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Mindray Medical International Limited (NYSE:MR)

Q2 2012 Earnings Call

August 7, 2012 8:00 a.m. ET

Executives

Cathy Gao - Manager of Investor Relations

Jie Liu - COO

David Gibson - President

Alex Lung - CFO

Analysts

Bin Li - Morgan Stanley

Richard Yeh – Citigroup

Wei Du - Goldman Sachs

Jessica Li – CICC

Ingrid Yin – Oppenheimer

Jack Hu - Deutsche Bank

Katherine Lu - Cowen and Company

Shaojing Tong - Bank of America/Merrill Lynch

Sean Wu – JPMorgan

Hao Zhou - Piper Jaffray

Operator

Good morning everyone, thank you for standing by and welcome to Mindray’s Second Quarter 2012 Earnings Conference Call. (Operator Instructions) 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. Hi, everyone. Welcome to Mindray's 2012 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. Xu Hang, our Chairman and the Co-CEO; Mr. Li Xiting, our President and the Co-CEO; Mr. Alex Lung, our Chief Financial Officer; Mr. Jie Liu, our Chief Operating 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. David Gibson will discuss Mindray's operations in the North America region. Mr. Alex Lung will review the detailed financial results as well as the company’s outlook for 2012. 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 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 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 and uncertainties, and 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 filed with the SEC on April 30, 2012. 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. In the second quarter despite the challenging environment in various international regions, we managed to achieve very solid landmarks in terms of our revenues, profits and operating cash flow. Overall we continued our sales momentum in the last few quarters and achieved year-over-year revenue growth of 23.3% at $267.8 million.

Our non-GAAP gross margin was 57.8% which improved both from a sequential and year-over-year basis. We delivered solid non-GAAP net income growth of 19.4%. Net operating cash flow was also strong. We added 1.6% year-over-year growth.

For the past quarter, China remained the key growth driver for our company. China sales maintained its robust strength and recorded 27.1% year-over-year growth of which drug sales represented more than 97% of total domestic sales. Total international sales also rose 20.5% over the same period last year. Both emerging markets and developed markets achieved good sales growth of 21.1% and 19.7% year-over-year respectively.

These are very encouraging numbers particularly given the volatile developed markets have been over the past year. To clarify, developed markets represent the North America and Western European countries. Emerging markets represent all the countries and in all the regions except for China and developed markets.

In regard to new products, we have introduced five so far this year and are well on track to deliver our target of launching 7 to 10 products. These new launches include the latest high speed bio-chemistry analyser, the BS-2000, the BS470 biochemistry analyser and the BC-5390, hematology analyser, the fully automatic urine sedimentation analyser, the EH-2050B Plus and the new portable diagnostic color ultrasound system, the Z6. These new products continue to highlight our mission in making better healthcare solution, more accessible to customers.

The BS-2000 biochemistry analyzer is most high end biochemistry analyser we have introduced so far. It is designed to provide a scalable and automatic solution to hospital and the clinics with the high sample volume. The EH-2050B Plus urine sedimentation analyser is a result of us successfully integrating high sensor technology since our acquisition of the company a year ago. The equipment provides comprehensive urine analysis for patients at least compatible with number of other different biochemistry analyzers to form a integrated urine analysis report.

Finally, the Z6 color ultrasound system incorporates the existing Mindray color ultrasound technology into a portable and cost-effective product and a product that provides excellent image quality. We had a fourfold quarter partially for our IVD segment in terms of sales growth, reagent contribution, new product launch and the post acquisition integration efforts.

In this quarter IVD segment achieved 31.1% year-over-year growth rate. Reagent revenue growth accelerated contributing 34.4% to the total IVD sales this quarter compared to 28.4% in the same period last year, and 31.5% in the prior quarter this year. This is largely due to the contribution from equipment and reagent bundle sales as a model, as well as new product contribution from the BS-800 and BC-6800, with more new product launch that we mentioned earlier along with the continued integration efforts from the other acquired – for our lab solutions, we are very optimistic about the future growth prospects of our reagents as well as overall IVD segment.

In addition, the recent completion of the orthopedics acquisition in China enabled us to gain immediate access to the new fast-growing consumable market segment. We anticipate to grow this business through our strong capital position, large scale operation experience and worldwide presence. We will give you more updates as we move forward. Overall we expect to continue to totally deploy our strong cash position, actively seek attractive external opportunity worldwide.

Now let’s discuss the company’s performance and dynamics by geography and segment respectively. First is our domestic sales. We continue to deliver greater result based on favourable demand and our efforts to capture market opportunities. As we have discussed in the past, the Chinese government intends to increase patient traffic to country level hospital and as a result, we continue to see robust infrastructure upgrades and derive purchasing activity in the segment of this market.

We expect the favorable spending trend to continue. Our key account team strategy has proven to work well and we expect our team to continue in this direction. Longer term we expect to continue to invest in and expanding the drug service platform in order to be have relationship with key hospital clients and enforce the customer loyalty.

The healthcare sector remains a top priority for the government in the private investment. We believe that we continue to benefit from this strength. For the long run, we also expect to the demand of healthcare product and service in China to continue to accelerate based on trends such as growing aging population, expansion of health insurance coverage, increasing level of reimbursement, urbanization, and the changing lifestyle. We remain optimistic about the operating environment in the domestic market.

Moving on to our international sales, we did well in both in the emerging market and developed market in the second quarter. In the emerging markets our investment efforts and expanding our key account coverage in top sales countries and enhancing our capability in public sector participation helped us drive our top line sales growth. We did particularly well in the CIS region, Asia-Pacific and Africa, each growing by more than 30% year-over-year.

Latin America also achieved over 25% growth year over year. Despite the unrest in Africa, we managed to deliver strong results thanks to our improved growing sales in the service infrastructure. We were more impacted in the Middle East where we experienced negative growth during the quarter, primarily due to the shortfall of government centralized procurement activity in Turkey.

Developed markets grew close to 20% year-over-year of which Western Europe growth posted a mid-teen growth and North America sales increased by over 20%. David will provide more information on the North America operations. In Western Europe, new product launch, increased drug sales and a stronger brand awareness were the primary reason for our good performance despite the severe economic (indiscernible) in the region. In the long run, we believe that Mindray is in good position based on our strong product performance, product offering, comprehensive sales and service platform as well as increasing brand recognition.

However considering the current market outlook, we remain cautious and we will monitor the hospital CapEx situation closely. And we expect to continue to invest in order to gain market share.

Now let me give you a breakdown of the performance of different segments in the second quarter. For our patient monitor and life support line, our efforts in launching new series of iPM (indiscernible), in addition defibrillators and anesthesia machine all contributed to the growth of this segment in the second quarter. We believe that these products will continue to help drive our sales growth in the near future.

Reagent sales continue to accelerate and make up 34.4% of our IVD sales versus 31.5% in the first-quarter. The reagent, the five-part hematology analyzer also contributed to an overall IVD sales growth. We expect the BC6800 and the recent introduction of the BS2000 to help us into the mid to high end markets and accelerates reagent growth further in the coming years. The BC6800 is our most sophisticated hematology system with high processing speed. As mentioned previously, the BS2000 is our fastest biochemistry analyser.

For the MRI segment, the color ultrasound products were growth drivers. As mentioned earlier, we recently launched the portable color system Z6. We believe that Z6, TCAs and then upcoming economic EDR to be introduced this year will help us gain a stronger footprint in China and other emerging markets.

Now I would like to invite David to give us more color on North America operations.

David Gibson

Thank you, Jie. North America had a strong quarter with a year over year overall sales growth of 22.5%. We maintained our double digit growth trend and continue to grow much faster than the overall market. In the second quarter NAC’s machines and ultrasound in the direct channels were the growth drivers for our strong performance.

Recently we've been selected by HealthTrust Purchasing Group as a provider of both NAC’s equipment and portable ultrasound for their members. This opens up over 1400 acute care facilities as well as over 10,000 ambulatory care centers, the physician practices and alternate care sites. Our A series anesthesia system and M series ultrasound can now be offered to all HealthTrust members.

We see this contract as an endorsement of Mindray as the strong player in the U.S. market and we expect to drive our overall sales growth. We've already benefitted from this contract in Q2 with several anesthesia systems installed. For ultrasound our direct channel delivered another excellent quarter. Revenue per direct ultrasound salesperson continues to rise, continue our plan to expand served markets we recently introduced to DCA which provides a higher performance and rounds out our offering for our outpatient.

Along with the DC7, DC3, M7, M7, we believe we now have the ability to offer solution to a much larger portion of the market than ever before. The M7 and M5 continued to do very well and anesthesia and emergency medicine segments earn praise from customers for both the imaging performance and reliability.

The United States supreme court recently upheld the US healthcare reform law. However hospitals continue to have a cautious stance based on the overall economic uncertainty. We continue to view the U.S. capital equipment market is relatively stable with growth in low single digits. Our plans are based on gaining share and not relying on market growth, we feel comfortable with the current environment.

We reorganized and expanded our sales team in the first quarter in order to broaden the opportunities we cover in U.S. hospitals surgery centers. We’ve already seen some positive impact in the past quarter and we believe that with the new sales structure in place and our suite of products, we continue to deliver the low teen growth rates with a focus on expanding our market share while improving the operating margins for the region.

Now I will pass the call to Alex to discuss detailed financial results as well as the company’s outlook for 2012.

Alex Lung

Thanks David. In the second quarter, we achieved a 23.3% year-over-year increase on the topline for a total of $267. 8 million. Leading our growth was China revenue of $115.3 million which increased 27.1% year-over-year primarily driven by our strong performance in the mid-end market segment. We are happy to see five consecutive quarters of over 25% sales growth in the domestic market, thanks to our stringent sales and distribution network as well as favorable private and government investment involvement.

International revenues were also strong at $152.5 million, a 20.5% year-over-year growth. This represents 57% of our total sales. Our good performance continues to reflect the success of our increased investment in the international delivery channel. As Jie mentioned, both emerging markets and developed markets did well this quarter.

Non-GAAP gross margin was 57.8%, slightly higher than 57.6% in the second quarter of 2011 and 55.5% in the first quarter. The year over year increase reflects the improved operational efficiency and lower material costs. The sequential increase was due to change in our product mix and also lower raw material costs on top of seasonality factors.

Our non-GAAP selling expenses were 17%, lower than last year’s level of 17.7% and the first quarter’s at 17.5%. This was primarily due to positive impact of sales restructuring program. Non-GAAP general and administrative expenses were 8.7%, higher than 7.7% in the year before and the same as the first quarter.

The year-over-year increase was mainly because of higher accounts receivable for patients and compliance costs. Our non-GAAP R&D expenses were 8.4% of total net revenues compared to 8% in the second quarter of 2011 and lower than 10.7% in the previous quarter. This drop was mainly due to lower percentage of MPI project expense as we had higher sales versus last year.

Our non-GAAP operating margin was 23.7% compared to 24.2% in the same period last year and 18.5% in the first quarter. Our non-GAAP net margin was 22.2% for the second quarter versus 22.9% in the second quarter of last year and up from 18.4% in the prior quarter.

Regarding tax benefits related to the national key software enterprise status, we have not yet received approval from the PRC tax authority for the 2011 and thus have not recorded any tax benefits in the first half of 2012. As a reminder, we recognized $7.6 million of such tax benefits in the first quarter of 2011. Due to the change in the review timing, from once year to once every two years, we cannot determine at this time when the tax authority will release the list of companies that are eligible for the status. Upon notice, the potential benefits will be included in our financial statements, which will allow us to enjoy a 10% income tax rates to our Shenzhen subsidiary.

EBITDA was $66.4 million, a 16.7% year over year increase. We generated strong net operating cash of $61.4 million this past quarter, up a significant 81.6% from the second quarter of 2011. Compared to the first quarter, excluding seasonality pattern, our working capital strengthened based on the improved operational efficiency. Our DSO was 64 days versus 79 days. Inventory days were 87 days versus 92 days and cash conversion cycle was 97 days versus 117 days last quarter.

We saw better receivable collection in China and in certain developed markets this quarter though we continued to see some temporary receivable delays in some of our key emerging markets. We also continue to optimize our inventory management. Going forward we expect to continue to exercise cautious credit policy and enforce reinsurance protection in our key markets worldwide. We remain highly confident that we have a healthy working capital position.

As previously disclosed, we have entered into FX forward contracts to mainly hedge our exposure in euro and U.S. denominated accounts receivables. These hedging contracts have yielded mark to market gains of $0.4 million and 41 million in the first half and in Q2 respectively. However the final gain or loss of this contract will depend on the market conditions when these contracts complete. We expect to continue to proactively minimize our FX exposure in the future.

I will now discuss our financial guidance. Based on what we can see currently we are maintaining our 2012 topline guidance of at least 18% year-over-year sales growth. For the remaining of the year we continue to expect China and other emerging markets to be the key sales growth drivers due to our strong competitive position and favorable private and government spending trends in healthcare industry.

But we do foresee headwinds in certain regions of the emerging markets that are politically unstable or are having changing FX control or FX fluctuation environment. For the developed markets we have done well in this quarter. We expect to continue our steady market share gains in the U.S. based on our product launches and direct sales efforts. Although we achieved good growth in Western Europe in the second quarter, due to the troubling economic development there, we are cautious and are working to ensure that we remain nimble in order to find the best opportunities in the region.

Despite the macro challenges such as rising cost in China we have improved our efficiency and the positive impact is clearly demonstrated in our gross margin and operating margin improvement, as well as strong cash generation in the second-quarter. For the full year we continue to expect our gross margin to stabilize and our operating margin to be close to the last year’s.

We still view that other non-operating figures such as government subsidies are difficult for us to predict. We believe we will be able to further improve our efficiency in the second half and as a result we are raising our non-GAAP net income guidance to grow at least 15% year over year from our prior guidance of 13%. As always, this figure excludes any tax benefits, and assuming a corporate income tax rate of 15% for our Shenzhen subsidiary.

We are confident about delivering our revised financial targets for this year. Excluding potential M&A expenditure, we continue to project capital expenditures to be around $19 million for 2012. I would like to turn the call back to Cathy now.

Cathy Gao

Thank you Alex. Operator, please help open the lines for the Q&A section. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mr. Jinsong Du from Credit Suisse.

Unidentified Analyst

Hi this is Irish calling on behalf of Jinsong. You said you have a strong improvement and the uptick in cash flow this quarter and you have a lower accounts receivable level and slightly higher inventory level. Is that because of improvement in working capital and – or just depending on the potential partners –

Alex Lung

Hi Irish, this is Alex. Thank you for the question. Well the improvement in the operating cash flow position comes from two factors. The first is that we are able to achieve better financial performance for our Q2 and you would see the improvements on our net margin and also gross margin. And secondly, on the working capital aspect, we actively manage our global inventory and you would be despite a continued increase of our sales we are able to maintain a steady inventory balance. So as a result, this also helped us to improve our working capital position.

With regard to accounts receivable in this quarter, we are able to achieve better performance as a result of increased collections from the developed markets and also we have seen good performance in China markets. So these key factors helped us to achieve a better operating cash flow as compared to the same quarter last year.

Operator

Your next question will come from the line of Bin Li from Morgan Stanley.

Bin Li - Morgan Stanley

So my question is on the guidance. So now you are guiding top line at least 18% and bottom line at 15%, which is implying your top line growth for the second half is going to be something like 14% and for bottom line for the second half growth is 12% which obviously is well below your current run rate, or the rate that we saw in the first half. Should we read this as just a pure kind of factor of your trying to be conservative or should we read into the word at least sort of basically leaving some room for yourselves and also should we read it into the uncertainties that Alex and Jie, both of you have mentioned?

On the guidance as well I think you previously guided for operating margin to be flattish versus last year. Now for the first half obviously the operating margin is slightly below last year’s level. So are we looking for second half OP margin to improve from here?

Alex Lung

The way we see the second half of the year is still we have very strong confidence about getting our overall yearly targets. Overall as I mentioned, we still see very strong growth in the emerging markets and also in the China market benefited from the government spending trend in those sectors. But we'll get that, actually in Q2 we have actually experiencing lot of economic conditions in different parts of the worlds, including the FX impacts in the emerging markets, in Latin America and also in India, and also in the Europe, the debt crisis as well.

So after taking into consideration of these factors, we believe that we still will be able to achieve a full year target but I mean we should exercise, we are still cautious as a result of the impacts of those potential economic factors. And also operating margin for the first half of the year, you can see from Q1 and Q2 is improving sequentially. For the second half of the year, we believe that – if it is going to achieve our full year target, we would expect the Q3 and Q4 operating expenditure to be in the similar level at the beginning of the year.

As we are a growing company it is our strategy to decide as to when and where we should actually invest appropriately into the respective region to help us to grow the business. You will see improvements on the operating margin in Q1 and Q2. It means that the way we see we are able to obtain some operational efficiency already, and we should be able to transfer some of the resources from this improvement to be able to invest into the region, that is the resources. And for the second half of the year we will see very closely as I said where these investment opportunities are and to invest appropriately. And as a result we will continue to balance our investment with the achievement of our operating margin. So that is the strategy we continue to apply to balance the growth and also balance profitability.

Bin Li - Morgan Stanley

The full year OP margin is still flattish.

Alex Lung

As I mentioned, it’s our target to improve the OP margin such that the OP margin would be similar to the last year’s performance.

Operator

Your next question comes from the line of Mr. Richard Yeh, Citigroup.

Richard Yeh – Citigroup

I have a one question on the margin improvements. Can you, Alex, touch a little bit more color on the margin improvement because if we take out IVD reagent sales, the margin improvement is too significant. So you just mentioned that it was due to the product mix and also lower material costs. Can you tell us a little bit more color what has changed from the second-quarter and the first quarter that made such a pretty notable improvement? Also would this -- going forward is this margin -- 57% gross margins should be our assumption going forward or we should look at differently? And also on the G&A I noticed that you had lower G&A as a percentage of total sales. How should we look at this versus other quarters? Should we – just this basis for the full year or next year?

Alex Lung

With regard to the margin improvement, if you compare to the first quarter and second-quarter, second-quarter is not – is actually one of our strong quarters for the year so there is some seasonality factors if you compare to the first quarter. And if you look at the top line we have an increase in sales as compared to Q1. So from the manufacturing perspective we are able to generate more economy of scale as compared to the Q1. And also compared to the second-quarter as you point out rightly that the mix also is in favour for us such that we get more – we get some margin improvement as a result from the mix as well. I think overall if you compare this year to last year -- if you compare the same, compare to last year the improvement is also from the better pricing control as well. So it helped us to improve the margin.

And to come to your second point about the 57% of gross margin, Q2 normally we will record the highest gross margin in a year, and you would see a similar pattern in previous year’s also. I think for us for the full year, we will continue to – we should be able to continue to maintain a mid-50 range of gross margin. With regards to the G&A, the G&A for this quarter is at 8.7% of the revenue for this quarter. In this quarter as I mentioned just now, we have some expenses that is actually -- happens to be higher than previous quarter’s, including some additional compliance costs and some additional accounts receivable provisions as well.

Throughout the year we expect the G&A as a percentage of the revenue to be stable at the level at around 8% of the full year. And which is very close to the same level as last year full year as well.

Operator

Your next question will come from the line of Mr. Wei Du from Goldman Sachs.

Wei Du - Goldman Sachs

I am not sure whether you would give out those numbers. Actually I want to know among the three segments, which segment is the highest gross margin on an average basis? If you don’t disclose that number, can you give us a future trend of which segment you expect to have the highest gross margin, it’s actually when you are continuing to increase reagent sales in the IVD segments?

Alex Lung

You are right. I am afraid, I am not in a position to provide you the specific details. Actually you should be able to see the annualized result in our annual report Form 20-F, if you actually see in one of the pages. But just to give you an indication of the margin trend – margin performance of the three product lines, our highest margin is actually from the imaging segment because of the higher technology elements involved in the product. And secondly is actually the IVD product line and then followed by our patient monitor and life support product line.

Wei Du - Goldman Sachs

Going forward, would that be still the same, in my model yes we do put in a higher gross margin on the imaging, according to our estimate. But I think as you continue to grow the reagent business in IVD segment, would that bring the overall gross margin to be relatively higher in the future?

Alex Lung

In three words, we still have in other segments to have improving margin as well. But currently it would depending on the progress of the mix within the IVD segment as well, i.e. the ratio of the reagent and also the equipment and also how we actually package our business in a channel.

Wei Du - Goldman Sachs

Can I ask another naïve question? I think how you calculate your share based compensation, would that fluctuate with the stock price?

Alex Lung

Our share based compensations is calculated – we have two kinds of share-based compensation. We issue stock options and also restricted stock units as well. For the stock options we will calculate the fair market value and then amortize the share-based compensation over the period - over the vesting period. Whereas for the RSU it will be based on the day we actually issue the RSU and amortize the costs over the vesting period.

Operator

Your next question comes from the line of Ms. Jessica Li from CICC.

Jessica Li – CICC

You mentioned that you will continue to look for attractive investment opportunities worldwide. Could you elaborate on what business areas or segments you view as attractive? Looking at your more recent acquisitions, you seem to gradually getting to consumables area. Should we view this as a changing your strategic direction in M&A?

Jie Liu

Hi Jessica, this is Jie. I think that every time we maintain our series of acquisitions, on the (indiscernible) first party, acquire the area related to our product segment, second is their new technology that will help us to elevate our current market position, and thirdly, some other high gross margin, high growth areas such as we did orthopaedics. So I think we didn’t change anything but we continue to look at some attractive target during discussions.

So for us it’s basically because IVD side is another thing we can do probably, we try to do more in this area. And there are some other high growth area, consumables that could be another area of top priority. There is other one, is to continue to seek any technology platform which basically most likely would be in the U.S. or Western Europe.

Operator

Your next question comes from the line of Ingrid Yin from Oppenheimer.

Ingrid Yin – Oppenheimer

So my question is on the (indiscernible), 59% growth is very soft, now that there is sales already, 34.4% of IVD sales, and will that continue to go up, what is the reasonable long term targets for the ratio? Is the reagent margin higher than the rest of the group? And also I’d like to understand your sense on Dragonbio integration, are there products participating and winning tenders this year and/or you are in the middle of equating their products? And if you could, can you explain to us the foreign exchange impact to your revenue, gross profit and also your net profit?

Jie Liu

I will answer the first part of the question on the reagent. On the foreign exchange, I will pass over to Alex. We would like to see the more percentage of revenue of the IVD segment coming from reagent because of the beauty of the recovery of the revenue nature. And also probably from what we did in the past few years, probably you can remember, 15% roughly percentage of the revenue, IVD revenue coming from the reagent at the beginning – of the IVD business coming from the reagents, and which number is a ideal number, we would like to see more than half of the IVD revenue coming from the reagent because that’s the initial target. But depending on – always depending on this nature, some areas in the IVD segment have even higher percentage of revenue coming from the reagent and also depending on this smaller, if you go into more reagent, then probably more percentage coming from the reagent also.

So that’s – we hope we will see after we’ve done a lot of their acquisition in different areas of the IVD segment and also our newly introduced biochemistry analyzer BS-2000 and even next year we move to some immuno-chemistry. Those – a lot of activities and initiatives will help drive the reagent growth together and now we get the group result of the whole IVD business. Foreign exchange, maybe Alex.

Alex Lung

Actually for the foreign-exchange impact, it still holds true in our cost structure such that 10% of RMB appreciation will have a negative impact of 1% on our net margin. As for euro, if euro depreciates about 10% to 15%, it will have about 0.2% to 0.3% negative impact to our net margin. It still holds true in our cost structure.

Operator

Your next question will come from the line of Jack Hu from Deutsche Bank.

Jack Hu - Deutsche Bank

I have a question for Jie and Dave. It appears that you are gaining market share, so out of China or developed markets and emerging market, can you share with us in which market you are gaining market share, on what product lines and over which companies?

Jie Liu

In the worldwide basis, when we look at the different segments of the product, patient monitor and life support, the worldwide basis even on lower number is the 15 in the imaging line, that’s gaining more shares worldwide. We cannot see any segment grow at such a speed. But in terms of geographically as I said that we get a strong growth in the emerging markets but specifically the more CIS region, Asia Pacific and Africa, Latin America but we did lose shares -- I believe we lose share in the Middle East because of some government centralized purchasing activities and for the developed markets is basically for – Western Europe is the same story, North America, David can add more.

David Gibson

I think we saw good performance, strong performance across all the product lines, in particular as we highlighted in the prepared comments, the portable ultrasounds, with the expansion of the direct channel was our strongest share gain that we had, and then followed up with the anesthesia segments and the patient monitor life support segment. And our world is really heavily dominated by the large multinationals GE and Phillips. And some of the share came from along with some of the smaller players. It’s not any single company that’s completely yielding share, it’s pretty broad based.

Jie Liu

Jack, I think all of the three lines are pretty diversified gaining shares, most of the areas.

Operator

Your next question comes from the line of Ms. Katherine Lu from Cowen and Company.

Katherine Lu - Cowen and Company

I have a follow up question regarding guidance. You keep your top line guidance unchanged and raised your net income guidance. I know both sides probably are still on the conservative side. I am just wondering what prompted you to raise the bottom line guidance? Was that better than expected top line growth and the contribution from acquisition, or it’s a benign interest rate environment or the high cash level? And also if you can give us some numbers regarding the revenue generated by the acquisitions from last year, that would be great.

Alex Lung

Hi Katherine, this is Alex. Thank you for the question. I think the change of the guidance primarily reflects the performance that that we have already achieved in the first half of the year. And you would see in the first half of the year we are able to improve our overall gross margin, and as a result of the improving manufacturing efficiency, economies of scale. And also you would see from the selling expense side, we are able to get more optimization out from the operation also.

So that actually helped us to improve not just the gross margin but also helped us to improve our net income growth from our original expectations as well. So the increase in guidance mostly is a reflection of what we have already achieved. Whereas for the remaining half year, we still believe that our original trend, we should have a higher chance of achieving that as original budget and plans.

Operator

Your next question will come from the line of Shaojing Tong from Bank of America/Merrill Lynch.

Shaojing Tong - Bank of America/Merrill Lynch

First, I would like to get update on China sales, what’s the percentage of sales in China are coming from government tenders and also I’d like to get update on the acquisitions that you have done, the six acquisitions that you have done in the past – about 12 months, that are we -- of course the orthopedic acquisition just happened, and for the other five acquisitions, are we on target to meeting our like sales operating income targets for those?

Alex Lung

I will just answer the first part of the question first. For the Q2 2012, the percentage of tender sales -- as a percentage of total China sales is at 2.6%.

Jie Liu

Same thing is there for the first five acquisition of local Chinese domestic companies, is in different stage of integration. It’s going well and they are first always going through their quality to make sure those new acquired products companies have their similar standard to Mindray quality products, it takes time to really integrate to Mindray’s platform. And we did see lot of progress to provide a better products such as the new 50B on their urine sedimentation analyzer, just to see the launch of just the new products. And also the synergy they are using our sales channel did help to drive some growth of the acquired companies but depending on the nature of the business, some business such as their infusion pump, more related to our product line but other (indiscernible) or the PACS system probably, they are more related to their image products and now is in the progress to integration.

Operator

Your next question will come from the line of Mr. Sean Wu from JPMorgan.

Sean Wu – JPMorgan

I have like a set of questions, it’s more like maybe I would like to ask Ms. Li and Jie about this, your observation behind the acquisition of the Dragonbio, it’s an orthopaedic company, right? It’s I think in some sense it’s out of set of your kind of core competency now, and if you are making acquisition in orthopaedic area, are you going to make acquisitions in the stents, other consumable areas? And what are your investment criteria and also what can you do to make Dragonbio more competitive like (indiscernible).

Jie Liu

I think as I said earlier for the criteria of the acquisition, the high gross margin, high gross consumable margin is one of our criteria to choose the target company. Wuhan Dragonbio orthopaedic company is a good target to following category of our selected criteria. And we think by using Mindray’s platform to have a very good cash position, high standard of their quality system, the spirit of innovation and the investment in R&D, we do think we have the capability to really get up the leading position in the area we choose.

So for the orthopaedic, it's just met our target and we did a lot that we have a very good track record to really beat up the leading position for different products with it we plan to enter. So the orthopaedic is one example. As far as some other stent or whatever, any possibility could be happening but depending on how we evaluate the target and how we can really beat up if it is possible for Mindray to get up the position of the – competitive position in the market. So for us we hope we can really use Mindray platform to capture the growth opportunity of China and other emerging markets.

Sean Wu – JPMorgan

Do you see any kind of synergies between the sales and marketing for orthopaedic implants or like existing lines of product?

Jie Liu

The synergy – depending on what kind of synergies, first is the quality system, that’s – Mindray have the highest standard in the industry, and the way to organize manufacture, and also the way to organize R&D, that’s the core competency that Mindray has. So other small companies, they may not have this kind of world class capability. So that’s the synergy we can really pass on to the company such as the orthopaedic company, Wuhan Dragonbio.

But on the other hand, the direct sales may not so much synergy but it could be helpful by our different platform – sales platform in different province, helped their company into the tender list. Even though for the orthopaedic you have to get a brochure of that tender first, and now you get their access to the market. So I think Mindray, the people, Mindray is the connection, Mindray is the relationship that can help Dragonbio to pass this kind of first entry first. Then you organize some other more efficient sales team to really capture the sales opportunities. That’s what we can do better than other competitors.

Operator

Your next question will come from the line of Hao Zhou from Piper Jaffray.

Hao Zhou - Piper Jaffray

I have a question regarding the ultrasound. Can you guys give us some colors in terms of the drivers behind the ultrasound growth this quarter, particularly in terms of breakdown in different regions? And also can you guys give us some colors in terms of the TCA traction in China and ex-China in terms of perceptions and recognition by the physicians and experts in hospitals and when do you guys see TCA can be made more meaningful growth contribution for the ultrasound business going forward? And then any new product, can we expect in ultrasound business in the near future?

Jie Liu

I think we consider ultrasound together with the DR margin (ph), the medical imaging system, but the growth driver for this quarter majorly coming from the color system. And back white actually, only a modest growth but the color system has better growth. In terms of area, actually U.S. and also emerging markets is doing extremely well last quarter but then China relatively weak, the Europe is very weak too. So that’s geographically what we did and probably you see that we just launched the new system of the portable color ultrasound system Z6, that will help us -- together with other systems will help us beat up the competitive positions in low to mid end segments. But I think the low to mid end segment we are continuing to launch some products to defend our leading position.

But on the other hand, it’s the high color system, such as the TCAs, we launched last year, get a very positive feedback from doctors and physicians they use, and they are very impressed with the image quality and the reliability and the functionality of the system. And it takes time to really ramp up the sales because of the way you move into the mid to high end segment, the requirement and the application specialists, more requirement and the selling cycle will be longer too. We expect this kind of selling of the TCAs will be moving in a much better situation. So this is another new product we have to capitalize for future growth.

Operator

Ladies and gentlemen, due to the time constraint, the Q&A session will end now. There are no further questions at this time. Sir please continue.

Cathy Gao

Thank you all. Thank you everyone for participating today’s call. Before we close the call, I just want to say a few words in regards to the recent headline and the market sentiment to our Chinese companies. On behalf of Mindray’s management team I would like to reassure our prospective and existing shareholders about our company’s commitment to good corporate governance. In our 60-year (ph) history as a public company, we have made tremendous efforts in building our trust and credibility with our shareholders and we cherish a solid reputation that we have successfully achieved. We are a global company and we strive to be good corporate citizen internationally.

More importantly, we like to take the opportunity here to thank our shareholders for their continued support throughout the years. Thank you for joining us and we look forward to speaking with you soon. Thank you all.

Operator

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

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