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Executives

Cathy Gao – Manager, IR

Jie Liu – COO

Alex Lung – CFO

David Gibson – President, Mindray DS USA Inc.

Analysts

Jin Song Du – Credit Suisse

Ingrid Yin – Oppenheimer

Sean Wu – JP Morgan

Bin Li – Morgan Stanley

Shaojing Tong – Merrill Lynch

Richard Yeh – Citigroup

Jessica Y Li – CICC

Jack Hu – Deutsche Bank

Wei Du – Goldman Sachs

Katherine Lu – Cowen & Company

Anthony Petrone – Jefferies Group

Jason Mann – Barclays Capital

Mindray Medical International Limited (MR) Q4 2011 Earnings Call February 28, 2012 8:00 AM ET

Operator

Good morning, everyone. Thank you for standing by, and welcome to Mindray’s Fourth Quarter 2011 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 relay purposes. 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 conference, Ms. Cathy Gao, Mindray’s Manager of Investor Relations. Please proceed, Ms. Gao.

Cathy Gao

Thank you. Hello, everyone. Welcome to Mindray’s 2011 fourth quarter and full year earnings call. We released our financial results last night and they are now available on the company’s website on Newswire services. There will also be an archived webcast of this conference call on our Investor Relations website.

Joining today’s call are Mr. Xu Hang, our Chairman and Co-CEO; Mr. Li Xiting, our President and Co-CEO; Mr. Alex Lung, our Chief Financial Officer; Mr. Jie Liu, our Chief Operating Officer; Mr. Minghe Cheng, our Chief Strategic Officer; Mr. David Gibson, our President of North America Operations; and Ms. May Li, our Deputy Chief Financial Officer.

In a moment, Mr. Jie Liu will provide an update of the company’s operational performance. Mr. Alex Lung will review the detailed financial results as well as the company’s outlook for 2012. Mr. David Gibson will discuss Mindray’s operations in the North America region. After that, they 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 US 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 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 made and views expressed here today due to a variety of factors. A number of such risks and uncertainties and factors are outlined in our public filings with the SEC.

In particular, please refer to risk factors beginning on page four 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 applicable law.

I will now turn the call over to Mindray’s COO, Mr. Jie Liu.

Jie Liu

Thank you, Cathy. Good morning and good evening, ladies and gentlemen. Thank you for joining us today. In 2011, we celebrated the company’s 20th Anniversary with great achievements evolved from overall we achieved strong year-over-year revenue growth of 25% yen at US$880.7 million, by exceeding the sales target of at less 16% and we set out as of end of the year. Last year China and the emerging market remained the key growth drivers for our company with each achieving over 25% year-over-year growth. We also delivered high teens year-over-year growth in developed markets both in West Europe and in North American market.

Operationally, we focused on bringing sales and the service coverage to the next level. In domestic China, we continued our strategic sales reinforcement program to strength our distribution network on the developed or strategic countries. We’ve also invested in adding drug servicing care count to bid on relationships with the key hospital clients and also customer loyalty.

Based on highly demanded survey conducted by four independent third party on 2011 service quality performance succession among all medical device players in China also with quality satisfaction was ranked number one in general. In addition, the emerging markets we continued to build up the service and sales in the service platform in key countries. We also expanded to the key accounting and increased our presence in public sector. In developed markets, we gained wider market acceptance in the US with a few for our new product introductions and continued to gain market shares in West Europe.

We also put in place a new CRM system to improve sales service efficiency in key regions including China and the emerging markets. On the R&D and the product development front, we accelerated our product upgrades and the portfolio expansion. As a result, we exceeded our product development target and launched 13 new products into the market. We also made four acquisitions in China last year, which further strengths our company technology and the product offering including acquired products monitored to the number of marketed products have now exceeded 100.

I’ll now turn the call to Alex for financial details as well as some fourth quarter and the full year highlights.

Alex Lung

Thanks, Jie. In the fourth quarter, we have achieved a 25.2% year-over-year increase on the top line for a total of $264.1 million, leading our growth was China revenues, which increased 30.9% year0-over-year, primarily driven by our strong record of sales that made up more than 90% of China sales in the fourth quarter.

We are happy to see four consecutive quarters of robust sales growth in the domestic market. As a result of our sales reinforcement programs, private hospitals investment ramp ups and the government focus on the level of profits. International revenues were strong at $146.5 million, a 20.9% increase year-over-year growth. This represents 55.5% of our total sales.

Our good performance reflects the success of our increased investment in an international delivery channel. Despite the shortfall in the Middle East in the fourth quarter, the emerging markets continue to drive upwards. We also achieved high double-digit sales growth in the developed markets, of which the North America market did particularly well.

Non-GAAP gross margin was 54.7%, slightly lower than 54.2%, in the fourth quarter of 2010 and 55.5% in the third quarter. The sequential decrease was a result of change in our product mix and the appreciation of RMB. The year-over-year decrease was mainly due to the city construction tax and the education surcharge.

Our non-GAAP selling expenses were 19%, similar to last year’s level of 19.2%. This was higher than the third quarter 18%, because of seasonality and increased marketing activity.

Non-GAAP general and administrative expenses were 6.3%, lower than 8.5% in the year before and 8.9% in the third quarter. The sequential decrease was due to less FX fluctuation in this quarter and our hedging measures that helped to reduce the negative impact from our FX exposure.

Research and development continued to be our focus this past quarter. Our R&D spending we capitalized for the quarter was approximately $30 million or 11.3% of total net revenue. Our non-GAAP R&D expenses were 9.3% of total net revenues. Our non-GAAP operating margin was 20.1% and our non-GAAP net margin was 19.6% for the last first quarter.

EBITDA was $57.6 million, an 8.7% increase over the fourth quarter of 2010. Compared to the first quarter our DSO was reduced by five days to 66 days. Inventory days were reduced by 22 days to 78 days and cash conversion cycle was improved by three days to 108 days this quarter. This reflects our commitment to improve our working capital apart from the seasonal factors.

Going forward, we will continue to exercise cautious credit policies and enforce the insurance protection in our key markets worldwide. We remain highly confident that we have a healthy working capital position.

Now on to the full-year highlights, our net revenue grew 25.1% year-over-year to $880.7 million. Our non-GAAP net income grew 10.1% year-over-year to $178.8 million excluding the tax benefits for a year of 2011, which is in line with our financial guidance. We have achieved healthy margins. Our full year non-GAAP gross margin was 55.8% and our non-GAAP operating margin and non-GAAP net margins were both 21.2%.

In 2011, we generated strong net operating cash of $192.4 million, of which $96.4 million came from the fourth quarter. This was primarily because of improving operational efficiency and working capital management, especially in the inventory.

Our full year capital expenditure was around $90 million, higher than our initial target of $70 million to $80 million, partly due to the $7 million payment to Datascope as a result of a final agreement that we’ve reached in obtaining that marks.

To show our commitment to shareholders, the Board of Directors has declared a cash dividend on the ordinary shares of $0.40 per share based on our net income for a full year 2011. This is the sixth consecutive year that we have declared dividends following our IPO in 2006. In the next few years, the Board of Directors intends to put aside around 20% to 25% of the annual net income for dividends upon annual review.

I would now turn over the call to Jie, who will discuss our strategic initiatives and sales trends by region.

Jie Liu

Thanks, Alex. I would like to first discuss our big sales contributing regions and then finally emerging markets, down to West Europe. Now I’ll leave it to David to give us more color on North America. And as discussed, we had another robust quarter for our domestic sales. China sales growth was 30.9% year-over-year, such robust growth with a regard of strategic sales reinforcement program, which had prepared us to capture the rising opportunities.

Country level hospital in China are aware of Mindray traditions and it has a strongest flow with the government releasing various incentive program and funding to encourage the patient traffic in the country level hospitals. Over the last year and half, we saw a robust infrastructure upgrade and the device purchase activities. Our sales distribution network had allowed us to work more effectively in meeting rising demand from country level hospitals.

And our key accounting has been able to booking more big orders from the sizeable country hospitals. Our direct servicing platform, which was expanded last year has served a key role in improving key accounts satisfaction, and it will be an important driver for both top-line and bottom-line growth in China. Looking forward, we remain optimistic about overall operational environment in China.

Aging population and a continued organization are the two long-term factors, and we have significantly affected the shape of Chinese economy from the medical device market, in particular we’ll benefit. Based on this, we are confident that our company, as a domestic technology leader, is a strongest product portfolio and the service capabilities, catering to the mid and small-sized hospitals will continue to have great prospects.

As for our international sales, we recorded a strong growth of 20.9% in the first quarter, which again reflects the success of our investment to enhance sales channel overseas. Emerging markets were again a key growth driver with sales growth of more than 24%. Demand in overall emerging markets remained strong despite a political uncertainty in some regions. Throughout the last year, we fully expanded our key account coverage in the top emerging countries and enhanced our capability in public sector participation. These investments and efforts continue to payoff.

In the CIS region, sales are most tripled during the quarter, thanks to the growing demand and opportunity in the public sector. Sales in Africa also recorded strong double-digit growth despite political unreset there. As a result of our improved ground sales in the service and infrastructure.

In West Europe, we recorded our single-digit growth in sales. We remained committed to the region and were monitored often the CapEx situation closely and invested optimistically to gain share.

Now, let me give you a breakdown of the performance of our different segments in the first quarter. For patient monitors are need too high in the patient monitors, anesthesia machines, defibrillator, and surgical equipments were all gross contributors for the segment in the first quarter. We think these products will continue to help drive our sales in the future. Reagent sales continue to accelerate and now make up 32.1% of our total IVD sales versus 31% in third quarter. We expect the introduction of BC-6800 last year will help us accelerate reagent growth further in coming years.

For the ultrasound segment, color ultrasound products drove our sales growth in the first quarter. We also introduced DC-8 color ultrasound system towards the year end of 2011, which we expect will help us gaining a stronger foothold in higher-end segment in China and the emerging markets.

Now, I would like to invite Dave Gibson to elaborate on our North American operation.

David Gibson

Thank you, Jie. North America had another very strong quarter, with year-over-year overall sales growth of 23.2% and sequential growth of 25.1%. This is a sixth consecutive quarter with double-digit increases and we continue to grow much faster in the overall market.

The strength of Q4 was above our long-term trend and help us exceed our expectation and mid-teen growth rates for the year. The overall key to US growth has been our ability to match a very competitive product offering with targeted sales channels. And I will discuss each of these product segments in detail.

The ultrasound segment continues as our fastest growing product segment. Our strategy of targeted direct sales that leverage the existing patient monitoring sales team has produced great results. The portable ultrasound products continue to compete very well based on image quality against much larger players and we continue to gain share. We also continue to support and expand our indirect distribution for outpatient settings with particular emphasis this past quarter on the OB market. For 2012, we will continue to ramp up our direct sales team for the rapidly growing ultrasound segment and anesthesia and emergency medicine.

In the monitoring products segment, the award winning V Series monitoring platform along with our DPM range of monitors allows us to compete effectively across the border range of hospitals than ever before. With the monitoring line, we have now been able to double our served market in North America since the merger with Datascope in 2008.

In the operating suite segment, the A-Series is the cornerstone of our multimodality sales strategy along with procedural ultrasound and patient monitoring. The A5 continue to generate enthusiasm among customers including the establishment of reference at university hospitals. We are very pleased with the A5 based on both the market acceptance and it’s an example of ability to rapidly develop market specific products with our global design and engineering teams.

With the introduction of the new products such as with the M7, the V series and the A5, or gross margin improved steadily over the last three years with more products compete on their performance and customer preference rather than price, we been able to gain share without sacrificing margins.

Going forward, with the goal of delivering low teen growth rate, we will continue to invest in the marketing initiatives in our direct sales channel. Alex will now talk more about the guidance and our plans for this year.

Alex Lung

Thanks, David. As we mentioned to investors in January, we are maintain our guidance of more than 18% year-over-year sales growth for year 2012.

We expect China to be the best, due to our strong competitive position and favorable private and government spending trend in the healthcare industry. In emerging market, we see both private and public opportunities, although we do foresee head wins in regions that are politically unstable.

For developed markets, we expect to continue our steady market share gain in the US, based on our product introductions and direct sales efforts. While we expect some pressure on our sales in Western Europe as a result of the economic uncertainty.

Despite, the rising costs and RMB appreciation in China, we expect our gross margin to stabilize for the year, as we continue to enhance the efficiency. Our research and development spending goal remains at about 10% of our revenues. We will focus our R&D investment on technology and product development as well as improving efficiency.

We intend to launch between 7 to 10 year product this year across all three product lines. In terms of the other trends, we expect operating efficiency to improve in China as we have mostly finished some of the one-time key investments such as certain sales and service cost as well as the CRM system. However, we plan to continue to strengthen our international sales, service and other support infrastructure especially in the emerging markets. We believe that this investment is necessary for Mindray to establish a strong position in the global market place in long run.

Based on these considerations, we expect our overall operating margins for a year to stay at similar levels. For other non-operating figures, we would like to point out that some items in the calculation of the net income such as government subsidies and interest income are difficult for us to predict. Having said that, consistent with our core practice we will provide you with our non-GAAP net income guidance.

Excluding any tax benefits and assuming a corporate income rate of 15% of our Shenzhen subsidiary, we currently project this non-GAAP net income to grow more than 13% year-over-year. Let me just emphasize again that profitability will remain a big focus for our company and as mentioned, we are confident that our operating performance will stay strong despite the challenging macro factors.

Lastly, we expect capital expenditure to be around $90 million for the year 2012, this $90 million does not include potential merger and acquisition expenditure. We will continue to actively seek external opportunities via M&A and technology cooperation that could bring complimentary technology of products to our company.

I would like to turn the call back to Cathy now.

Cathy Gao

Thanks Alex. Before opening the lines, please be noted that each person can only ask one question. Now, let’s open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jin Song Du with Credit Suisse.

Jin Song Du – Credit Suisse

Hi. Thank you for asking the question. Just question regarding the guidance and emerging trends, so given your earnings guidance of at least 13% increase year-over-year, what will be your assumptions for the gross margin and the EBIT margin for 2012?

Alex Lung

Hi. Thank you Jing song. This is Alex. As I mentioned just now in this call from the guidance standpoint, we expect that gross margin to be in a similar level to be stable or the EBIT margin, it’ll be also at the similar level at 2011.

Operator

Your next is from Ingrid Yin with Oppenheimer.

Ingrid Yin – Oppenheimer

Hi. My question is your guidance for the net income growth. It’s higher than 13%, and also Alex mentioned earlier that operating margin will stay similar, does that mean you’re assuming operating income will grow similarly with revenue growth rate? And did you – so what kind of tax benefit assumption did you build in this guidance?

Jie Liu

Okay. Hi, thank you Ingrid. For – I mean, I think the key point I just pointed out is that for our, in our guidance, we actually expect the operating margin to be at a similar level as 2011. In terms of the tax benefit, well, you know that in Shenzhen in 2010, we obtained a key software enterprise award. In year 2011, we also have very good confidence that we may also get the award as well. But consistent with our previous guidance, we’ve excluded that key software award tax benefit impact in arriving our guidance. So, the 13% is also assuming, excluding that tax benefit.

Operator

Your next question is from Sean Wu with JP Morgan.

Sean Wu – JP Morgan

Hello, Alex. Maybe I am just beating a dead horse here. So, you have the operating margin growth stay same. So opening publish grow along side with the top line. So, what below that opening line makes you confident that the net income trend below or at top line, I know there is some like particularly, when have seen the same gross margin or profit margin, you have the 380 rebate in top line?

Alex Lung

Hi, Sean. Thank you for the question. Let me just answer your first question first, on operating income expenses. Our non-operating income and expenses comprised a number of things, the first is the government subsidy, which is unpredictable in terms of the occurrence and secondly is our biggest income is actually the interest income in 2011 and you may aware the interest income that we receive are mostly from China and the market situation actually changes all the time.

So, I mean, in our guidance in 2012, we believe that because of our non-operating income stream are mainly from these two factors, which are difficult to be certain. So, that’s why when you compare the net margin growth of 13%, we have actually considered the non-operating income may not be the same level or may not be in the same growth rate as our top-line or the EBIT or the operating margin line in 2012. And the second question is the VAT, the software VAT refund, we actually record as the revenue.

Operator

Your next question from Bin Li with Morgan Stanley.

Bin Li – Morgan Stanley

Yes. Hi, everyone. I want to ask your top-line guidance that you – obviously you’re guiding for more than 18%. It sounds to me you’re more bullish for the China revenue than international revenue. And can you explain the difference of your assumption and the guidance for China and for the international business? And on the same line, maybe not much on a guidance, bottom line guidance per say but outlook for your working capital and operating cash flow.

Your cash flow improved a lot during the quarter and so was your working capital for this quarter, but if I look at AR days at the end of 2011, it was still higher than end of 2010. So, my question is in the long run, not much in the quarter or next two quarters but more thinking about next year or next few years, just conceptually will your AR days keeping going up or become stable or even improve, come down next year.

Jie Liu

Hi Bin, this is Jie. May be just, I just talk about some top line assumptions and down there data too has the remaining part of the question. The China in the emerging markets, we were actually projects there, the subsidy is more than 20%. For the further North America market, the low teen and the West Europe, it is single digit. That’s our assumption behind and that’s also the understanding so far we got and also reflect our past performance and our forward forecast for the different regions in ‘12.

David Gibson

Okay, let me answer your question on the working capital side, actually the working capital, the way we look at is more looking at the improvement on the overall cash conversion cash, of course the AR and inventory also play a major role – major impact on that. You were seeing this quarter we have quite a good improvement on the overall cash conversion cycle and that was actually driven mostly from the inventory-based reductions. The overall ARD, they have increased, but we believe that it is mostly as a result of a continuous expansion of our top-line.

We strongly believe that in terms of managing the accounts receivable, the ARD is still within our expectation, so it’s not actually completely offline from our normal business. But we do anticipate that because of the expansion and the US growth in the direct sales market in the developed region and also expansion in the international region, it’ll actually put some pressure of increasing the receivable days, as our return of the increasing sales growth of that region, I mean these are the areas that we will put a close monitor on it and actively monitoring the overall turnover days and also with the cash conversion cycle.

Operator

Your next question comes from Shaojing Tong with Merrill Lynch.

Shaojing Tong – Merrill Lynch

Hi. Thanks for taking my question. Just I want to know what’s the currency assumptions that you put in your 2012 for revenue and the bottom-line guidance. And also on the fourth quarter numbers, generally spending as percentage of sales that dropped significantly, can you give some clarity on that? Thank you.

Jie Liu

Hi. Thank you for the question. For the currency assumption in year 2012 we expect the US dollar to RMB to be at 6.3 and the Euro is on 1.3. Euro to US dollar, it is 1.3.

David Gibson

1.3, sorry. Okay, with regard to the second question on the first quarter G&A spending actually if you compare to the first quarter performance as a percentage of revenue has come down and if I just recall our first quarter, we have expected a $5.3 million total exchange loss and part of this is actually related to the Euro as a result of the debt crisis. In the fourth quarter we have seen the overall exchange loss has reduced and secondly in the first quarter we have also taken out some forward contract to actively manage our FX exposure that overall helped us to reduce significantly in our exchange loss in Q4, that resulted in the reduction in percentage of total G&A as a percentage of revenue.

Operator

The next question comes from Richard Yeh with Citigroup.

Richard Yeh – Citigroup

Thanks for taking my question. I was just wondering if you can talk to us about the selling expenses ratio, we are hoping actually it was going to come down, but it actually went up in the quarter and also on the G&A actually came down pretty notably. So, can you give us a sense and how should we think about – just kind of how we should think about SG&A ratio as a percentage of sales and also how we should think about operating leverage and what kind of expectation we should have for 2012? And also can you talk about some market dynamics in the country level hospital? What kind of opportunities are we going to see on which segment – on each of the business segments? Thanks.

David Gibson

Hi, Richard. Thank you for the question. May be let me just try to answer you the finance related question. I already shared with you, responded to you on the market dynamics. For the selling expenses ratio, it has increased sequentially; that is mostly related to more health activity and marketing activity going on in fourth quarter. And in particular, there are major marketing activities also happened in China, also happened in Europe. That also is a seasonal effect that we spend more to execute and participate in those marketing activity.

On the SG&A side, the sequential reduction as compared to Q3, I mentioned just now, in Q3 we have recorded a high FX loss as a result of the European debt issue and in this quarter the FX itself is more – the euro exchange rate has also – the fluctuation has reduced and we have also taken out forward contract to manage our exchange exposure.

With regard to the – you mentioned about operating leverage in 2012. In our comment just now, we do expect the operating margin to be at the similar level in 2012. So in that case, the operating margin should be at a similar level. So, I’ll turn the call to Jie with regards to the market dynamics.

Jie Liu

Hi. This is Jie. Regarding to the country level hospitals in China, again the focus in the past year and a half, the goal on the hospital reform, the goal of this is to keep the patients in the country level hospitals to make sure not so many people gather in the big hospitals.

To this long-term goal, so whether the company or the country actually invest on the country level hospitals, firstly in the beauty – in the infrastructure to get another new base, and the first round of this kind of the – after they finish the building construction, the first round of (inaudible) is coming from the patient monitor, operating theater and that’s coming from the anesthetic machines, surgical lights, surgical equipments, something like that.

Gradually, the target of the building up the new – the infrastructure is to attract the more patients. When the patient traffic get more patients there, the hospital needs more ultrasound machines and also more IVD, in-vitro diagnostics products. So they gradually move to the ultrasound and diagnostic products. So that’s sequentially to improve. The first stage is still in the in the novel kind of stage, it’s still we think in the early stage of the – this kind of trade. So, it’s now is on the hospital construction stage. Some hospitals already have finished their construction; some hospitals are still in the process of their building their new bed for their hospitals.

And then further, I think taking this opportunity, I may add something other on the emerging markets. Emerging market is a very similar situation to this, as all the government in different emerging markets with the economies good, they want to get more new hospitals to meet the increased patient demand for better healthcare and also to improve their quality of healthcare. That’s a long-term trend for the emerging countries. And that’s also the requirement from the patient’s side in the emerging markets. Also, may be David, our North America operations, David Gibson may add some other color on the North American situation. David?

David Gibson

Yeah, I think the market dynamic in North America is at this point fairly stable. And we’re in another election cycle. But, I think the expectation is that we know what lays out in front of us in the hospitals or knowing what’s coming in healthcare reform and the chances of appeal or major changes are probably fairly minor. And we’re in a low growth environment. Going forward, we do see increased investment in the IT arena right now and as that goes down and CapEx stays the same in the hospitals, the imaging modalities and monitoring some of other may pickup. The real goal for us with construction relatively stable.

No real market growth, it’s really about shared gain and the competitive positioning and as I mentioned in the prepared remarks about being compete on more than just price points, but with image quality and customer preference for the capabilities in the ergonomics of the machine. And that’s positioning us well. So, stable markets, slow growth in the market on the order of mid single digits and our goals are to exceed those growth rates and take share.

Operator

Your next question is from Jessica Y. Li with CICC.

Jessica Y Li – CICC

Hello, thank you for taking my question. First of all I noticed that your R&D expenditure as percentage of your total sales increased in Q4 and I wonder why that is? Is it because you include M&A of various costs to your R&D expenses? Second question is with regard to your strategy on in terms of continued to pursue acquisitions as one of your growth strategy. As multinationals are also increasingly working to acquire products and companies in China, how do you actually see yourself backing up against your multinational competitors on the M&A front? Thank you.

Alex Lung

Hi, thank you Jessica. This is Alex. With regard to the question on the R&D actually our R&D spending for fourth quarter also is in line with our company policy, is around 10%. Actually for the fourth quarter, our R&D expenditure as a percentage of revenue has increased as compared to the previous quarter, it was mainly as a result of the amount that you’ve capitalized under the US accounting principle has reduced in this quarter. Let me just correct myself, the R&D spending for Q4 is actually 11.3% of the net profit for the quarter.

With regards to your second question on acquisition strategy, we’ve communicated in the path that we’ve three acquisition criterias. The first is basically the business and product that is complementary to our existing three product lines. And it can also leverage our existing platform to further unlock synergy.

The second criteria that is technology that is complementary to our existing three product line as well. That can shorten our time to market or to help us to deliver product at a higher level of technology segment. And the third is basically business tax can demonstrate high growth and high profitability. So, these are the three criterias.

We’re actively looking at acquisition initiatives both in China and also in the international market. In the past year 2011, we managed to complete four acquisitions. We understand that the multinational players are also very acquisitive. So, I think, in this market, organic growth is just one factor, it is also quite important for Mindray. But it’s also for the acquisition, we will also be very active and we’ll not be behind the multinational player as well.

Operator

Your next question is from Jack Hu with Deutsche Bank.

Jack Hu – Deutsche Bank

Thank you for taking the question. Congratulations for a strong quarter. So, right after the Chinese New Year there are five provinces that started the tender for high-end medical consumables including pacemaker stent and orthopedics. Out of these five provinces, the three provinces including Guangdong, Chongqing and Hunan are using a double envelope tender system in the Mongolia and the (inaudible). So we are looking at the quality criteria that’s a high need seeder, the industry leaders, but on pricing it seems the policy encourages price competition.

So, I understand that our lease policy has nothing to do with Mindray for now because it’s only includes high end medical consumables. My question is, if the centralized tenders include equipment and if leasing happens to equipment, I want to know what your risk and mitigation strategies are. This is my first question.

My second question is your return on investment throughout three regions including China, the emerging market and the developed market because in your prepared remarks you mentioned that you are going to prioritize your investment in the emerging market. So, please make a comment on that? Thank you.

Jie Liu

Hi, Jack this is Jie. Regarding the question of centralized tender for the high end medical consumables, I think that’s not new for the market. Five or six years ago, the eight province’s centralized purchasing, that tender already began for the optics. So, there are – these kinds of initiatives a few years ago didn’t affect the manufacturers too much. Actually, if all the tenders go to their, centralized, it will help the leading domestic companies based on all the current information we’ve got now.

Firstly the market needs more cost effective products to meet their – not only the patient needs, but also the government needs. Another kind is for their twelve five-year plan, the central – the Chinese government wants to encourage the local manufacturers in the different industries. So, for their centralized tender, they’re gradually moving to more favorable to domestic companies, especially for the leading domestic companies.

If these, kind of move to the some of the Mindray products, we are, first our product range is very diversified, wide range of products; only some of them, effect may not be that big impact of us. The second one is, we are pretty large of the depends coming from outside the China, actually, almost 58% of the revenue coming from outside of China, that’s the beauty of the Mindray business model. Any risk from China later, but as you said, we can adjust our investment focus to gain other areas. But now in the current stage, China is still the strongest growth area and it represents the best opportunity for the investment return.

Operator

Your next question is from the Wei Du with Goldman Sachs.

Wei Du – Goldman Sachs

Hi. The question would be on the IVD sub-segment, you mentioned that the reagent has already accounted for 32% or 31% in 4Q ‘11. I’d like to know that, could you give us a – like a segment breakdown of the growth for the reagent and for equipment? And also, what is the, like, total gross margin trend for these two parts? Thank you.

David Gibson

We don’t disclose exact number of the reagents or the equipment side, but what I can say is the reagent is much faster than the equipment side. Our average is more than 20% but the reagent is much faster. That’s it.

Operator

Your next question is from Katherine Lu with Cowen & Company.

Katherine Lu – Cowen & Company

Hi. Thank you for taking my question. My first question is a follow-up regarding the country level hospital spending. We noticed that recently Fujian Province, the cuts of healthcare service procedure price on CTMIs and color ultrasound by 13% to 15%. I’d like to get your thoughts whether or not that’s going to impact manufacture margin eventually maybe in the long-run? And second is, I’m wondering if you can provide some qualitative description regarding the quarterly net income growth trend through 2012. Is it going to be evenly distributed throughout the year or it’s going to second half – to be second half focused? Thank you.

Jie Liu

Hi. This is Jie. I will answer the first part of the question, second part I’ll leave to the Alex. For the reversal fee for the CTMI these kinds of cutting, I think that, that’s a right structure for the government. They’ll have to reduce cost of their healthcare. And if this move to this direction, gradually moving down a little bit, I think that will hurt the multinational companies.

For the leading companies – domestic companies like Mindray, we’re more in the cost effective solutions, I think, to further retaining on their find the new equipment that’ll be there. The issue where further all of the hospital purchasing, the Tier 1 hospital, especially the class 3 hospital in China more considering what kind of product they want to buy. They only buy the cost effective product, Mindray product is a high-quality and low cost effective, better return on the investments. This kind of a move actually will help Mindray to buildup the market share in the Tier 1 hospital – class 3 hospitals.

Alex Lung

Hi, Katherine. This is Alex. Hi, with regard to the net income growth trend, Mindray also demonstrate seasonality in fact, so that should be – the margin growth trend should improve gradually from the beginning of the year to the end of the year.

Operator

The next question is from Anthony Petrone and Jefferies Group.

Anthony Petrone – Jefferies Group

Thanks. One for – a couple for Alex. Alex, can you elaborate a little bit on the R&D increase just mentioned a little while ago and the changes in the accounting policies there for R&D capitalization and if there is any back reporting changes that will need to be recognized as we go forward? And then may be one for Jie and David, is the company experiencing any benefit from the Novation agreement for the M5 and M7 Ultrasound systems in the current Q and if not what do you expect that could, how do you expect that to develop throughout this year? Thanks.

Alex Lung

Hi, thanks for the question, this is Alex. I will answer the first part of the question may be let me clarify just now. The R&D increase in Q4 that is mainly the cause under the US accounting principles, the company can only capitalize the portion in relation to software development actual if it is depending on the progress of our individual project. So, in this quarter, we have less work that is actually spent on software development. As such we have less capitalization.

I mentioned just now our R&D spending for the fourth quarter is around 11.3%, which is still in line with our overall spending trend. We did not do any change in accounting policy in terms of R&D capitalization and we did not actually do any regional active adjustment.

Jie Liu

Hi, just adding some color on the innovation of the products and imaging is M5, M7 are a good example of the innovation, how the Mindray can innovate in their industry to really create a value for customers and also helps the company get up to the leading position in their hand carried ultrasound segment. Also it’s not only SCO product such as M7 and M5, but also our products such as V0 product to get a very good market acceptance in the North America market and also this kind of the innovation really helped change the image of the company from the market follower to our market innovation in the industry. It really helped Mindray become the leading company in the near future in the patient monitor segment; that’s not all the story.

We have a lot of new innovations in different segments. I can – probably can tell you more on that when we have more time. Actually the company now is focusing more on the high quality and also a further more innovation to really deliver the value to the customers. It’s not only the price as our North America President, David Gibson pointed out earlier, we are not only – it is not pure compete on the price, but also compete on the quality and innovation as lot of examples demonstrated Mindray’s laser truly innovative company that we’re bringing lot of value to our customers.

Operator

Your next...

David Gibson

I think, just – I’m sorry, yeah, I think just to add to what Jie said there and I think, there was also a question on the Novation contract, just to address those two points real quick. With the innovation and accessibility, one of the goals is to design products that are accessible not just from a perspective of affordability, but also from the easy use, lower head training requirements and in lot of places in the world, that means that more people can use it and therefore deliver care and the less time focused on using machine, digging through menus or with complexity, allows you to spend time with your patient.

And that’s really one of the key design goals for everything we do, is how do you make it so that more people can receive care and those that receive care get better care because the clinician is able to spend more time with them; not becoming an x-ray machine operator. And that’s one the key areas of innovation that we’ve been pushing forward with.

In terms of the question on Novation contract with the M5 and M7, it’s a significant milestone in gaining credibility with the products as a new market entrant. We’ve climbed up into the top-10 market share now in ultrasound in the US which is a real significant milestone. We’ve made it out the other category in the market share reports we now have our own mind. But, the Novation contract enables us to have that extra stamp of credibility and continue the growth story and go forward with it.

It allows us to continue – I don’t think from Novation on its own, we see that as big direct sales that we’re not assigning a block of sales to that Novation contract in particular. But, it makes the sales we are doing easier and allows us to continue the growth rate. We’re continuing to push with acceptance with other GPOs and we think we will have some good stories continuing through the rest of this year on our non-monitoring products in the US with the other GPOs.

Operator

Your next question comes from Jason Mann with Barclays Capital.

Jason Mann – Barclays Capital

Thank you. So, building on that theme. And first off, congratulations on growing top line 25% this year. So, into those story, looking ahead at 2012, some of our channel check – kind of suggests that price competition has intensified – particularly among the GPOs and even increasing some of the high-end international markets. So I’m curious how you see the competitive dynamics for 2012 and specifically how you split your growth between ASP versus volume growth? Thank you.

David Gibson

This sounds like a very heavily North American-oriented comment there with the GPOs question, but I think just to answer that real quick from the way we perceive it, the price competition intensified, I think, largely due to us producing some very competitive products that we introduced at some great price points. And we have seen more price matching in the second half of 2011 than we did in the previous quarters, as we gain legitimately.

And – so we see our major players in the market having to come down and match where we’re at. It hasn’t had the effect and we haven’t maintained a price gap on the way down. If they know we’re participating in an opportunity, they can come, match price on that particular opportunity, the next opportunity they’ll go into – they’ll keep the price up. And that’s the nature of the way the price competition has been.

And we haven’t been continually dropping our prices as a result and we’ve got some advantages where we had a very good point in the marketplace right now with regards to that. So we see right now, our price declines being consistent with what they’ve been in the last couple of years, and the majority of our growth coming from unit gains with some moderate price decline modeled in that for the US And this is a fairly similar story around the world and the high-end markets.

The only difference being as you get into a lot of the economic factors in individual countries, in individual regions, like we have the Western Europe, the story changes so much from country-to-country but the overall region is struggling that the macroeconomic factors overwhelm what we’re talking about here in the individual either monitoring or ultrasound or market segments where there is some price decline happening.

Operator

The next question is from Jin Song Du with Credit Suisse.

Jin Song Du – Credit Suisse

Thank you. Once again on my follow-up question. Regarding the acquisitions you mentioned earlier. Did you – I don’t think you talked about it before, but could you just remind us what will be your focus and also what will be the maximum size of those acquisitions?

Jie Liu

Hi, Jin Song. With regard to the acquisition side, it is relative to Mindray as well and also we’re, I mean, depending on what kind of acquisitions targeted. I think in terms of – in general, I think for our sites day, within our cash reserves level, I think we are comfortable to acquire a company in the range – in a region of $100 million.

Operator

I’ll now turn the call back over to Cathy Gao for closing remarks.

Cathy Gao

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

Operator

Thank you for joining today’s conference call. You may now disconnect.

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