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Mindray Medical International Ltd. (NYSE:MR)

Q2 2014 Earnings Conference Call

August 12, 2014 8:00 ET

Executives

Cathy Gao – Senior Manager of Investor Relations

Li Xiting – President and the Co-CEO

Minghe Cheng – Co-CEO and Chief Strategic Officer

Wang Jianxin – Chief Operating Officer

Alex Lung – Chief Financial Officer

May Li – Chief Investment Officer

Analysts

Richard Yeh – Citigroup Global Markets Asia Ltd.

Bin Li – Morgan Stanley Asia Ltd.

Jack Hu – Deutsche Bank

Sean Wu – J.P. Morgan & Co.

Wei Du – Goldman Sachs

Iris Wang – Credit Suisse

Jessica Li – Jefferies & Company, Inc.

Operator

Good morning everyone thank you for standing-by and welcome to Mindray’s Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, we will conduct a question-and-answer session. Today’s conference is being recorded for replay purposes. If you have any objections, you may disconnect at this time.

Now, I would like to turn the call over to your host for today’s conference, Ms. Cathy Gao, Mindray’s Senior Manager of Investor Relations. Please proceed, Ms. Gao.

Cathy Gao

Thank you operator. Hi, everyone. Welcome to Mindray’s 2014 Second Quarter Earnings Conference Call. We released our financial results last night and they are now available on the Company’s website and Newswire Services. There will also be an archived webcast of this conference call on our Investor Relations website.

Joining today’s call are, Mr. Li Xiting, our President and the Co-CEO; Mr. Minghe Cheng, our Co-CEO and Chief Strategic Officer; Mr. Wang Jianxin, our Chief Operating Officer; Mr. Alex Lung, our Chief Financial Officer; and Ms. May Li, our Chief Investment Officer.

In a moment, Ms. May Li will provide an update of the Company’s operational performance and Mr. Alex Lung will review the detailed financial results as well as the Company’s outlook for 2014. After that the management team will be happy to take 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. Statements made and the views expressed here which are not historical facts are forward-looking statements. You should be cautioned that the forward-looking statements are only predictions and may involve inherent risks and uncertainties. As such, our actual results may be materially different from the statements and the views expressed here today due to a variety of factors.

A number of such risks, uncertainties and the factors are outlined in our public filings with the SEC. In particular, please refer to risk factors beginning on Page 5 of our Annual Report on Form 20-F. Any projections made here today are based only on limited information currently available to us, and are subject to change. Mindray does not undertake any obligations to update any forward-looking statements except as required under the applicable law.

I will now turn the call over to our CIO, Ms. May Li.

May Li

Thank you, Cathy. Good morning and good evening, ladies and gentlemen. Thank you for joining us today. In the second quarter, we reported US$334.5 million in total net revenues, growing 8.9% year-over-year. Excluding the tax benefits, our non-GAAP net income was US$64.3 million, compared to US$68.2 million in the same period of last year.

As we discuss in May, the market conditions in various key countries continued to be challenging for our business during the quarter, particularly this slow recovery as our home market China as well as our favorable foreign exchange and geopolitical factors that affected our performances in several emerging markets. Our China sales were US$152.5 million, which grew 3.4% year-over-year and represented 45.6% of our total net revenues.

Outside of China, our international sales reached US$282 million. Nevertheless, we are happy to see our IVD region sales increased as far as the growth momentum exhibited by our high-speed biochemistry analyzers and the high-end ultrasound products. Reagents sales in the second quarter accounted for 41.2% of total IVD sales up from 36.6% a year ago and 38.1% in the previous quarter.

In addition to the reagents, our biochemistry products such as BS-800 and BS-2000 performed well in China this quarter. Looking at other items, our cash conversion cycle continued to at a similar and healthy level compared to a year ago and was 89-days, compared to 85-days in the second quarter of 2013.

Now, let’s look at our detailed second quarter performance by geography and segments respectively. Starting with China and the emerging markets and on to the developed markets. Our second quarter domestic sales increased 3.4% year-over-year. As mentioned, we were seeing more tender activities in the last two quarters compared to late 2013.

Yet the overall market remains relatively slow as hospitals are still quite reluctant in purchasing new equipments. Having said that we remain confident that the industry fundamentals are solid and anticipate the overall market demand to get better in the second half. As a domestic leader in this factor, we are well-positioned to compete on demand.

Overall, our IVD region sales continue to climb thanks to mid-to-high end product such as the BS-800 and the BS-2000. Our new 19 manufacturing facility has almost being completed, and a construction of our new plan in Shenzhen under way to meet the growing demand for IVD product. With the introduction of new products like the Chemiluminescence, CL-2000i and the cellular analysis line CAL-800 as well as the sales ramp up of important products, we remains optimistic about the prospect of this segment based on the increasing recognition of our brand and attractive product performance.

In terms of market sub-segment, we still see sustainable investment activities by the government in the county level hospitals. As part of the healthcare reform, the number of county level hospitals to be upgraded should reach 1000 by the end of 2014 from the current level of around 300. This will undoubtedly benefit Mindray, given our dominant presence in county levels.

Private hospitals demands are also poised to grow rapidly based on government initiatives and private investments. In fact, it is expected that private hospitals will account for 20% of all national healthcare services in China by 2015, compared to the current level of 9%. Without compelling value proposition to private hospital customers, this segment will be an important strategic focus for us going forward.

We will also continue to improve our sales program and extend our direct servicing platform in China. This allows our extensive product offerings continue to put us in a very strong position in a domestic marketplace. Our international sales recorded 13.9% year-over-year growth in the second quarter.

Overall, emerging market sales grew single digit from the same period last year. Continued political and foreign exchange pressures caused the weaker sales in selective countries. In the second quarter, Asia Pacific was the highest growth region delivering sales to 35% year-over-year sales growth, thanks to strong order in the Philippines and more favorable currency environment in India and the decent growth in Australia. The overall, long-term market potential in Asia Pacific continues to be promising.

In Africa, we’ve recorded low-teen growth based on good orders in countries such as Egypt and South Africa. In Latin America we had strong growth in Columbia and Mexico where sales were up over 35%. Although we had such lower quarter in Brazil we expect this to be back on track for the remaining fiscal year. In Venezuela tighter currency and the import policies as well as political instabilities continued and we expect those to remain as headwinds. However, the long-term underlying demand in many Latin countries is still strong.

In the CIS region, recent political tensions have created new uncertainties for many companies. We will continue to monitor such situation there for our business. In the Middle East, we are happy to see strong orders in Saudi Arabia in second quarter. However, last year’s large [indiscernible] presented a tough comparison to us. Our long-term outlook and the strategies in emerging markets have not changed. We remain optimistic about the region’s growth potential, though we are subjected to foreign exchange on the geopolitical risk.

In key countries, we will further enhance our platforms to promote our brand and better serve local customers. For example, our new sales offices in Philippines [indiscernible] capture new growth opportunities there. We will also work on expanding our coverage by adding sales and marketing personals and optimizing the latest support infrastructures such as logistic, IT, finance and other services.

We’re confident that these plans will help us develop strong competitive positions in the key countries. Sales in the developed market grew by more than 25% year-over-year in the second quarter, which included contribution from Zonare. Western Europe sale grew at a low double-digit level. This was lower than our pervious growth mainly due to tough comparisons in key countries such as UK and France. We did very well however in Spain where we recorded over 40% growth and Italy was also a growth driver for us this quarter.

Looking ahead, we are confident that our strategies are working well and our long-term prospect in Western Europe looks promising. In North America, sales in this quarter increased over rose 40% in addition to the contribution from Zonare. Our organic business also improved. We did particularly well in patient monitoring and procedure product. [indiscernible] hospital that included both Mindray and Zonare products.

We are not only encouraged by the endorsement of such a reputable internationally recommended the customer that also the synergy and the value faded by the collaborative efforts Mindray and Zonare. In terms of market dynamics overall we expect margin remains flat. However, we’ll continue to focus on pushing new products in the market and then improving operational efficiency to enhance our long-term competitive position.

Now, let me give you a breakdown of the performance about different business segments in the second quarter. Net revenues from the Patient Monitoring and Life Support segment grows 1.8% year-over-year. This was largely due to the slowdown in certain key emerging markets in China, which impacted our P&L line the most.

Our growth in the anesthesia and surgical equipment segments were doing better however thanks products such as high-end anesthesia machines. Patient monitor and Life Support is the most mature segment among our three business lines. And also they include by the product functions and launch new products which will increase our competitiveness in various projects.

In our IVD segment, sales increased 11.3% year-over-year. The reagents biochemistry analyzers and the CL-2000i were the main contributors to growth in this quarter. We introduced our first immunoassay product the CL-2000i along with several reagents in late 2013. The product received very good feedbacks from our customers.

Going forward, we continue to invest in order to penetrate into the fast growing immunoassay segment more quickly. As the installation base for products such as the BS-800, the BC-6800 and BS-2000 and CL-2000i continues to ramp up, we expect our IVD business to improve gradually and to continue to drive product growth for the company.

For the Medical Imaging segment, the year-over-year net revenues growth for this quarter was 11.2%, which included Zonare’s revenue contribution. Apart from that color ultrasound especially the high-end DPA [ph] did well and led out sales growth in this quarter. As we continue to integrate Zonare’s business, we will leverage the combined entity to accelerate the launch of next generation high-end ultrasound product, in order to further grow our business.

Our Others net revenues grew 26.3% year-over-year in the second quarter. This was mainly because of increasing revenues from our organic business after sound services as well as the Zonare acquisition.

I will now turn the call over to Alex for financial details as well as our outlook for 2014.

Alex Lung

Thanks May. In the second quarter our top line recorded 8.9% year-over-year increase to $334.5 million. China net revenues were $152.5 million a 3.4% year-over-year increase. International net revenues were $182 million a 13.9% year-over-year growth.

Non-GAAP gross margin was 57.2%, compared to 58.2% in the second quarter of 2013 and 55.9% in the first quarter of 2014. The year-over-year decrease was mainly due to the integration of Zonare, the sequential improvement is largely due to the seasonality. Our non-GAAP selling expenses were 18 of total net revenues higher than last year’s level of 17%. This was mainly due to increase in our investment initiative as well as the consolidation of Zonare business.

Non-GAAP general and administrative expenses were 8% comparable to 8.5% in the same period of last year. We have continued to invest in R&D over the past quarter. Our non-GAAP R&D expenses were 9.7% of total net revenues, compared to 8.9% in the same period of last year.

Non-GAAP operating income declined 2% year-over-year to $71.6 million, primarily resulting from Zonare’s dilutive impact. Taking out the tax benefits non-GAAP net income dropped 5.8% from the same period of last year to $64.3 million. This figure excludes the tax benefit of $1.9 million recognized in the second quarter of 2014 in relation to the nation wide key software enterprise status.

Our non-GAAP operating margin was 21.4% compared to last year’s level of 23.8%. Our non-GAAP net margin was 19.8% for the second quarter compared to 22.2% in the same period last year. Excluding the tax benefits, our non-GAAP net margin was 19.2% for the first quarter, compared to 22.2% in the same period last year.

Our cash conversion cycle was 89 days in the second quarter, similar to 85 days from a year ago. Our accounts receivable days were 52 days unchanged from the same period last year and lower than 59 days in the previous quarter. The inventory turnover days were 99-days, compared to 88-days in the second quarter of 2013 and 114-days in the prior quarter.

This was primarily a result of lower than expected sales in this quarter. Going forward, we will continue to adopt consisting credit policies and enforce insurance protections in our key markets worldwide. We generated net operating cash of $84.6 million in this quarter, 11% increase from last year’s level. Our capital expenditure was $23.2 million, up 14.7% from the same period last year.

Let’s move on to discuss our financial outlook for 2014, based on the weakness in China and some key emerging markets. We are revising our full year topline guidance and now expect more than 10% year-over-year sales growth. Overall we continue to believe that the long-term fundamental of this markets remain solid and the above markets will gradually improved in the second half.

However, we are mindful that our performance in some emerging countries could fluctuate based on political and currency risks. We also remain optimistic above our prospect in Western Europe and other emerging markets, thanks to our increasing brand awareness, emerging private and public opportunities as well as better sales and service offerings and we expect the overall U.S. market remain flat.

As we discussed extensively over the last few quarters, in order to support and sustain our long-term growth, this year we will speed up our investment primarily across sales, marketing and distributions as well as product innovations. These investment initiatives are well on track. Meanwhile, as we lower our topline guidance we now anticipate our 2014 non-GAAP net income to decrease by single-digit percentage from last year. And this figure excludes any tax benefits and assumes a corporate income tax rate of 15% for our Shenzhen subsidiary.

Our consistent investment in the past have successfully made us deliver a global medical technology player to-date. We are confident that our investment strategy will help us to further grow Mindray and strengthen our market positions. Given the lower than expected construction progress, we now expect our capital expenditure to be around $130 million this year. This guidance excludes potential M&A expenditure. We will continue to seek external M&A opportunities that could bring complementary technologies or products to our company.

Separately, the company announced that Mr. Chen Qingtai has resigned for personal reasons as an independent Director of Mindray's Board of Directors and a member of Audit Committee, with effect from July 31, 2014. Mr. Chen has confirmed that his resignation was not the result of any disagreement with our company on any matters relating to our operations, policies or practices. We appreciate his great support to the company throughout the year and wish him the best in his future.

That’s all for now from me, and I would like to turn the call back to Cathy.

Cathy Gao

Thanks, Alex. We will now open the lines for questions. Operator, proceed please. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Richard Yeh from Citigroup. Please ask your question.

Richard Yeh – Citigroup Global Markets Asia Ltd.

Thank you for taking my question. I just have a question. Can you talk about your sales restructuring and where we are and that what’s the rationale behind and also what actually affecting the gross margin and we saw there is a decline in the second quarter and what’s actually affecting the price cuts or is there any other reason that – how should we think about the gross margin in for the remainder of the year maybe next year. And, also I have another question the start buyback you can continue to buyback and for the remainder of the year, because we notice that there is a – probably a less buyback in the second quarter and what are the reasons? Thank you.

Alex Lung

Hi, Richard. This is Alex. Hi, thank you for the questions. For your first question maybe let me just get you the gross margin part first, the main reason for the reduction in gross margin on a compared to last year was mainly related to the acquisition of Zonare as we discuss that in our previous call Zonare actually attract a lower gross margin as compared to our group efforts that is the mainly the reason. And in terms of the sales restructuring now we talk about in our previous call that we are actually in the process of increasing our coverage in China, the mid and low end area by broadening our distributors coverage and gain market share. This initiative is well underway it still in progress we more we will see more of this effect coming in the second half of this year.

In terms of the gross margin for the second half of the year, I would reiterate that for the full year we will expect the gross margin to be filled at around the mid-50 level this is the incentive from the company try to maintain a competitive pricing strategy in order to gain market share. To your second question about the stock buyback I mean the company spend about $110 million on the stock buyback and we will definitely continue with the program which is going to expire in some time next year. So we’ll still have opportunity to continue to do that for the rest of the year.

Cathy Gao

Thanks Alex. Next question please.

Operator

Thank you. Your next question comes from the line of Bin Li from Morgan Stanley. Please ask your question.

Bin Li – Morgan Stanley Asia Ltd.

Thanks for taking my question. So my question is on the revenue breakdown if you can provide more color so from this years for this quarters 9% growth can you put down for us in terms of price, volume and effects impact for your guidance for the revenue can you also breakdown for us what’s your outlook for China versus international and also on the revenue for Ultrasound and this quarter it grew 11% and you tell us the breakdown between Zonare contribution or if you would [indiscernible] the line growth for ultrasound business? Thank you.

Alex Lung

Hi, Bin this is Alex. Hi, thank you for the questions. I think for your last question about the Ultrasound I think we have been maintaining our consistency in this unfortunately we don’t breakout the Zonare performance separately. So unfortunate that the way that we’re disclosing our information. And go back to our first question about the 9% in growth. I would say still most of the growth actually coming in from the volume and then for this quarter I think the FX impact and the – it’s actually remain to be a lesser of the impact.

In terms of the guidance breakdown as we talk about it in our prepared remarks, we lower our topline growth to about 10%. So for the full-year basically it result break it down into different regions then it will be, for the full-year China will still expect to be a low teen kind of growth rate. And then for the Western Europe is also on a low teen and the emerging markets is on a high single-digit, and for North America because of the acquisition affected in it will be a mid single-digit for the full-year.

Bin Li – Morgan Stanley Asia Ltd.

Full-year.

Alex Lung

Full-year for mid-teen.

Bin Li – Morgan Stanley Asia Ltd.

Mid-teen.

Alex Lung

Yes full-year mid-teen.

Cathy Gao

Thanks Alex. Next question please.

Operator

Thank you. (Operator Instructions) Thank you. Your next question comes from the line of Jack Hu from Deutsche Bank. Please ask your question.

Jack Hu – Deutsche Bank

Well, thank you for taking my question. I have a two one of them actually, the first one is a follow-up question on the China growth their assumption here. So Alex you just share with us on a full-year basis we’re still expecting China to grow in low-teen, so will into grow first half was 17, low single-digit. So we’re actually expecting middle to high-teen for the second half of the year.

Two my question is what actually give you the confidence, we can do high-teen here for China in the second half is really big, is it more like, we have a lower base actually for the second half of last year, are we seeing a change that we see actually you report on quarterly but when you look at the numbers on a monthly basis you see obvious improvement this is actually my first question on China side.

Second question, actually is on emerging market actually, I recall you mentioned actually in last quarter which is a moment ago in trying to maintain competitive market share. We've seen actually you took some price down, with your emerging market. So my question is simple, are you done with the price cut in the selective emerging markets. Thank you.

Alex Lung

Hi Jack, thank you very much for the questions. Let me divert the first question to Mr. lung and bear with me I’ll just try and say its for Mr. Lung.

[Foreign Language]

Wang Jianxin

[Foreign Language]

Alex Lung

Okay all right. Thank you Mr. Wang. Let me just repeat what Mr. Wang just mentioned in English. So Jack basically Mr. Wang reiterated your observation about the – in first half of this year we have achieved a low growth rate. So it would imply it in the second half we have to growth in of our China over 15% in order to achieve what we talk about the overall looking grow for the full year. And the reason why we feel that we have confident in achieving that are as follows.

The first is that in the first half of the year we observed certain tender activities and now so those tender activities, big tender activities are now gradually servicing. So what we actually expecting those tender activities to gradually materialize in the second half of this year. Okay and secondly is that because of the anti-corruption there has been slowdown in hospital regular purchasing. And now we are seeing more of this regular purchasing activity we are engaged as well.

So the sales from that aspect as also picked up. And then thirdly traditionally second half of this year is also the end of the budget seasons for a year. So in general a lot of the purchasing activity should happen a lot more frequent compared to the first half of this year. And then lastly Mr. Wang also mentioned, IVD business both hematology and biochemistry business are doing well. And in particular for the high end equipment coming from the biochemistry side for instance the BS-2000 model in this year the first half of the year our installation base of this machine has already exist that flat year.

We believe that we are installation base in pays it will further drive the consumption of increasing the agents in the second half of the year. So overall, this actually constitute to the our confidence of the growth in the China.

Cheng Minghe

Hi, Jack this is Cheng Minghe. And I would like say something about emerging markets, but although its not good in the first half but compared to last year the second half – the Venezuela and Turkey low number, the first half this year Turkey have a big sales in the first half also Venezuela have some not very small number in the second half compared these two number in the second there are no comparison.

And we just say also the Russia, Ukraine still not in good situation including Argentina, but the other region would be much better than the first half. For example, the second quarter Asia, remain very good situation - very good about we’re believing the second half Asia, Africa and the other Latin America country keeps very good situation also we have several big tender, we hopeful can get some in this year. So we’re quite confidence in emerging market in the second half will better than the first half.

Cathy Gao

Thank you, Cheng. Next question please.

Operator

Thank you. Your next question comes from the line of Sean Wu from JP Morgan. Please ask your questions.

Sean Wu – J.P. Morgan & Co.

Hello, thank you for taking my question. I just have look and a follow up the question on the China sales probably, clearly for the first half of your growth is about and taken a below 4%, which how to see that low China growth like only 4% I understand it’s based and I probably think going on. So, I think ask like your public overall like through the market share. So, like in high-tier hospital or low-tier hospital or county level hospital in which segment are you face like particular challenge and how you’re feel of both questions?

Alex Lung

Hi, Sean. Thank you for your question. Let me divert this question to Mr. Wang as well.

Wang Jianxin

[Foreign Language]

Li Xiting

[Foreign Language]

Cheng Minghe

Hi, this is Cheng. Yes, let me just repeat what Wang can just mention. Okay its Wang just mentioned. So Mr. Wang mentioned that it is true that for the overall growth rate of around 4% is that indicated that we are losing some market share in the China region and the reason for the lose of the market share if we saw break it down into our different product lines, we realized that we are using the Patient Monitor and Life Support segment is that area that we are seeing most of the competition and using most market share.

That was mainly because from the product portfolio management aspect we are – we do need some overall and they are certain product line that we are actually lacking in the overall competition. And secondly is that the patient monitor is trading behind it’s because of the lacking of the big purchase orders from the hospitals. From the IVD and the imaging line we believe that we will maintain those lines well and we believe that we are still in line with the overall markets.

Wang Jianxin

[Foreign language]

Alex Lung

Hi, thank you Mr. Wang. What Mr. Wang also added in the second half of the years, there are three reason that we believe that we’re actually drive the recovery of the China market. The first point is that at the mid and low-end products market segment, basically we have continuous efforts in broadening our distribution channel and also our key accounts personal in order to get closer to the market demand and because of this continuous investments we will see a more of the upside coming in for the later half of the year.

And the second point Mr. Wang mentioned if that based on the order on hand on the government tenders on any features and the Ultrasounds requirement. We believe that, those tender activities is going to a high level of activities is going to engaged in the second half and also we do see at the county level, hospital level they’re more of the modernization project going on. So it will require a increase in of this bigger government all the activities as well.

And then thirdly, from the IVD standpoint in the first half we did a lot ground work in terms of, installing our mid and high-end chemistry analyzers BS-800 and BS-2000 those initial investment we will be gradually seeing to payoff in the second half of the year, when those equipments starting to increase consumptions of deviations.

Wang Jianxin

[Foreign Language]

Alex Lung

Mr. Wang also mentioned that since July, we’re seeing a increasing hospital purchasing activities. So it is also a good sign to indicate that, of a overall China is returning to a stronger growth for the equipment area.

Cathy Gao

Thank you. Alex. Next questions please.

Operator

Thank you. Your next question comes from the line of Wei Du from Goldman Sachs. Please ask your question.

Wei Du – Goldman Sachs

Hey thanks for taking my questions. I guess I have two questions, I understand you do not disclose Zonare contribution to your total revenue, but I believe you said part of that in the ultra sound imaging section and also part of those are in the other income. I guess you know at least can you give us a breakdown between the other income just the ratio lets say whether its 50/50 or 30 over 70 on the total Zonare breakdown without giving out you know the Zonare contribution.

Second, I think I noticed the overall industry growth actually did slowdown in china from month-to-month, but I still notice industry growth is still above 15%. You are not the only one seeing the challenge in China for a lot of the major players are seeing the revenue slowdown.

However, we also noticed a number of sizable enterprises in the medical device industry are going up, so I guess my question is more on the general market side, are we actually seeing the smaller players catching up to actually continue to grab market share from the leading players.

It’s the same thing I think you know today's call obviously everybody is wondering how are we going to grow our China business especially in the second half. I understand you know Wang actually mentioned the fundamental reason related to the company, but I think we still want to hear more if you can give us more color on the market.

Alex Lung

Okay, thank you for the questions and let me address your second question to Mr. Wang and I’ll come back to you on the first question.

[Foreign language]

Wang Jianxin

[Foreign language]

Alex Lung

What Mr. Wang just mentioned that for China small company we understand that there may be some companies actually doing better. But both those actually mainly because their focus is on the cost too and below hospitals and the cost rate is not as big so they benefit from certain flexibility.

Wang Jianxin

[Foreign Language]

Alex Lung

Was Mr. Wang also mentioned that for big companies actually from what we understand is they are also having some impact in China as well so they may not be growing that well also. And Mr. Wang also mentioned in the previous explanations that why in the first half that we did not do as well as we wanted to be and also mentioned that in first half we have already did some ground work and hopefully that we will some of the result coming in to drive growth in the second half, but from the markets perspective as Mr. Wang mentioned because of the budget year and also of the increasing government activities we do believe that the second half market situation in China is going to be better than the first half.

And two ways in terms of your questions, I believe when you talk about the Zonare contributions from the service revenue. It is actually quite minimal compared to the other area that we have, so I don’t think it is a meaningful percentage contribution to that actually.

Cathy Gao

Thanks Alex. Next question please.

Operator

Thank you. Your next question comes from the line of Iris Wang from Credit Suisse. Please ask your question.

Iris Wang – Credit Suisse

Thank you for taking my questions. It sounds like your expectation about the tender market is pick up is better than what you expected in last quarter and I remember in the 1Q earnings call, you mentioned that it was due very uncertain to forecast of tender sales from the public purchase that government tender of the resume. So if the China situation becoming better, why are you still cutting down the topline growth, so what parts – what is the duration is maybe worse than you expected.

[Foreign Language]

Wang Jianxin

[Foreign Language]

Alex Lung

Let me respond in English, based on what the Mr. Wang just mentioned. So, Mr. Wang just said, what the China aspect even though we have mentioned about there are some outside from the market situations, but if you look at our own performance in the first half the growth rate is still very small.

And then, because of this in order to achieve a low teen kind of growth rate overall for the year the second half has grow more than 15% and this is a very big challenge for us for the change within enough space of time. On the other hand, for the international is also did not as perform as well as we originally signed up for. So the combined two results that’s why we also take down the overall guidance.

Cathy Gao

Thanks Alex, operator can we have the last question please.

Operator

Thank you, your next question is from the line of Jessica Li from Jefferies. You can ask the question.

Jessica Li – Jefferies & Company, Inc.

Good evening. Thank you for taking my questions I am going just ask a very quick question. You mentioned that the county level and private hospitals are important growth drivers for you going forward in China. So you can share with us what percentage of your China sales actually it comes from these hospitals now. Where do you see their contribution going in the next three to five years? Thank you?

Wang Jianxin

[Foreign language]

Alex Lung

Mr. Wang just mentioned that for the private hospital development in China is actually receiving a better high growth rate and their equipment installation is also growing very fast. So apart from the public hospital modification that drives the increase and the improvement demand. Actually private hospitals is growing very quickly as well and from Mindray ourselves we also has before our sales and marketing personnel in the private hospital side to meet the demand and the increasing interest in increasing demand from this private hospital group.

Cathy Gao

Thanks Alex.

Operator

Thank you. I’d now like to hand the conference back to Ms. Gao. Thank you and Please proceed.

Cathy Gao

Thank you operator and thank you everyone for participating in today’s call. As always, we appreciate your support of Mindray. The replay of today’s webcast will be available later today and our management team and the IR team will be available for questions. Thank you, again, for joining us and we look forward to speaking with you soon.

Operator

Thank you, ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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Source: Mindray Medical International's (MR) Q2 2014 Results - Earnings Call Transcript

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