Mindray Medical International Ltd. Q4 2009 Earnings Call Transcript

| About: Mindray Medical (MR)

Mindray Medical International Ltd. (NYSE:MR)

Q4 2009 Earnings Call Transcript

March 2, 2010 8:00 am ET


May Li – Head, IR

Ronnie Ede – CFO

Jie Liu – COO

David Gibson – President of Datascope Patient Monitoring, Mindray DS USA Corp.


Bin Li – Morgan Stanley

Shaojing Tong – Merrill Lynch

Richard Yeh – Citigroup

Katherine Lu – Oppenheimer & Company

Ding Ding – SIG

Jinsong Du – Credit Suisse

Wei Du – Goldman Sachs

Hongbo Lu – Piper Jaffray

Yale Jen – Maxim Group

Junaid Husain – Soleil Securities


Good morning, and thank you for standing by for Mindray’s fourth quarter and full-year 2009 earnings conference call. At this time all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. 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. May Li, Mindray’s Director, Head of Investor Relations. Please proceed.

May Li

Hi everyone, and welcome to Mindray’s fourth quarter 2009 earnings conference call. Our financial results were released last night and are available on the company’s Web site as well as on Newswire Services. In addition, an archived webcast of this conference call will be available on the Investor Relations section of our Web site at www.mindray.com.

Joining today’s call are Mr. Xu Hang, our Chairman and Co-CEO; Mr. Li Xiting, our President and Co-CEO; Mr. Ronnie Ede, our Chief Financial Officer; Mr. Jie Liu, our Chief Operating Officer; Mr. Minghe Cheng, our Executive Vice President of Strategic and Business Development; and Mr. David Gibson, our President of Mahwah operations.

Our management team will review fourth quarter and 2009 highlights as well as comments on the current financial and the market environment in each of our major sales markets, after which management will be available to answer your questions.

Before we continue, please note that this call will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today.

A number of potential risks and uncertainties are outlined in our public filings with the SEC. Mindray does not undertake any obligations to update any forward-looking statements, except as required under applicable law.

I will now turn the call over to Mindray’s CFO, Mr. Ronnie Ede.

Ronnie Ede

Thank you, May. Good morning and good evening ladies and gentlemen. Thank you for joining us today for our fourth quarter and year end 2009 earnings. First, I will provide an overview of the Company’s performance, followed by a discussion of the detailed financial results. Mr. Jie Liu, our COO, will then discuss our operations by regions. Before opening the call to questions, I will discuss the company’s 2010 outlook.

Year 2009 was both an interesting and challenging year, presenting broad uncertainties in the various geographies in which we operate. We achieved good revenue growth of 15.8% and non-GAAP diluted EPS growth of 11.4% year-over-year.

Despite the economic crisis, and impact from various proposed healthcare reform and stimulus packages, we maintain our focus on operational excellence and innovation. Now, only that we continue to invest in R&D but we also increased investments in the international delivery channel. And hence, promotional activities worldwide and improved working capital efficiency. As a result, we were able to launch 10 new products into the market while driving solid top and bottom line growth as well as cash generation.

Jie and I will go into details during this call to provide perspectives on the strong business growth that we have seen in China and the increasing stability and signs of recovery in several international markets.

We are very pleased to report that our net revenue growth 15.8% to 634.2 million for the full year over 2008. Domestic sales and international sales increased 24.28% and 9.1% respectively.

I would like to highlight the fact that our international sales growth for the last quarter was up 6.4% year-over-year, which we achieved in phase of lingering difficulties in the international operating environment, especially, within the U.S. and European markets.

The company’s full year non-GAAP net income increased 11.1% to $147.4 million over 2008, representing a non-GAAP net margin of 23.2%, non-GAAP operating margin for the year was 25.4% and non-GAAP gross margin for the year was 56.8%.

Gross margin expanded year-over-year despite dilution from four more months of acquired operations, mainly due to the continuous product mix change towards higher margin products and geographic mix changes towards higher margin regions as well as synergies for the Mahwah operations.

In 2009, we generated $172.2 million in net operating cash, compared to $93 million last year. This significant increase is mainly driven by higher cash collections from customers embedded software VAT refund as well as a one-time Beckman Coulter payment in relation to the termination of a joint development and OEM project as a result of BCI’s own acquisition of Olympus Diagnostic Division.

In continuation of our commitment to shareholders the Board of Directors has declared a cash dividend on its ordinary share of $0.20 per share based on our net income for the full year 2009. This is the first consecutive year that we have declared dividends since our IPO in 2006.

Our R&D investment in 2009 was approximately $58.4 million or 9.2% of total net revenues. And was focused on expanding our product portfolio, integrating with our Mahwah R&D infrastructure as well as continuing to drive down our COGS.

We will now go into detail about our quarterly results. China sales for the quarter was strong. With the sequential and year-over-year increase in revenue fueled by both the anticipated pickup our China tender sales as well as non-tender sales. Additionally, international sales also rebounded displaying sequential and year-over-year increases. Jie will provide more color on our regional performance later in the call.

Despite a tough comparison to fourth quarter 2008 which resulted from a significant retroactive VIP refund we saw a steady year-over-year margin trend this past quarter. Non-GAAP gross margin for the quarter was 54.9% and non-GAAP operating margin was 22.4%.

EBITDA was 51.7 million during the quarter, representing a significant 28.4% increase over the same quarter of last year.

We generated $86.3 of net cash flow operations during the quarter. This significant increase was largely due to operating efficiency improvement in our overall working capital management.

Collection of multi quarter software VAT refund as well as a $14 million one-time payment from Beckman Coulter regarded from the termination of the joint development project agreed to in third quarter for the pay in fourth quarter.

At the end of the quarter we had $204.2 in cash and cash equivalents. Mostly in RMB onshore as compared to $131 million at the end of the third quarter.

Total cash, cash equivalents, restricted cash and restricted investments were $372.5 million this compares to $299.3 at the end of the third quarter 2009.

Our DSO in the fourth quarter decreased to 53 days from 62 days in the third quarter. Inventory turnover days were also down to 74 days in comparison to 98 days in the third quarter. While accounts payable turnover days were 43 days in comparison to 62 days in the third quarter. These factors have strengthened our cash conversion cycle to 84 days as compared to 98 days for the third quarter.

Although the turnover days here were partially positively impacted by higher sales volume in Q4 in comparison with the previous quarter, the faster conversion cycle doesn't [ph] reflect better management of inventory and faster collection of receivables during the quarter.

We remain committed to this endeavor in maintaining a healthy working capital position especially in terms of inventory control. As a reminder, in the second quarter of 2009, we changed our method of calculating DSO inventory turnover days and AP turnover days.

We now use the average of the beginning and ending balances of each quarter to calculate the AR inventory and AP unit turnover days rather than using the average of the beginning of the year and end of the quarter balances. Such calculation method would inevitably magnify the quarterly fluctuation of each of the turnover days. But the new calculation would be more reflective of the current status of the operation.

We continue to exercise cautious credit policy in each of its key markets including China, U.S. as well as the rest of the world. As a result, increasing our account receivable was a lot less than our sales increase sequentially.

The company is actively managing its inventory level as evidenced by the sequential decline in this quarter’s inventory level and inventory turnover days. The decline is also partially result of the significant increase in China tender shipment compared to the third quarter and improved raw material inventory management.

Before I go into more financial detail, let me first turn to our COO, Mr. Jie Liu who will spend a few minutes discussing our sales trends by region.

Jie Liu

Thanks, Ronnie. Good morning and good evening ladies and gentlemen. For the year 2009 Mindray achieved domestic China sales of US$292.6 million, an increase of 24.8% over year-over-year. China sales for the quarter was strong 87.5 million year-over-year increase of 20.4%.

Again, we reiterate that this is the tough comparison resulting from a significant retroactive VAT rebate we received during the same quarter of last year. Both distributor sales and the tender sales were strong during the quarter, indicating a consistently strong domestic China demand and healthy competitive environment. Tender sales for the fourth quarter accounted for 17.6% of China sales, up from 5.9% of the third quarter.

Full year tender sales accounted for 17.4% of China sales. In 2010, we remain firm and our belief that the Chinese government is committed to investing its intended budget into taking the necessary steps to help improve upon the nation’s current healthcare infrastructure.

As a result, we expect the medical device sector will continue to be a major beneficiary of this plan in the coming years. As we anticipated and mentioned in our last conference call tender sales rebounding during fourth quarter primarily as a result of the shipment of delayed tenders.

From the third quarter and increased government spending throughout 2009, we got typical fluctuation in tender sales on a quarterly basis with the lowest recorded tender sales in third quarter followed constructively by a strong fourth quarter tender sales.

It is worthwhile to mention that while quarterly fluctuation of tender sales is normal, there is no fixed pattern of seasonality sales this year quarterly distribution of tender sales is not indicative of future trend.

Now, on to our international market performance. Outside China, we achieved year-over-year sales increase of 9.1% in 2009. International sales were 101.3 million for the quarter representing an increase of 6.4% over Q4 2008, and a 20.2% sequential increase over third quarter 2009.

Emerging markets which now accounted for more than a quarter of our two-third revenues, continue to expect a strong growth trend with sales increase in the higher double-digits both sequentially and year-over-year.

The rebound in the vast majority of our emerging markets including North America, Asia-Pacific, Africa and the Middle East indicate continuously improving market environment (inaudible) our sales expansion strategies within this market. The rebound also results from a rollout of our localization strategy in some of the key emerging markets.

We are equally encouraged to see developed market continue to stabilize. With U.S. order up slightly year-over-year, the fourth quarter United States sales declining with the European market.

We believe the solid execution in these markets by our strengthened team of both direct in U.S. and indirect sales personnel, coupled with successful launch of several new products designed for the developed market during the year are behind there consistently improving results of this market, especially in comparison of some of our key international peers.

Local affairs: The U.S. Hospital CapEx project appear to be showing up. We hope to see improvement there throughout 2010. However, there is still lingering uncertainty around the expected timeframe in terms of final U.S. Healthcare Reform Bill. Overall, Mindray strong domestic sales coupled with our stabilizing developed market performance and the solid emerging market growth position us well for 2010.

With this, I would like to turn the call back to Ronnie to discuss other operational trends and the guidance in more details.

Ronnie Ede

Thanks, Jie. Our R&D pipeline was solid throughout 2009. We will leave a total of ten products surpassing our development growth of 7 new products to 9 new products and increasing our total number of products on a market to over 70 products.

Certain of our new products were released into our patient monitoring and life support product lines, including two patient monitors, clinical alert systems, an anesthesia machine, our first surgical lights, and surgical beds and ceiling panel systems.

Mindray also released two new ultrasound products in the medical imaging product line. And one new hematology analyzer in the individual diagnostic product line. In addition, we also introduced six more reagents.

Despite a challenging business environment in the U.S. and Western Europe, we are pleased with our integration process last year which has been moving along in accordance with our overall objectives.

As you may remember, the Mahwah operations now sells a variety of a Datascope DPM and Mindray branded products in the direct sales territory of U.S., Canada and part of the Latin America, Asia-Pacific and Western European markets.

Synergies from manufacturing and R&D realignment have resulted in significant margin improvement and cost saving for the Mahwah operation. Additionally, the new product development effort between our Mahwah and Shenzhen engineering teams has been progressing well and we were able to release our second co-developed patient monitored product in the second half of last year.

In 2009, Mindray USA expanded its GPO account base into include all DPM branded products in its GPO account. This expansion provides the GPOs whose contracts cover over 85% of US Hospitals and Surgery Centers with direct access to the DPM product line.

Additionally, during 2009, Mindray started to invest in the set-up of ultrasound direct sales and support capacity in the U.S. market demonstrating our continuous commitment to expand our business in the developed market.

Now, I will like to discuss our outlook for 2010. Last year, strong operating result in China and improving market conditions in some of our key international markets, particularly, during the second half of 2009, have made us confidence of our sales activities, margin trends and new product development going into 2010.

Based on the current market condition and our competitive position, we maintain our previous guidance of 17% year-over-year, full year sales growth. The sales growth targets has already factored in unfavorable year-over-year comparison in the first quarter 2010, resulting from a $6.5 million of retroactive VAT rebate in the first quarter of 2009.

Furthermore, we will strive to achieve non-GAAP EPS growth of 17% year-over-year, excluding the positive adjustments to the corporate income tax rate for the central subsidiary in the first quarter 2010, resulting from our awarded nationwide Key Software Enterprise Status for calendar year 2009.

This guidance is based on an assumption of 15% applicable income tax rate for a central subsidiary for 2010 and total fully diluted shares outstanding remaining at 113.7 million shares.

We expect capital expenditure to be in the range of $60 million to $70 million for 2010. We view 2010 as a starting point for Mindray to execute on capturing growth opportunities in some of the key markets where there is an opportunity for pick up in hospital expenditure or an increase in government purchases.

China and other emerging markets will likely continue to lead growth for the overall organization as developed market look to recover. We will continue to build up our international sales and support infrastructure by further localizing our international sales staff and investing in expanding our new market segments.

We will also continue our investments in the international sales channel coming into 2010 to better position the company in a recovering market. These investments and a $6.5 million of retroactive VAT software refund in the first quarter 2009 may negatively impact our first quarter 2010 growth rate.

In addition, we may also see the lingering market uncertainties in certain developed market may still exist in the first half of this year. Coupled with our new product release schedule may also increase a backend loaded pattern of sales and profit growth for year 2010.

However, business has appeared to stabilize in the developed market and shown signs of recovery in emerging markets. Thus, we are confident about our guidance for the full year 2010.

Regarding R&D, we intend to invest 10% of revenue back into R&D, while meeting our 2010 goal of launching another 7 new products to 9 new products. As compared to previous years, the new product mix will give more toward higher end applications and more advanced product features, with the aim of increasing penetration into higher end market segment.

Please allow me to quickly revisit three main principles regarding our R&D investment strategies here. We focus on investing in competing existing product portfolio with new applications and features that meet growing needs from customers. We also invest in developing new products beyond existing product portfolio to get into new markets and gain incremental revenue and growth profit dollars.

Equally important, we invest in improving existing product platforms through seamless cooperation between the engineering and manufacturing teams to optimize product performance and reduce costs.

In terms of our operational efficiency, we will continue to closely monitor the Company’s working capital and ensure it is being used effectively, especially in the area of the inventory management.

As recently announced, we obtained a nationwide Key Software Enterprise Status which allows us to enjoy 10% corporate income tax rate for our Shenzhen subsidiary for calendar year 2009. The related tax saving as a result of this change in corporate income tax rate for the Shenzhen subsidiary was estimated to be $8.6 million.

U.S. GAAP requires the company to recognize the related financial impact as a result of the change in another tax rate when substantive approval is received. As we were notified about the award in January 2010, the related adjustment to our corporate income tax provision will be recorded in Q1 of 2010.

As a result, the applicable corporate income tax rate for our Shenzhen subsidiary as reported in the 2009 financial statements remains at 15%. The granting of the nationwide Key Software Enterprise Status is a subject to approval each year. There is no reliable indication that Mindray will be granted this status in 2010 or in any future years. Thus, the Company’s 2010 guidance is based on the assumption that the corporate income tax rate of the Shenzhen subsidiary will remain at 15%.

With this, we return to the operator to open the call for questions.

Question-and-Answer Session


(Operator instructions) Your first question comes from the line of Bin Li of Morgan Stanley.

Bin Li – Morgan Stanley

Hi, everyone. Thanks for taking my questions. My first question is about your guidance for 2010. Right now you’re guiding for 17% year-on-year for both top line and EPS. Can you explain that you are not assuming any operating leverage? If I look at your historical top-line/bottom-line trend, in the past three quarters in 2009, you always had some kind of leverage either coming from gross margin improvement or SG&A or R&D leverage, so my question is really are you assuming one of these operating lines will offset another one so you don’t get net operating leverage or is there anything missing here?

Ronnie Ede

Thanks, Li Bin, and I appreciate your questions. You are correct in terms of some of your assumptions and past status. However, you can recall couple of things which has been changed. First of all, as you have seen in 2009, the operating top line and bottom line are not in synchronization of the growth rate. That as I explained in the past was entirely due to the acquisition of our Datascope operations. We have four months of additional sales and because of the breakeven or slightly negative performance of the Datascope operations in the past that revenue increase did not contribute to the bottom-line. Coming into 2010, that problem is no longer an issue. However, while we are forecasting or guiding the industry in terms of top line and bottom line in synchronization growth is because of the following: First of all, as you can hear from us through this prepared remark and also our past discussions and conference calls we will be very much focused on reinvesting our revenues into our R&D to develop better products for our future. We do need to make sure our product line pipeline will help us to sustain and improve our growth as we go into 2010, 2011 and beyond. As a result of that as I said in the prepared remarks we will be investing approximately 10% of our total revenue back into our R&D. That itself is a higher percentage than we have been spending in 2009.

Second to that, we are also realized in order to maintain a high growth rate especially in the international arena we need to put investments into the region to understand the region, to train our distributor, to have localized people to flow in information from the region so that we can develop better products and also provide better marketing directions for our teams over in the locals regions. As a result of that we will be investing more into the channel which part of that you have already seen in our Q4 timeframe. With these assumptions we feel we need some effort to make sure our top line and bottom line growth would be synchronized.

Bin Li – Morgan Stanley

Just want to be clear when you say I saw leverage in the last three quarters that actually exclude the Datascope impact because in the last three quarters you have pure sort of apples-to-apples comparison where we do observe operating leverage, I guess, what’s you’re also saying is when I be observing some delveraging on the SG&A line or R&D line, are you implying that gross margin will be improved somewhat?

Ronnie Ede

To answer your first part of the question the investment in R&D line will be increased and the investment of not SG&A, but just the selling line could be increased to ensure our investments in those regions will help us to sustain our future growth.

Bin Li – Morgan Stanley

Okay, thanks.


(Operator instructions) Your next question comes from the line of Shaojing Tong from Merrill Lynch.

Shaojing Tong – Merrill Lynch

Hi, everyone. Thanks for taking my question. My question is related to the Datascope synergy. If I remember correctly the plan was to realize about 30 million comp synergies in the three years' timeframe, can you give us an update at this point how much of that 30 million has been realized?

Ronnie Ede

Shaojing, thanks for the question. Yes, we have said in the past that we anticipate by 2011, we will realize $30 million of synergy through the combined operation. I am happy to report that we are very much on track to create a synergy in several different ways. First of all, as you can tell we have introduced several new products in the North American market, those products are not just provide better features, better functionality, but also provide substantial amount of increased gross margin, which was one of the major reason, help the entire company move upwards in gross margins.

Second to that is we have done a lot of reduction in outsource activities whether it’s the manufacturing or R&D area which also helped to improve our overall synergy. The third area we did have our program to realign our labor forces to ensure we take advantage of our different expertise in different geographical locations, all these have provide good synergy combined synergy for the entire company.

I very much feel that we are very much well on track in reaching the $30 million cardio research for ourselves without the reduction of the sales happen in the Western European country as a result the economic crisis and healthcare reform proposal uncertainty. I’m sure we have realized a lot better in terms of our overall bottom-line but without the synergy we already created we would be a bigger problems.


Your next question comes from Richard Yeh of Citigroup.

Richard Yeh – Citigroup

Hi, thanks for taking my question. I like to get your some sense on competition in emerging market. Ronnie, can you talk about the competitive landscape in emerging market and since you are talking about, you are spending more money on the selling expenses to grow into those emerging markets can you discuss what type, what market you are spending more money and what kind of a selling strategy you are implementing there? Thanks.

Ronnie Ede

Hi, Richard thanks for your question. I will lead to Jie Liu, our CEO, to answer your question on this one.

Jie Liu

Hi, Richard, this is Jie, for the emerging markets for the multinationals, the biggest emerging market for multinationals is China market, of course. China, I think, we continue to invest here and we believe we are in a better position to really compete in the market, but outside China, your question probably more like the outside China emerging markets.

We talked about big four, that’s probably the another, three Brazil, Indian and also Russia, Russia is because of their financial crisis, oil crisis probably, there is some issue. We did actually quite aware in 2009 that is there the Indian and Brazil is the biggest emerging market where do we actually much better in any other countries, but overall in the North America, Africa, and Asia-Pacific and Middle East we are achieving more than 20% gross.

It’s a quite impressive growth in the emerging markets, so as long as there competition will go, now more and more multinationals move to the emerging markets where we were from emerging markets and that we are still as a very big funded ourselves in the emerging markets, of course, including self, we’re more experienced in this kind of market condition, we know how can really compete in this price sensitive market and also we know that where the condition is not mature enough how we can really win the competition.

Of course, as Ronnie pointed out, we have not only invested in the mature markets such as U.S. and the Western Europe but also we keep to maintain the future investment on the key emerging markets, such as India, Brazil and Mexico. We set up the office and also hiring more people for the Indian market we can see, we are trying to set up the second office, it's not only one office there, so we never state we are coming from the emerging markets and we are truly sure we can do a much better job in the emerging market.


Your next question comes from the line of Katherine Lu of Oppenheimer & Company.

Katherine Lu – Oppenheimer & Company

Hi, good evening, and thank you for taking my question. I just want to follow up on the guidance assumptions. Congratulations on a very strong and top and bottom line guidance. I’m just wondering it sounds like you are expecting gross margin improvement to offset increase spending in R&D and potentially SG&A so I’m just wondering what kind of assumption did you deal with for your asset income and also what kind of currency assumption did you deal with for your revenue guidance?

Ronnie Ede

Hi, good morning, Catherine, and thanks for the question, I think you are very much correct and we feel very good about it, overall revenue we have achieved in Q4 timeframe, especially, as we mentioned that overall in the developed world, and also the international market, we actually saw growth in the total combined market, although the developed market did not decline that much in Q4 anymore.

To answer your question in terms of overall assumption, yes, we do anticipate to increase a little bit investment in our selling expenses and R&D expenses however; these kind of investment is not out of our overall efficiency improvement. In other words, we anticipate we can improve our overall efficiency and productivity and then invest some more money into R&D and otherwise it would become the additional productivity gain. Those investments will not impact that much in terms of our overall top line and bottom line improvement.

In terms of our gross margin assumption, as I always said it before, we have been anticipating level gross margin numbers on year-over-year basis with slight improvement on almost stable gross margin. Therefore, we made assumption of a top line and bottom line synergistic gross rate at around 17%.


Your next question comes from the line of Ding Ding of SIG.

Ding Ding – SIG

Thank you. Good morning, everyone, congratulations on a strong quarter. I think it was your accelerating growth in China this quarter. I notice the gross margin and operating margin were lower than what we expected in fourth quarter. Would you please talk about what are the key factors behind that? And going forward the percentage we saw in fourth quarter ‘09 on selling cost as a percentage of revenue is that representative for what we should expect for 2010? Should we expect some leverage on G&A cost? Thank you.

Ronnie Ede

Good morning, Ding Ding. Thanks for the question. First of all, the gross margin, the Q4 has always been the lowest gross margin for us, and for almost every year we are in operation. And I think I mentioned this particular set during our last conference call and the reason as I stated last time is due to, first of all, we revaluate our inventory as we renegotiate with our suppliers every year in Q4.

Second to that is we actually have larger tender sales in Q4 and as we have some impact on our overall pricing and slightly on top of that maybe a little bit price erosion as we always see in Q4 timeframe. So nothing which is out of ordinary as what we anticipate I thought we have been discussing about this during our last conference call in the Q3 timeframe.


Your next question comes from the line of Jinsong Du of Credit Suisse.

Jinsong Du – Credit Suisse

Hi, everyone, just a quick question, this $6 million other income, could you elaborate what is that?

Jie Liu

Part of that is a government incentive for us investing in Nanjing and as part of the incentive provided to us for operating in Nanjing operation.

Jinsong Du – Credit Suisse

Is that one time or you are going to get more?

Jie Liu

Usually it’s a onetime but you have different kind of subsidies from government from time to time you can see throughout the years we have those kind of things so many years we have those kind of things but not from the same sources.


Your next question comes from the line of Wei Du of Goldman Sachs

Wei Du – Goldman Sachs

Hi, I just have a simple question. I’m very curious about your R&D strategy because it looks like you’re going to put more effort into the R&D, that’s why you are not reducing your R&D expenditure as a percentage of sales, so would you elaborate on the products pipeline you are focusing on, are those going to be in the existing three segment or its going to be the new area of product development? And then in generally if you have time, if you don’t mind, would you also comment the impact of Mindray with the current hospital reform in China? Thank you.

Ronnie Ede

Thank you, Du. First of all, in terms of our R&D investment, as you have been learning from us in the past that we have been always talking to the Street. R&D is the core competency of the company. What we have been doing in the past and successfully carry all the way to. Today is through our ability to generate better products and provide better returns to our users, as a result of that that helped the company to grow and helped the company to generate profits.

And in terms of our strategy, as in my prepared remarks, we have three types of strategy. First of all, we try to develop products vertically improve our existing product line to provide more functionality and to compete the product line offering totally to high end.

Second strategy is to add new product within the three categories we have that we have not yet offered to our customers, these products may carry lower margins initially, but would help the company to grow fast and help the company to generate incremental gross profits.

The third strategy, engineering department is to continue to invest to reduce costs, and improve the existing products functionality. So these three strategies have not been changed and will continue moving forward toward directions.


Your next question comes from the line of Janice Chen [ph] of Piper Jaffray.

Hongbo Lu – Piper Jaffray

Hi, actually this is Hongbo Lu. Thank you so much for taking my question. May be I have missed this. Can you give us the VAT for the quarter on China revenue and also the rough growth rate breakdown for different ex-China regions, especially in the US, what kind of growth year-over-year did you see in the quarter? Thank you.

Jie Liu

Thank you, Hongbo. In terms of the first question, yes, we did not mention that number yet, the incurring VAT software refund for the quarter is $5.5 million compared with previous year we had a $14.4 million of VAT. Out of $14.4 million, I would say around $10 million are truly retroactive, so it’s not a true comparison. So if you compare with this number, our gross rate, net of that 10% will be substantially high.

And to answer your second question in regard to Q4 to Q4 comparison in different part of the world and especially, asking me about North America and developed world in the Western European country we still saw a slight decline, well, that decline is a high single digit decline, it's very much, much better than previous quarters and is a great improvement.

And further to that is our North American territory, North America territories decline was the cost compare with substantially higher quarter of Q4 2008, we actually enjoy within that quarter we actually had one of the largest sales in North America for $3.6 million and which is one deal and its now repeatable, so its net of that particular deal we actually have the gross. Since David Gibson is on the line I like him to make some comment of the operation and what he has seen on our North American operation. David, can you comment?

David Gibson

Yes, just highlight a couple things on that, if you look at the Q4 ’09 number comparatively to Q4 '08 slight decline, comparatively the Q4 '07 we had growth over that two-year period in Q4. So we are very happy with that. The overall North American market condition is improving slowly, capital budgets are thawing, you see a variety of reports out there, estimating how much capital expenditure increases are going up 2010 versus 2009.

It is going to be an uneven increase as some areas of hospital spending ramp up a little faster than others, and hospitals are still and this is affirmed, I was in discussion yesterday with senior purchasing managers, one of the largest (inaudible) hospital chains in U.S. still very much on a prioritization and having corporate approval and high level approval to get capital spending, they are not pushing those approval levels back down, but they are going to be spending more overall. So it’s a good sign. And I think it's showing that things are progressing along, but it is a slow improvement, not a dramatic return to where we were in 2006.

Jie Liu

Thank you, David.


Your next question comes from the line of Yale Jen of Maxim Group.

Yale Jen – Maxim Group

Thanks for taking my question and good evening. My question is about as you pointed out that in Q4 '09 the international sale was at a substantial increase for over quarter up to $101 million and would you see a similar level going forward for the upcoming four quarters in 2010 or how should we think about that?

Ronnie Ede

First of all, as you know, our overall guidance stayed at around, we anticipate around 17% gross year-over-year for 2010 versus 2009. That particular gross assumption baked into it is a higher gross in China, of course, north of 20% to 25% gross in China, double-digit growth in the emerging market and single-digit gross in the developed market. We believe this particular target we set for ourselves and we guide industry does take some effort of our part before we can achieve it. This is also based on our understanding of the current market conditions and what we have seen as we are exiting 2009.


Your next question comes from the line of Mr. Junaid Husain of Soleil Securities.

Junaid Husain – Soleil Securities

Good morning and good evening everyone. Ronnie, relative to your sales growth guidance of 17% for 2010 I do understand and appreciate that you do not give guidance on a quarterly basis, but perhaps you could give us a sense for the phasing of revenues on a quarterly basis. Would you say this growth should be steady on a quarter-to-quarter basis or should we expect any potential springs up or down based on new product introductions or perhaps decisions on government tenders?

Ronnie Ede

You are absolutely correct. We have always been showing seasonalities for every year. And I don’t think 2010 will be an exception either. I can assure you one thing; we would not be equally growing 17% for all four quarters. I also mentioned in my prepared remark. Last year, same quarter, Q1 of 2009 we did receive $6 million additional VAT refund as a retroactive portion of the VAT. That’s not going to repeat in Q1. So with that we definitely will see some slowdown in Q1 gross rate versus the other quarters and we probably would see back end loaded a little bit in terms of gross rates.


We have a follow up from the line of Bin Li of Morgan Stanley.

Bin Li – Morgan Stanley

Hello. Hello.

Ronnie Ede

Yes, Bin, go ahead.

Bin Li – Morgan Stanley

Okay, yes, hi, Ronnie, you mentioned you have explained quite well about the balance sheet improvement, but I was just wondering, I remember last time, last quarter, the guidance was pretty cautious and you said that you expect a stable AR days or inventory days, so what has happened or what are the things has happened during the last quarter that really surprised you?

Ronnie Ede

No, actually, Bin, I don’t think that things really surprised me in terms of overall operation. First of all, you know the turnover days whether it’s a DSO, its AR or AP or inventory, it’s also a function of the sales, the higher the sales you will have a smaller turnover days that’s one thing. Second to that is the real operational control. What you can tell from our balance sheet, our inventory actually reduced $12 million from last quarter and that’s a real reduction and that reduction is substantial due primarily as we mentioned to the tender sales in Q4 versus the anticipated tender sales in Q3 and also raw material inventory control. We continue, we will exercise our control and better our system to enable us to be more effectively managing our inventory.

In terms of receivable, our receivable also being managed very well in terms of collection. As a result of that our receivable order increased at a much less pace in comparison with our revenue increases. That’s our overall DSO improve a lot. I will say the following that those number will be fluctuating as we move forward, especially the calculation days, because like in Q1 timeframe, which is the lowest quarter in our seasonality pattern, we will probably show some of those days we grow up a little bit, but these are normal fluctuations.

To answer your question again, I think we have anticipated improvement; we also anticipate some fluctuations as we move forward but our commitment to industry and to everyone is we will continue to be very careful about how to utilize our working capital and be more effectively using the working capital we have.


Your next question comes from the line of Janice Chen of Piper Jaffray.

Hongbo Lu – Piper Jaffray

Thank you, this is Hongbo again. And Ronnie, just going back to the operating leverage question, to sum up, I think what I heard is for the gross margin in 2010 compared to 2009 we should expect a stable growth margin. And then for R&D 2009 we are looking at about 9.2% spending of the total revenue and then you said in 2010 you are going to spend about 10%. So where are you going to make up for that 0.8% of difference to achieve the same growth rate for top-line and non-GAAP EPS? Thank you.

Ronnie Ede

Thanks for the question. There are couple of places I think we can look into it. First of all, your assumption is our assumption and I have been also telling the same thing in the past, we do not, we would not chase gross margin increases as our first priority because that would not be our overall target, we will be improving our overall gross margin dollar, but not gross margin percentage, as our priority. Although we will be trying very hard to improve our gross margin – don’t get me wrong there, we would try to improve our gross margin, but we will be effectively competing in the market in order to gain market share, if that’s necessary.

Second to that, in terms of answering your question, where can we come back with the efficiency? I don’t think our G&A expenses will be increasing in the same percentage as what we have been spending right now. And we will be looking into even in the R&D area, international area, how can we improve efficiency while spending additional dollar in the necessary areas. Thank you.


Ladies and gentlemen, that concludes the Q&A session. I would now like to turn the call back over to your, CFO, Ronnie Ede.

Ronnie Ede

Thank you. Again, I would like to thank you all for participating in today’s call. Over the coming year, we would look to grow our business increase our market share by driving new market segment penetration with products launched over the last two years, spending our presence in key emerging markets, leveraging our domestic leadership and further building up develop market sales capability. We will also strive to improve the effectiveness of our working capital utilization and adjust our overall strategy as necessary to better compete globally.

We are cautiously optimistic in our ability to achieve our guidance for 2010 and we remain our long-term objectives in all geographies. We appreciate your long-term interest and supporting Mindray and our business. Thank you for joining us today and we look forward to speaking with you all soon. Thank you


Ladies and gentlemen, that concludes the presentation Thank you for your participation. You may now disconnect. Have a great day.

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