Mindray Medical International (NYSE:MR)
Q3 2012 Earnings Call
November 6, 2012 08:00 AM ET
Cathy Gao - IR
Jie Liu - COO
David Gibson - President of North America Operations
Alex Lung - CFO
Richard Yeh - Citigroup
Bin Li - Morgan Stanley
Jinsong Du with Credit Suisse
Jessica Le - CICC
Ingrid Yin - Oppenheimer
Jack Hu - Deutsche Bank
Good morning, everyone. Thank you for standing by and welcome to Mindray's Third 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.
Thanks operator. Hi, everyone Welcome to Mindray's 2012 Third Quarter Earnings Conference Call. We released our financial results last night and they are now available on the Company's website and Newswire services. There will also be an archived webcast of this conference call on our Investor Relations website.
Joining today's call are Mr. Li Xiting, our President and the CEO; Mr. Xu Hang, our Chairman, Mr. Jie Liu, our Chief Operating Officer, Mr. Alex Lung, our Chief Financial 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. David Gibson will discuss Mindray's operations in the North America region. Mr. Alex Lung will then review the detailed financial results and discuss recent Company's update 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, 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.
Thank you Cathy. Good morning and good evening ladies and gentlemen. Our team continues to work hard in third quarter and we have achieved good overall performance. We reported to our revenue of $257.1 million represent a year-over-year growth of 17.7%, our non-GAAP gross margin was 56.5% which was 100 basis points better than the same period last year. We also delivered solid non-GAAP net income gross of 18.1% to $50.1 million. Net operating cash flow was again very strong at a $59.3 million.
Almost doubling that of third quarter last year. China continues to be our key growth driver and the sales remained robust recording 25.9% year-over-year growth. Total international sales rose 11.6% over the same period last year and the emerging markets was primary contributor with a sales growth of 20.5% year-over-year. We recorded a weaker sales performance in developing markets where we register slight decline for 1.4% for this quarter mainly because of weaker than expected overall marketing condition in North America.
David will give more details about North American region later on. To clarify we define developing markets as North America and Western European countries. While our emerging markets are everywhere else except China and the developed markets. Sales continue to rise for our IVD segment. The reagent the business was particularly strong contributing 37.4% to overall IVD sales in this quarter up from 31% in same period last year and 34.4% in the previous quarter.
This is mainly because our equipment in the reagent (inaudible) business model and he is working well and the two recently introduced two new products, BC-800 and the BC-6800 helped to ramp up sales. The IVD segment achieved more than 30.3% year-over-year growth in this quarter. Over the last few quarters we have continued to expand our product offering and to integrate other IVD business we have acquired.
For these reason we are very optimist about the future growth prospects of our reagents and overall IVD segment. In this quarter we introduced two new product the medical imaging line color ultrasound system DC-3 and a competitive economic and digital radiography product DigiEye380. So far this year we have already launched seven new products and have made our full year target of seven to 10 new product launches. In terms of M&A we made two small acquisition in China recently. The first one is Shanghai Medical Optical Instruments Factory Corporation which manufactures and sales flexible in this coast and the relating such devices. This deal compliments our prior acquisition of Hangzhou Optical Medical Instrument Corporation which folks are rigid in this coast.
We expect these two transaction to help expand our reach into the minimally invasive surgery devices and the related surgery consumable market which will supplement minor existing to the operation solution. We all support our continuous stake in (inaudible) instrument which makes coagulation analyzers and related to product for (inaudible) and the cardiovascular disease detection. The company’s thrombotic and hemostatic products will complement Mindray's existing IVD products. This deal help us come up with even more complete solution for our customers and to support our strategy of penetrating into attractive consumer overall product market.
Going forward we continued to make prudent use of our cash and also actively seeking attractive external worldwide. Now let’s discuss the company performance and dynamics by geographic in the segment. Firstly in China our whole market, we continue to deliver great results that’s when you’re growing 25.9% year-over-year gross. And this is a six consecutive quarter of over 25% domestic growth, our good performance was primarily driven by our efforts to think market opportunities and to expand our sales to country-level hospital which are our stronger segment. We have also increased penetration in to Tier hospitals in the private hospital of our key accounting efforts.
Regular sales activities as expected continue to be a major domestic growth representing more than 95% of total domestic sales. In the third quarter equipment of purchase activity remained strong and the country level hospital and above driven by cost upgrade, increasing patient visits as well as to some degree the gradual change for service sales to become more importance also profit for hospitals.
In addition to strong IVD and the reagent this quarter some of our large solution products such as anesthesia machines and the surgical equipments also achieved a very solid growth. Overall we remain very optimistic about healthcare industry in China. We continue to see new government measures aiming at helping Chinese people get easy earn and achieve medical treatments.
Healthcare spending by the government also continually rising trend. In 2011, healthcare expenditure only accounted of 5.3% of total government physical spending and this is expected to go up. The subsidies for new rule cooperative medical system were also increased from the currently the rate of RMB240 per capita per year to RMB360 per capita in the near future. In addition in order to encourage patient traffic to country-level hospital, patients with serious illness are fortified to get treatment in country-level hospital. We receive up to 85% of cost reimbursement by 2015 up from the current level of 75%.
We view these macro-trends as major positive for company like us that have strong competitive position in China. Internally our strategy to optimize our sales force and the channels continues and these allow us to grasp opportunity to present you by the favorable sales scale spending training more effectively.
Our strong China performance for the past few quarters reflect our successful strategies. We will continue towards these direction. Now let’s look at our international sales. The emerging markets remained the strongest region recording 20.5% gross in the third quarter. In particular sales in the CIS region by more than 60% and the Russia – sales in Northern America were up 20%, Mexico and Brazil achieved highest growth followed by Argentina.
We recorded over 25% gross in Africa, despite the political unrest, thanks to our improved grand sales with service infrastructure. We continue to experience sales decline in middle-east during the quarter primarily because of the drop-in in centralized procurement activity in Turkey. Compared to the last year, income and about expansion plan to capture opportunity in key emerging countries and the expected emerging markets to further lead our international sales growth in the future.
Development market sales were down 1.4% year-over-year with Western Europe posting 2.7% of growth by our North America sales dropped 3.4%. Our growth U.S., Europe markets moderated the third quarter mainly because of all the detail residing from severe economic weakness in the region. In the near term we still see opportunity in this public, in some public markets and we’re continued to invest in all the market share.
Our efforts to expand our direct sales team is also ongoing. Over the long run, we believe mining is in good competitive position because our strong priced performance product offering comprehensive sales and service platform and an improving brand recognition. Giving the current economic trends we remain cautious on the regions outlook.
Now let me give you a breakdown of the performance of different business segment in the third quarter. Our (inaudible) products and the surgical equipment in particular contributed to the growth of our patient life support segment in the third quarter. This is largely due to the increasing awareness of a brand and success of our sales efforts and excellent product quantity. With upcoming the launch of (inaudible) products, we believe that (inaudible) products and the surgical equipment will continue to help drive our sales growth for the patient monitor life support segment. In IVD the reagent the five part hematology analyzer and the mid to low end by chemistry analyzer drove our IVD sales. A DC-68 our most sophisticated mythology system with high processing speed targets mid to high end markets and spread our hematology reagent sales growth.
The biochemistry reagent sales also grew significantly based on the ramp up of the insulation base of DC-800. Going forward we also expect the recent introduction of BS-2000 our fastest biochemistry analyzer to help us continue this increasing trend.
For the medical imaging segment the collapse on products and the DR products was the gross drivers. It is a ramp up of DC-8. The outlook color ultrasound system and the newly introduced economic DR product. We believe these products will help us gain a stronger foothold in China and other emerging markets. Now I would like to invite David to talk more about our North America operation.
In the third quarter the overall healthcare for the patient environment in the U.S. slowdown significantly which like many industry participants including ours. We believe the macro uncertainty is surrounding upcoming President selection, the physical foot and the implementation the Affordable Care Act laying our customers purchasing decision causing major slowdowns and delays in the market. In the third quarter, North American sales were down 3.4% year-over-year, anesthesia machines achieved solid growth offset by weakness in monitors and solar ultrasound growth. Our A series anesthesia machines continued to perform well in the install state through the U.S. We have established a solid base of reference accounts in a wide range of possible types and the GPO contract with Health Trust Purchasing has continued to benefit our sales in the past quarter enabling us to compete many hospital groups were as often as before.
We are also seeing positive signs of the (inaudible) product line in addition to the cardiac package for the N7. These new features including the addition of the (inaudible) transition further extend our region in the emergency medicine segment. We believe we have maintained a gain share in the ultrasound market but in the hand carried and color card systems.
At the beginning of the fourth quarter we completed realignment of our U.S. sales team to improve cross selling and management strategic accounts. We see significant opportunities building on our successes within a regional integrated delivery networks or IDMs for all of our product lines and particularly we have been able to win preferred vendor status for the ultrasound and anesthesia and several regional IDMs.
Looking ahead the rest of the year we expect macro uncertainties will continue to drag on our customer spending. Although our plans are based on gaining share and not allowed our market growth we are more cautious about the outlook of the U.S. and are projecting a low single digital sales growth rate for North America region for the year. However internally we are taking steps in exiting strategies which we think will help us gain share in this tough environment. Now I will pass the call to Alex to discuss the detailed financial results, other company updates as well as company’s outlook for 2012.
Thanks David. In the third quarter we achieved a 17.7% year-over-year increase. On the top line for a total of 257.1 million leading our growth was China revenues of 117.7 million which increased 25.9% year-over-year primarily driven by our strong performance in the mid-end market segments. International revenues were 139.4 million and 11.6% year-over-year growth. This represents 74.2% of our total sales.
As Jie mentioned emerging markets were the leading contributor to the growth in the international markets in this past quarter. Non-GAAP gross margin was 56.5% compared to 55.5% in the third quarter of last year and 57.8% in the second quarter.
The year-over-year increase reflects lower raw material cost, improved operational efficiency and a change in product mix, the sequential decrease was due to seasonality factors. Our non-GAAP selling expenses were 17.8% lower than last year’s 18% but higher than the second quarters 17%.
The sequential increases was primarily due to the lower sales space. Non-GAAP general and administrative expense were 9.2% of total net revenues higher than 8.9% in the year before and an 8.7% in the second quarter. The increase was mainly because of higher compliance cost. Our non-GAAP R&D expenses were 8.6% of total net revenues compared to 8.4% in the third quarter of 2011 and in the previous quarter. The year-over-year increase was mainly a result of investments in the medical production innovation project.
The sequential increase was primarily due to the lower sales base. Our non-GAAP operating margin was 20.8% compared to 20.1% in the same period last year and 23.7% in the second quarter. Our non-GAAP net margin was 19.5% for the third quarter versus 19.4% in the third quarter of last year and 22.2% in the prior quarter.
Regarding the tax benefits related to the National Key Software Enterprise status. We have not yet received approval from the PRC tax authority for the year 2011 and that’s have not recorded any tax benefits in the first nine months of 2012.
As a reminder we recognize 7.6 million in such tax benefits in the first quarter of 2011. Due to a change in the tax authorities review timeframe from once a year to once every two years. We cannot determine at this time, when the list of companies eligible for renewal will be released. When we receive notice from the tax authority the potential benefits will be included in our financial statements and that will allow us to enjoy a 10% income tax rates for our Shenzhen subsidiary.
EBITDA was 48.3 million about the same as last years; we again generated very strong net operating cash of 59.3 million this past quarter, up a significant 98.4% from the third quarter of last year. Historically our third quarter always has a long cash conversion cycle as compared to the second quarter, excluding seasonality patterns, our working capital actually is driven in the past quarter because of improved accounts receivables. We also continue to optimize our inventory management. Our DSO in the third quarter was 66 days better than 71 days in the third quarter of last year and only slightly longer than 64 days in the second quarter.
Inventory days were 100 days same as the third quarter of last year and compared to 87 days in the prior quarter. Our cash conversion cycle was 106 days versus 113 days in the same period last year and 97 days in the prior quarter.
Going forward we will continue to exercise cautious credit policy and then enforce insurance protection in our key markets worldwide. We remain highly confident that we have a healthy working capital position.
Now I would like to discuss an update regarding the legal dispute with an existing supplier. As we mentioned on our press release we are negotiating amended purchasing and licensing arrangement with a supplier that provides components for some of our patient monitored products solely in the United States and other international countries.
There are certain amounts in dispute for prior sales that made part of our discussion for arrangement. As a result we are making a related 9.7 million G&A expenses accrual in the third quarter for such disputed charges.
Due to the one time nature of the events this charge will be excluded from our non-GAAP earnings. We also announced last night about a change in our management team. Mr. Xu Hang has resigned from his Co-CEO position but will continue to serve as our Chairman. Mr. Li Xiting has been appointed as CEO by our Board and will also continue to serve as President.
Mr. Xu and the Board believed that this decision will help strengthen our company’s corporate governance, a necessary new structure to support Mindray’s long term prosperity. Our management team will like to take this opportunity to thank Mr. Xu for a significant contribution to the company as our Co-Founder. We are also very happy that he will remain as our Chairman and help us make strategic decisions in the future.
Mr. Li is also our co-founder and has led our company since our inception 21 years ago. As a result we are very confident that this will be a seamless transition and that under his leadership we will be able to continue executing our strategies successfully. Now I would like to take a moment to discuss our financial guidance. Based on our current observations, we are maintaining our 2012 top line guidance of at least 18% year-over-year at sales growth. For the rest of the year we expect China and other emerging markets into our key sales growth drivers.
Due to our strong competitive position and favorable private and government spending trends on healthcare. For developed markets we are more conservative about our North America sales projections considering weaker than expected market environment. We are also cautious about Western Europe’s outlook given its troubling economic developments.
However, we believe our long term competitive positions in developed markets remain very strong. We continue to foresee potential challenges in some emerging countries that are politically unstable, are experiencing significant FX fluctuations or have FX controls.
In the past quarter we have once again demonstrated our ability to improve our profitability. Our gross margin further expand compared to the same period last year. Our operating income growth rate continued to improve and we have consistently generated very strong operating cash flow.
For the rest of the year we are confident about achieving our non-GAAP net income guidance of at least 15% year-over-year growth. This figure excludes any potential tax benefits and assumes a corporate income tax rate of 15% of our Shenzhen subsidiary.
Going forward, our company is still in its growth phase and will continue to balance between making investments to pursue top line growth and focusing on profitability. Excluding any potential M&A expenditure, we’re now expecting capital expenditure to be less than 17 million for 2012. Down from our previous guidance of 90 million.
I will like to turn the call back to Cathy now.
Thanks Alex. We will now open the lines for questions. Operator please proceed.
(Operator Instructions). And your first question comes from Richard Yeh with Citigroup.
Richard Yeh - Citigroup
I just have one question on one time charge, I would like to know some nature about the distributor and in the past what percentage of a U.S. sales actually generated from the distributor and how is it going to affect the future sales in the U.S. My second question related is that can you discuss when can we expect to get meaningful contribution from the acquisition we have Mindray has done in the past and third question is just the can you give us some color on the growth rate on the patient monitors in China. Thanks.
The first question is that, it is actually emulation to a supplier not a distributor. The effects to the U.S. is actually minimal – (inaudible) to the second question on the contribution for the M&A, we have done a number of merger and acquisitions in China, in the past one year and nine months and we have been working on the integration of this projects. Prior to this acquisition this individual acquisition actually meaningful contributions on a standalone basis and we believe that we have this access of the integration into the Mindray operation that we will continue to unlock more synergy from this M&A opportunities.
Just adding also the question for the (inaudible) for the patient monitor and life support and the overall the single digit for this quarter growth and the major reason coming from the negative growth for North America and China and the emerging market remain the strongest growth more than double digit growth.
Operator next question please.
Your next question comes from Bin Li with Morgan Stanley.
Bin Li - Morgan Stanley
Like first question, it was regarding to the management change and maybe if I could ask Mr. Xu and Mr. Li, I understand that the rationale for management change and in the past you do have different responsibilities. My question is why now what’s special about this time point, why do you decide to do it now. And the second question is for David for the U.S. business. If I heard you correctly I think you were saying the outlook for this year for the U.S. business is in low single digit, correct if I’m wrong, does that mean you’re fourth quarter business will be in a double digit decline and if that’s case is it because the patient monitor business is weak in that area and so that that’s my second question.
Well I mean the (inaudible) arrangement has always been a topic I think among the investment community because it's not the most commonly seen arrangement among you know this kind of company of this type. And regarding your question, why, why now? I think you know I very much view that Mindray is at the eve of transforming into midsized the global corporation and this requires the board to step up its role and responsibility in designing and executing an effective performance measurement and incentive schemes for the management and I think we need to do it as soon as possible.
And at the same time equally, importantly since the financial crisis in 2008 the top management was very successful in executing growth strategies that turn the crisis into market share gain opportunities in most regions Mindray participates in. And last but not least I think over the past few years I think you know the management together with the board have already worked out a very clear path for Mindray’s future growth. So, above three are the most important reasons that I feel now is a good time for the company to take on such change. Thank you.
The overall, the cautious outlook I’m looking at as you’re well aware there is a tremendous amount of uncertainty some of which may or may not be resolved today with the election and we could see, we will get an indication are we changing direction going with the current plan or what’s going to be happening there and as a result we sit here this morning in particular but I think over the next couple of weeks things will start to say a lot.
We’re been very cautious about our look at Q4 and as well as what we saw really coming into the month of September leaving August and September we saw this sort of everybody wanting to take longer to make decisions and a lot of uncertainty and people what is the long range plan going to be and so we are cautious. And it's not that it's not just a one product issue, we are growing stronger in ultrasound we are growing stronger in the anesthesia segments because those are our smallest market shares and our biggest opportunities for growth but the uncertainties are hitting us across all product lines. The monitoring just happens to be still our biggest the ever to have grown substantially but monitoring is still bigger than the other two and it is our higher share product. So it tends to grow slower in the first place but the pressure across all three and we’re not I know you’re doing the math here and you’re trying to add up Q1, Q2, Q3 and then forecast to Q4 to get to the low mid-single digits. We are not seeing a double digit drop but we are seeing a very tough condition which is going to make the overall year come in at that is mid to low single digits.
Next question please.
Your next question comes from Jinsong Du with Credit Suisse.
Jinsong Du - Credit Suisse
So first about the China growth, could you tell us how many percent of the gross is actually from the RMB appreciation, meaning that or in other way, if you don't do the currency translation just in RMB terms, of the growth and also, how much of that growth is coming from the new product offerings. This is existing products. That's the question for China.
And then going back to the US, as you can see now we are already concerned about the situation. So if Dave of anyone could enlighten us in terms of the examples, for example, in the previous US elections, was that anything similar that happened and what was the case after the election? Obviously I know that this time could be different but a little bit of history could help.
And maybe lastly just to very quickly try to understand these onetime charge created from the dispute of supplier. Could you just let us to be more assuring, it’s just that it is one time. So could you let us be sure that there won’t be any similar cases of all disputes for several future? Thank you.
With regard to the currency impact, in this quarter the currency impact is actually not that significant. And the constant currency is very similar to the growth rate we already mentioned just now. With regards to the new product offering contribution, actually as we have talked about that before of our new products, normally when a new product was first launched, it will take a couple of years for the market to receive (ph) that products. So and it takes time to ramp up also. But we do see in this quarter that its consistent with their previous new product development trend, we see more revenue coming in from say product like from obvious 800 and BC-6800. But it is still new products or we should see more meaningful contribution going forward.
Yes, there is always a lot of different factors that come in to play. Historically the election years, if we look back obviously, 2008 had a financial crisis sandwiched right on top of it which was really the overriding factor until the health care reform came into play. But going back from that, 2004, was a continuation of the Bush years and no real subsequent changes that happened in that arena. And so we left uncertainty leading up to that one. 2000 was the end of the Clinton era and that was more overridden by Y2K at that time. And everybody preparing for their Y2K concerns and then the post Y2K conversions that were happening. So every election cycle had a little bit of a different twist to it. I think this one, because there is so much looming with the physical cliff which hadn’t been addressed, the implementation of the affordable (inaudible) is a key part of the presidential campaigns and obviously, Romney would advocate of returning if he could and Obama would continue as well as just some overall policy considerations and concerns that are sitting in there. That's one factor that's there.
I think the looming, with the (inaudible) results, the physical cliff situation and then to see frustration, that's $11 billion takeaway from Medicare and Medicaid side of the house in terms of reimbursements that would come in, effective January 1st and move forward for that year. that's weighing on people’s minds. So there is a lot that's sitting out there. That it’s not just the election. It’s sort of resolution of a lot of different things that have caused a market that would have been positive. You have positive momentum to stall weapons slowdown and make it a tough environment. I think we’re looking and saying that the market’s falling apart and it’s impossible. It’s just making it a tougher environment and harder to predict. Then we've seen in the last couple of years, as a bunch of things were covered and got a lot more stability leaving the 2008-2009 big recession. And so we hopefully, we’re getting more resolution, more visibility, we’ll continue to push and drive and get into every market opportunities that we see and sure look to gain in a tough environment.
On the positive forces, as people were looking to save more money, concerned about the future of finances, keep in mind there’s been a number of hospitals that have had to announce layoffs and personnel cut, in this environment over the last several months. We are getting more of a look than somebody just deciding to go with the large major brand of either GE or Philips. However, its taking longer to get through that decision making process, so people are realizing, I have less money to spend and I am going to spend it very cautiously. And so that's the summary of where we’re at right now and I think we’re well positioned with product. We’re well positioned with our sales team. But we’re positioned in a newer tough environment. We’ve got to continue to push forward into that.
Jinsong Du - Credit Suisse
Yes, about the one-time charge, whether you were sure that in the foreseeable future there won’t be any similar disputes. I know this is better still, if you could give us a little bit more color on the nature of that dispute that will help as well. And whether there be any other similar cases that you can foresee.
With regards to the dispute, we have already included in our press release and we also mentioned just now on the call. Unfortunately, due to there are some confidentiality restriction and we are still in the course of negotiations. I am afraid we are not able to commence further when this discussion is ongoing.
Jinsong Du - Credit Suisse
So that would be potentially more charges related to this particular disputes. And also just want to clarify, if this was like a single event or it could potentially be any other suppliers or that kind of party that has dispute as well.
I think I'll go back to your first part. Because the cases, the discussion is still ongoing and we are actually making this provision in accordance with the accounting principal and of course as this case developed, our outcome may vary as well. So but it’s actually difficult for us to predict the outcome right now.
And your next question is from Jessica Le with CICC.
Jessica Le - CICC
And my first question again going back to the outlook in the US. I know that there is significant uncertainty, but would like to know your view in terms of going into 2013. Would you expect any recovery, the reason I ask this is because some of your multinational competitors is expecting some recovery of growth potential moderation in 2013. So just wondering what your view is and maybe you can just paint a couple scenarios in action.
And then the second question again is on your one-time G&A accrual. So as you mentioned that, the discussion is still ongoing, so why that you're recording a 9 point some million for this quarter. Is that the best case scenario or the worst case scenario? I mean what can be the final sort of range be. Thank you?
Let me address the question. I think that in our outlook looking into 2013, the odds are pretty good that it returns to back to the slow rise that we’re seeing. It’s been the kind of a little bit of the trend in the overall US economy, stronger first half, weaker second half for the last year or two, that once everything settles down and I think in particular if there is revolution on the physical cliff, and the whole tax and deficit issues, the congress has to deal with then I think things will settle down and we can back in that slow 3 to 5% moderate growth recovery range in to 2013.
The demographics are still driving the number of critical care beds up in the US. The hospitals are just trying to figure out how to make money off of the patients under the shifting insurance schemes and shifting environment that's out there. But fundamentally they have patients, they need them, they care for them. They will need to have equipment. Surgeries will still happen. People will get sick. They’ll need to be taken care off. So those fundamentals are still there and we think we’ll see that return. And clearly, I don't think in any scenario or we at this point looking like there would be a dramatic deviation either dramatically up, maybe of market that was up in double digits or market that's down in double digits.
Under any election scenario, I think maybe if we do a worse case instead that there is a complete stalemate in government and a failure to resolve the physical cliff, which is a worst case scenario, I don't think any market participant is really forecasting. Everybody believes this is really going to be resolved, then maybe we've got a more dramatic down that will affect everyone, probably health care less than many other markets.
So the future is hard to predict and we don't have a round table of economic forecast this year to do this, but just at our look at it and talking to hospital CEOs and pursuing managers of large organizations. They see this cautiousness now and probably next year being a slight increase over what they did this year is the way they are looking at it right now.
Alex, I think there was a second question on the one time charge.
Do you mind just repeat that question?
Jessica Le - CICC
So the second question is on your one-time G&A accrual. I'm just wondering whether the current amount that you’ve recorded. What's the basis for that amount? Will there be any potential upside to that amount as the discussion is still ongoing.
Well actually the determination of this is actually based on our understanding of the development of the situation and is also based on the best estimate that we have actually determined as of the current status of the negotiations. This is actually something that we believe that actually should be refracted as of the end of this quarter. But unfortunately, since the case is still ongoing, it will be difficult for us to ascertain as to say, what is the variations of this going to be if this comes to a conclusion. But the amount that we have include, is our best estimates.
Your next question comes from Ingrid Yin with Oppenheimer.
Ingrid Yin - Oppenheimer
So my question is regarding your China market. It’s very strong obviously but what are you seeing in China market that's different from last year and do you think China’s leadership change will affect that. Overall you confirmed the guidance and looks conservative now because you already grew almost 21% in the first quarter. And what are the assumptions for the rest of the year for gross rates in different regions. And also lastly, US, obviously it has slowed significantly from the previous quarters, and do you think according to our calculation, the fourth quarter will be another quarter of decline and is that conservative or this is more reality and what is the next year’s medical device tax going to impact you in US? Thank you.
Let me answer the first question and I am going back to the guidance, we’ll be (inaudible). I think that any leadership change including China’s leadership change doesn’t matter, does not impact so much. The reason we said is doesn’t matter who took over the leadership. Its old leadership or new leadership. We strongly believe, we have the belief that we really want the next people living people, we have to heavily invest on the health care standard. We want to make sure the people living in this country have the good treatment of the health of any units and have their higher standards out there medical. Thus all the purpose of any leadership to concern. That's the reason the (inaudible) have their more constant of say in China, the medical device industry we have very good efficient in the next few years and that's the reason we say we’re in the competitive position to really capture this growth opportunity.
With regard to the guidance, I think as we mentioned, we are going to maintain the guidance for the rest of the year and from the different regions performance standpoint, we feel confident that China and the emerging market growth is going to continue to lead the growth trend of (inaudible). We believe that the emerging market in China, we could achieve over 20% growth. With regards to developed market, because of the economic environment in the Western Europe and also in the US. Actually the performance of this country was last and the previous two quarters. Because of the uncertainty, we actually believe that the developed market including the Western Europe and also the North America, should be growth in and around single digit for the 2012.
With regards to the medical device tax that you mentioned just now, this is something that is going to be in fact in 2013. As such it should not be impacting our current year, but with regard to the US, perhaps David can help me to give more color.
I just had one quick observation Ingrid, I don't know if you’d ever be able to get anybody to admit they were being conservative on a forecast on a call like this. But I think we saw quite a bit about all the uncertainties that are going on and I think we’re taking a very cautious approach. We need things to settle out a little bit. Obviously next week or maybe even by the end of the day today, we’ll have a little bit clear picture on the way things are going to go and maybe a declared direction and things will start to settle from then and this discounts (ph) will be there.
The medical device tax is going to hit everybody. It will impact across the board against all of our competitors, it will be tougher on startup companies and small competitors, then it will be on the really large ones and there is a lot of lobbying efforts. I am sure you are aware they try to get that medical device tax postponed, repealed or otherwise there. But it’s a fact of life right now, it’s baked into our plans and we don't see it as being a major hindrance to us as much as it maybe to some of the smaller competitors who are really going to struggle to pay that tax, maintain margins and stay competitive. We have a good competitive advantage because of our cost production, our cost position and the excellent value engineering we have in our products and we think that the medical device tax is obviously a negative impact on the business from the perspective of a tax, but it actually maybe a slight competitive advantage for us because of our ability to handle it comparatively to others.
Ingrid Yin - Oppenheimer
Alex, if I could ask one more question on the disputed charge. Is there a timeline for your negotiation about when it will finish?
I am afraid, because this dispute is ongoing and I am afraid I don't have a timeline in mind.
(Operator Instructions). And your first question comes from Jack Hu with Deutsche Bank.
Jack Hu - Deutsche Bank
Again this is on North America, so in the executive it seems product has category. Previously we are outgrowing our competitors? Is that still the same case in the last quarter even we had a minus 3 something percent of growth?
The second question is on interest income. It seems just based on my calculation, it seems somewhere in last year we are going to high yield financial instrument. My question is, how do you manage your risk (inaudible) and can you share with us on the visibility regarding how sustainable it is going to be, thanks.
Okay, I think just answer the question on the share gains on the year-to-date basis we’re confident across the product range that we've been able to gain share, in particular highlights with the carried ultrasounds and the anesthesia systems. Very clearly we’re gaining share with those two products at a much higher rate. I think Q3, the anesthesia continues, we mentioned performed extremely well and gain share. The other two we need to sort through the numbers and I feel pretty confident we didn’t lose, but how much we gained is still something we would need to calculate. But on a year-to-date basis we feel confident across all the product lines that we've been able to gain share in the market.
With regard to the second quarter on the interest income, actually in this year, since the beginning of the year they are more relaxing on the credit market in China compared to the last year. So as such, the overall PBOC rate has actually come down quite significantly throughout the year. so as such, even though our cash reserve has continued to increase, but actually because of the reduction in the interest rate has also drive us to a relatively lower rate of interest income as deriving in this year.
And we have reached all the time for questions. I will now turn the conference back over to Cathy Gao.
Thank you everyone for participating in this call. as always, we appreciate your support. The replay of today’s webcast will be available later today. Our management team will be available for questions. Thank you again for joining us and we look forward to speaking with you soon.
Thank you for participating in today’s conference call. you may now disconnect.
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