international markets, as sales grew 17.7% over the third quarter of 2009 despite a tough comparison year-over-year. Emerging market performance was again a key growth driver this quarter, growing approximately 22.1%.
In particular, we delivered over 30% year-over-year growth in North America and the CIS region, while the Middle-East recorded a double in sales. We are pleased with our progress towards the enhancement of our international sales channels.
To reiterate what was communicated during the recent quarters, our strategy is to develop country-specific marketing sales strategies, increase the number of local staff, increase investment in marketing initiatives such as organizing and participating in regional and the local industry forums as well as to build a solid service platform.
The new CRM system to be installed next year which will also facilitate emerging market sales will help achieve more effective order management and provide higher visibility in sales trends.
Looking ahead, we are confident that the strong market demand as well as our competitive position in emerging market will remain a pillar to the overall growth of the company.
Next, I would like you to invite Dave Gibson to add more color on our 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 continuous improvement we are seeing in our North America operations. Although customer demand in the U.S. still has not returned to the level prior to the financial crisis, we are pleased to see a steady recovery of the hospital budgeting and the purchasing situation the last few quarters.
Total North America sales grew better than expected to 13% this quarter on a year-over-year basis, and importantly is 3% sequentially. Sequential quarter growth is important since Q3 is the seasonally slowest time of the year for North American market.
The performance is also better than last quarter in which we reported 10% year-over-year growth. For the rest of the year, we are comfortable with the strong sales trend where the growth percentage is likely to be lower than Q3 going against a tougher comp for year-over-year.
Ultrasound remains to be the one of the biggest growth drivers for the region, especially in the direct channel. We believe that the strong trends we are seeing in the ultrasound market could become a long term sustainable phenomenon, reflecting the pursuit of lower cost alternatives in the imaging market, as well as dedicated ultrasound devices for surgical centers, emergency rooms and the critical care area. We continue to ramp up our ultrasound sales channel to capture this upcoming growth opportunity.
Our next generation patient monitor for the high-acuity markets, the V Series, has received U.S. FDA clearance as well as excellent initial customer feedback in the market. We are also having a new series of anesthesia systems that will be introduced over the next two years. The first of this new generation of anesthesia machines, the A5 was shown at the recent American Society of Anesthesiologists conference and was very well-received. Both of these products represent new technology platforms that establish Mindray as an innovator for human factors and performance.
We expect these two new product families would be our new growth drivers over the next several years in the patient monitoring and life support category.
Our margin and expense structures further improved this quarter, highlighting that our synergy progress remains well on track. Since the merger, we have upgraded the majority of the product line along with the introduction of several new products in North America that have dramatically expanded our serve markets, allowing us to achieve growth synergies along with cost reductions.
With the new global ERP solution in place, we now have the tools to work on improving our working capital cycle through improving inventory and receivables while maintaining our traditional low overall credit risk.
Going forward as part of Mindray's global expansion strategy, our North America operation plan is to further invest in marketing initiatives to help build a stronger global brand among hospitals in the region. We've built direct sales forces outside of the existing patient monitoring line, as well as the product development strategies for the developed markets.
Last but not least, like the rest of the organization, profitability remained a key for North America as we expand our footprint in the developed markets worldwide.
I will now transfer the call back to Ronnie who would comment on other 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 nine products across several new regions across its three product lines. As a milestone in our strategic expansion in the imaging sector, our first MRI system just received China SFDA approval in November. We've already met this year's development goals with the nine product launches. At the same time, we have accelerated shifting our product mix to the higher end applications, with more advanced features as we aim to increase our penetration into higher end market segments.
Now I would like to discuss our guidance for 2010. We are maintaining our full year guidance and are keeping our annual net revenue target for 2010 at $700 million. This continues to assume that 50% reduction of our tender sales for the full year 2010 in comparison to 2009.
In addition, we project a heightened growth in international market for the full year but expect the growth rate in Q4 to be lower than what we reported this quarter based on tough year-over-year comparison, as we experienced exceptional growth in Q4 of 2009 for the emerging market.
Our non-GAAP net income growth target remains at 10%. We have built in margin dilution from expected higher tender sales in the first quarter and heavier investment in sales channels.
Additionally, in the second half of last year, we had roughly $11 million other income from government subsidies which we do not expect to repeat with similar scale this year.
This guidance excludes the $8.6 million dollars corporate income tax recognized in the first quarter of 2010, and the gross rate is based on a 15% corporate income tax rate for our (inaudible) operation. We expect capital expenditure to remain in the range of $60 million to $70 million for 2010.
Lastly, as Jie and David separately discussed earlier, we are seeing a stabilizing and recovering market situation in most areas in specific segments we compete, with some exclusions throughout the organization, particularly expected completion of a restructuring program in China around mid-year next year. We are confident that we will grow better next year.
With this, we will return to the operator to open the call for questions.
(Operator Instructions) Your first question comes from the line of Bin Li representing Morgan Stanley.
Chris Lui - Morgan Stanley
Hi, this is Chris on behalf of Bin Li. Can you give us the latest status of your sales force restructuring? And also we would like to know the latest status on the government tender winning ratio. Are the trends going up or down? And also, if you can quantify that as well.
Can you repeat the first part of the question?
Chris Lui - Morgan Stanley
First part of the question is the latest status of the sales force restructuring.
As I said earlier, we have a separate team really focusing on the large hospital who has big projects as one instruction; another one is, actually we have the dedicated sales force to really focus on the low end products also. It is just to divide them, the responsibility and also their routine job. In the past, we put them together in all the programs, we now divide them. At the same time, we are adding more people also for the sales force. That's our current situation.
For the next step we are building up a more systematical way to really reflect the demand of the market. So now you manage the distributor, distributor manages the hospitals. In the future, we will have more managers there, real opportunity in the hospital side. That's the present direction.
To the second question.
Chris Lui - Morgan Stanley
The tender winning ratio.
The winning ratio of the tender we keep the same; no change so far; roughly same.
Chris Lui - Morgan Stanley
Can you quantify that like how many tenders you won in third quarter?
What Jie Liu was saying that our overall winning ratio remains the same like what we had in Q2. There is no change in that winning ratio of tenders. However, the absolute number of tenders is lower, as you know.
The winning ratio is kept around 50, which is the same as last quarter.
Your next question comes from the line of Jack Hu representing Deutsche Bank.
Jack Hu - Deutsche Bank
I have a question regarding your long-term growth strategy focusing on the D side. I do understand that for competitive reasons you can't release a lot of information here, but I would really appreciate if you can do as much better as you can. What is your pipeline status for 2011 through 2013? And especially, what is your R&D strategy for new products and what kind of products or areas you are most interested in? Is that developing in-house or in-license or through acquisition?
For the long-term development, I think we have a very aggressive plan to really develop more products in the pipeline. As I said earlier, we have the plan to build up another three R&D centers to recruit more R&D people. So that's really toward the future growth, to build up the future growth platform.
After we build up the three centers, we'll have the capability to recruit more talented people and also we need to cooperate with other manufacturers or technology. That's another side.
Here, I only talk about the internally developed. Internally, we are very aggressive on the product development. We are not only focusing on our current products, but also we are moving at higher end also to really develop some products really targeted at tier-3 hospitals. That product environment moved toward the high end of customers.
But that's not all. We are really committed to the cost effective product target to the healthcare reform. We will be separating some group of people. Some people we've been focusing on the more cost effective products and some people we're focusing on high-end products to target the tier-3 hospitals. So that will be the two different groups of people to really develop the product for the future.
In the future from 2011 through 2013, you will see more new products launched. That'll be either faster than current stage. That's our plan right now.
Your next question comes from the line of Katherine Lu representing Oppenheimer.
Katherine Lu - Oppenheimer
My question actually is on the China non-tender side. This quarter, the growth came in weaker than expected. Given the product development cycle, and I understand you talked about sales restructuring, the transition period probably will complete by mid-2011, I am just wondering do you think Mindray actually hit the (nail) in the non-tender side in Q3 or it will take one or more two quarters to see the inflection point?
First of all, as you can see, we are reorganizing our operations in China, as Jie has stated very clearly. And we're trying to look into different type of customers and provide different type of services. As we are going through this process along with lower sales opportunity in the lower tier markets, we have seen a little bit slower sales in the non-tender area.
As I stated in the prepared remarks, we do anticipate gradual improvement as we accomplish more and more restructuring of the China market. I think, Jie, you want to add any other comments to that.
I think for the China market, probably you heard some information. The low to mid end actually is growing not so fast as a high end market. That's the current market situation, but that's the current situation.
We have been focusing on the country level hospital reform for the next three to five years. There will be another driver for the industry growth. So for (inaudible) for low to mid segment, we will be very promising in the next three to five years. Mindray is in a very, very good position to prepare for this kind of change.
Of course, we are looking at two segments. We're working ourselves way up to the high end of the market, but we definitely are consolidating our strength in the lower end of the market. Whether China's reform continues with the government's commitment, we do believe continued increases in the lower end will see sales increases in the near future.
In the past, you heard a lot of tenders just for the country side clinics. Only price is the key driver to win the tenders. But now this country-level hospital, doctors are more focused on performance and the price also. But the performance will be very important in the future. That gives Mindray a better position compared with domestic players.
Your next question comes from the line of Richard Yeh representing Citigroup.
Richard Yeh - Citigroup
Your inventory level actually went up pretty big to 116 days. I am just wondering if you can give a comment on what kind of inventory level at distributor level do you have a sense what kind of a level that they have in the distributors? And also I will appreciate if you can really break down the China growth versus U.S. growth versus emerging markets' growth over the business segment on a patient monitor and ultrasound and in-vitro diagnostics.
First of all, our inventory status for inventory within the company has nothing to do with distributors' inventory level. Our sales is recorded, ones as the sales outside of the company.
The inventory did go up this particular quarter due to several reasons. One of them was forecasting of sales. And as you know, some of the raw material now we have started to accumulate earlier than 20 to 90 days. So our sales level is less than what we anticipate our inventory growth.
Second to that is also we have forecast system adjustment and differences in Mahwa and also some shipping methodology changes, resulting in higher inventory level at the end of Q3. Since the end of Q3, a lot of effort has been put into it to review the process, put in to review monitoring steps and look into how can we systematically control those kind of one-off glitch.
We believe that by the end of this quarter, we will come down to a very optimal level of the total inventory.
And as to your second question in terms of breakdown by geographical location as well as our product line, we do not provide that information publicly. Sorry for that.
(Operator Instructions) Your next question comes from the line of Shaojing Tong representing Bank of America-Merrill Lynch.
Shaojing Tong - Bank of America-Merrill Lynch
I just have an easy question on receivables. So the receivable days also has elongated quite in magnitude. So can you elaborate why is that happening?
First of all, let me correct one thing. When I read my prepared remark, our DSO is 68 days, not 69 days. However, the increase of receivable is due to several reasons. One, of course, we have a better than anticipated direct sales in the North American region, and that also caused receivable to increase.
Second to that is we also see some receivable increases in China and other regions as we increase a little bit of our direct sales. I look at this whole thing as what we are managing is a way of managing on the credit risk, especially the portion which has past due. We will continue to very carefully look at our overall receivable, make sure it's performing correctly and make sure we're managing within a normal range.
And we believe the optimal range is within around 60 days to about 70 days period, depending on the seasonality of total sales numbers. As sales increases in the quarter, we would see the DSO days decrease, but the total receivable is where we are managing at this time.
Your next question comes from the line of Wei Du representing Goldman Sachs.
Wei Du - Goldman Sachs
Just to follow up on the account receivable days or maybe working capital, I think you are doing the sales force restructuring or alignment. And going forward, you probably will target the high-end hospitals as well as mid to low-end tier markets.
So I am just wondering going forward, what kind of expectations should we have on the working capital front. So basically I am looking more into whether you can control the account receivable days at below 70 days for example.
And the second question, among other three segments, I noticed Patient Monitor growth has been fairly slow. Can you give a little bit fundamental reasons to highlight on why the growth has been fairly slow in the Patient Monitor, which region? Is that many because the domestic slower tender?
Again, on the working capital, our inventory base definitely can be controlled that much rather than what we are seeing for the end of Q3. And that substantially improved our overall cash conversion cycle.
In terms of receivable, as I stated earlier, we will be focused more on the performance of the receivables as we look at the necessity of direct sales regions such as the North American region and the Western European region and some of the high end regions for the domestic China operations. These will cause receivable to maybe increase, but we will be actively managing the risk and actively managing on the distributor side so that we can balance the overall receivable return.
Wei Du - Goldman Sachs
On the product growth among different segments, especially the patient monitor side?
First of all, patient monitor is not a very fast growing segment worldwide. However, for our experience we do see internationally both in North America and other emerging markets growing at a decent rate, some of them even at a double-digit rate. Domestic China, the patient monitor, because our market share is such substantial and also the market wasn't growing very fast, that one is now growing very quick.
Your next question comes back from Ingrid Yin representing Brean Murray.
Ingrid Yin - Brean Murray
My question is about the medical imaging system. You had a nice growth in that segment. Could you provide more color, where the demand is coming from? I know David commented earlier that, North American demand is really strong. Can you talk about other areas?
The international are basically for the image lines are growing faster. Major growth is coming from color ultrasound system.
And overall, the color ultrasound system is being well received in a lot of regions and we are also seeing some sales increases in the black and white area in certain regions.
Ingrid Yin - Brean Murray
How about in China? What is your demand for medical imaging systems?
Mainly coming from the ultrasound, but we also started to sell our DR systems which also creates a growth for us.
Your next question comes from the line of Hongbo Lu representing Piper Jaffray.
Hongbo Lu - Piper Jaffray
Ronnie, since you mentioned domestic market share for the patient monitor business. I just wonder if you can provide us a market share for some of your other product lines, because historically you give market share from Asia, but the last one we had update was in fourth quarter of '08. I wonder if there's anything that you can share in terms of your market share in China.
Second question is on clarification on guidance. Ronnie, you said in the guidance was an assumption of 50% reduction of government tender from 2009 level. And then when Jie made his remark, he said full year tender could be less than half of last year. I just wonder if you had enough offer for you then for the China growth.
And also on the international front, while we look at September, Shenzhen customers export data, the September data looks very weak. It was only 3% of your growth. I understand there's no perfect correlation, but my question is, do you think that customers export data was fully reflected in your third quarter ex-China as well. Or there could be some implications for the fourth quarter ex-China sales.
We are working with Frost & Sullivan for more objective market share assessment of what we have for the China market. And I don't think I want to provide any internal estimation of the market and I like to have the external number for everyone. I do believe in Q4 we can provide that data for everyone.
Secondly in regard to the tender sales, as I said, will be 50% reduction from last year's number, with what Jie was saying, more than half. We are talking about approximately the same thing. We are looking around 50% reduction from last year's tender number. Although, we do see more tender activities in Q4, but I don't think we can catch-up more than 50% of the sales than we've had in the last year.
Your third question regarding the export data, first of all, as obvious, as everyone can tell, the export data in Q3 did not correlate with our international sales. As I stated before, our export data first of all is related to attractive price and secondly we relate it to a lot of inventory shipment. And this past quarter particularly, whereas we have more inventory in Mahwah than what we should have. And as a result of that actually the export data was even overstated if we accounted everything.
I remember one thing is we guided the Street even now. In Q4, we commented our international sales will increase. However, our international sales increase in percentage would be less than what we have seen in Q3. So that maybe if you look at an absolute percentage term, the export data increases also would slow down. That's kind of correlated with that assumption also.
Your next question comes from the line of Jinsong Du representing Credit Suisse.
Jinsong Du - Credit Suisse
I have a question regarding operating expenses. This quarter's selling expenses in particular as a percentage of revenue, has it been increased over previous quarters and last year? And Ronnie, you also mentioned earlier that you'll continue to make investments on the sales front.
So could you tell us, number one, what's your guidance for selling expenses as a percentage of sales going forward, and also in particular what kind of investment are you doing in sales, like what kind of expenses in particular?
Particularly, we have done several things in the past quarter. This is cross-border in all regions. And for example in the China region we are adding sales people and also adjusted certain commission structures. Second to that, is in the Mahwa region we also have restructured our overall commission structure, which shifting some of the commissions and restructure the way we incentivise our sales teams.
In addition to that, we also have some one-time only charges due to some restructuring of the operations. So combining all those things, we do have increases in Q3 versus Q2 with a lot of those increases permanent in nature. We do believe the increases in sales expenses will continue moving forward. Whether the percentage will be similar to 18% or slightly less depends on the sales volume of the quarter. And of course in addition to that we also spent some money for advertising, travel and entertainment. These all increased as a result of a more focus to managing our sales toward the direct operations and direct opportunities.
Your next question comes as a follow up from the line of Bin Li representing Morgan Stanley.
Chris Lui - Morgan Stanley
Two quick questions; can you talk about the foreign exchange impact since the RMB appreciated so quickly, and also on the MRI opportunities?
Let me answer the FX issue and then give to Jie to answer the rest of the questions you have, Chris.
For the FX impact, as I stated before for RMB appreciation, within 10% our overall net impact should be very, very minimum to the company. Therefore, RMB appreciation for the last quarter did not provide any major profitability or any other impact to the company.
In terms of euro, has a very slight impact, but the euro impact was not strong last quarter either. Jie.
The MRI opportunity, we just launched MRI system during the CMEF in Shenzhen, and the initial feedback from customers is very positive. And most customers see us as an equal manufacturer as (inaudible) companies, much higher positioned than domestic players for the MRI system, even though we are a new entrant. But because we had a reputation of the brand, and also we did a very good job in delivering high quality products, so the customer has more persuasive Mindray could deliver high quality MRI systems. Of course, this one is an entry level system; is a permanent magnetic system that will target low end hospitals, even some private hospitals.
But MRI system is regulated in China, and if the Ministry of Health opens the door to all the manufacturers, then if they don't control the installation, probably the installation number will be even much larger. So if the government Ministry of Health wanted to really increase the healthcare standard to deliver better healthcare to the patients, maybe in the near future there could be some even big opportunities.
So that's our MRI systems. The total size of China MRI system for permanent magnetic system is roughly RMB700 to RMB800 million
Your next question comes from the line of Jack Hu representing Deutsche Bank
Jack Hu - Deutsche Bank
I actually have a question for Ronnie. Ronnie, in the second part of your prepared remarks, you mentioned that for next year you are confident that the China gross will be better than this year once the sales force (refreshing) complete in the second Q of '11. I just want to be more specific, are you referring to the total China gross or China gross excluding tender?
I think Jack, what I was talking about is overall, the company gross, not particularly only focused on China. As I said, we have seen stabilizing and recurring market situations in almost every area. And we are also seeing our restructuring program in China is taking shape, and we anticipate it's completing in the middle of next year.
So overall we do believe, the entire operation will be better for this year. We are still in the midst of an overall budgeting and reviewing process. We do not have a very specific number to guide us through at this time.
Ladies and gentlemen, this concludes the time we have for questions today. I would now like to turn the call back to Mr. Ronnie Ede for closing remarks.
Again, I would like to thank you all for participating in today's call. We are pleased with our performance in international markets this quarter and are committed to invest in order to continue building our presence in target regions. In China, we are aggressively implementing various strategies to address our challenges and restore growth in the domestic market.
As there has been no change to the Chinese healthcare reform plan, we continue to believe that we are well-positioned to benefit when government spending increases. Mindray remains dedicated to providing comparatively-priced high quality products across all three of our product lines, and we have already met our annual product launch goal this year.
We remain focused on our R&D effort and we believe that our planned establishment of three new R&D centers will create valuable assets for our organization in the future. As always, we appreciate your support of Mindray. Thank you for joining us today, and we look forward to speaking with you soon. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.
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