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Symmetry Medical Inc. (NYSE:SMA)

Q4 2012 Earnings Conference Call

February 21, 2013, 08:00 AM ET

Executives

Thomas J. Sullivan - President and CEO

Fred L. Hite - SVP and CFO

Carol Ruth - IR, The Ruth Group

Analysts

Matt Miksic - Piper Jaffray

Matthew O'Brien - William Blair

James Sidoti - Sidoti & Company

James Terwilliger - The Benchmark Company

Operator

Welcome to the Fourth Quarter 2012 Symmetry Medical Incorporated Earnings Conference Call. My name is Shawn and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Ms. Carol Ruth. Ms. Ruth, you may begin.

Carol Ruth

Thank you, operator. Joining us on the call are Tom Sullivan, President and Chief Executive Officer and Fred Hite, Senior Vice President and Chief Financial Officer.

Statements in this conference call regarding Symmetry Medical's business which are not historical facts may be forward-looking statements that involve risks and uncertainties within the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are predictive in nature and are frequently identified by the use of terms such as may, will, should, expect, believe, anticipate, plan, estimate, intend, and similar words indicating possible future expectations, events or actions. Such predictive statements are not guarantees of future performance, and actual results and outcomes could differ materially from our current expectations.

Factors that could cause or contribute to such differences include, but not limited to the loss of one or more customers, the development of new products or product innovations by our competitors, product liability, changes in management, changes in conditions affecting the economy, orthopedic device manufacturers, or the medical device industry in general and changes in government regulation of medical devices and third-party reimbursement practices.

We refer you to the risks in the forward-looking statements sections of the company's most recent Annual Report on Form 10-K, filed with the Securities and Exchange Commission, as well as the company's other filings with the SEC, which are available on the SEC's website at www.sec.gov.

Before turning the call over to Tom Sullivan, President and Chief Executive Officer, I'd like to emphasize Symmetry Medical's policy of not commenting or disclosing individual customers or a program. Tom?

Thomas J. Sullivan

Thank you, Carol. Good morning and thank you everyone for joining us today for Symmetry Medical's fourth quarter and full year 2012 conference call. One year ago, on our 2011 year-end conference call, I outlined the key strategic initiative to which Symmetry was committed to in 2012.

These included improving the gross margin in our OEM Solutions segment, integrating the Codman surgical instruments business into our Symmetry Surgical segment, commercializing a number of new products and delivering enhanced cash flow to significantly reduce our debt.

I'm pleased to report that we successfully executed on each of these initiatives over the course of the year putting us in a strong position to continue delivering improved results in both segments of our business. I will begin today's call with a quick review of the financial highlights for the fourth quarter and 2013 guidance, then provide an operational update.

Total revenue for the fourth quarter was $106.6 million, up 26% year-over-year and 6% sequentially. Revenue in our OEM Solutions business was up 7% year-over-year and 3% sequentially, reflecting the slight increase in procedural growth reported by our customers and relatively stable capital spending on instruments.

In our Symmetry Surgical segment, sales rose significantly compared to the prior year due to the Codman surgical instruments acquisition coupled with above-market organic growth of 10% excluding the impact of a large $2.9 million one-time year-end stocking order.

Gross margin for the fourth quarter 2012 was 27.1%, up from 16.4% in the fourth quarter of last year. The year-over-year gross margin improvement was driven primarily by a larger percentage of revenue from our Symmetry Surgical segment.

Gross margin also benefited from strength in our OEM Solutions gross margin, driven by increased leverage of overhead costs through higher sales, improvements in scrap and consumables and approximately 200 basis points of efficiencies resulting from the implementation of the Symmetry business system.

On a sequential basis, overall gross margins slipped 90 basis points as a result of product mix and the previously communicated impact of salary increases in September.

Our adjusted earnings per share was $0.17 and cash flow from operations for the quarter was $10.7 million. We reduced our total debt by $11.5 million in the quarter and our leverage ratio is now 3.3 times, down from 3.7 times at the end of last quarter and down a full turn versus year ago.

We are pleased with our success in improving gross margin and profitability and a significant reduction in our debt in 2012. As we look to 2013, we expect these trends to continue although at a slower pace with resulting EPS continuing to grow at a higher rate than revenue as we drive leverage in our infrastructure and further improve operating efficiency.

Accordingly, we are providing 2013 financial guidance of revenue in the range of $420 million to $440 million with year-on-year growth strengthening throughout the year from a base of flat to low-single digits in Q1. We believe underlying procedural growth rates for the full year to be in the 2% to 3% range, as adjusted EPS for 2013 is in the range of $0.64 to $0.76 per share which represents 12% to 33% bottom line growth.

Included in this guidance is a $0.03 per share impact of the Medical Device Excise Tax. Excluding this impact, our adjusted EPS is projected to grow 18% to 39%. I would now like to share with you specific operational updates and key initiatives for 2013.

Sales in our OEM Solutions business were up 7% year-over-year, reflecting solid results in implants, instruments and aerospace partially offset by lower case sales. These segments were also up sequentially from the third quarter, demonstrating the slightly to stable improved orthopedic procedural volumes reported in the fourth quarter and a relatively stable quarter of instrument capital purchases that includes some incremental activity related to new product launches expected in 2013.

Worth noting in the strong 16% year-over-year growth in implants as our customers' fourth quarter inventory reductions was less than year ago in an environment of strengthening procedural demand. In aerospace, growth was driven by improving demand from our customers and normal quarter-to-quarter fluctuations in volumes in this segment. Cases were down 11% year-over-year and 3% sequentially, excluding changes in foreign exchange rates as we continue to work to regain share and leverage our recent technology and service investments in this segment.

We believe we have made the investments to expand on our leadership position in the OEM Solutions segment and achieve market share gains. There are several potential catalysts for the business and we are well positioned to benefit from each of them. First, we are encouraged to see fourth quarter 2012 procedures going at a higher rate than the negative to low-single digits we experienced for the past several years.

While the main drivers and sustainability of this improvement are still to be determined, we believe in an improving economy, patient demographics and recent direct-to-patient advertising have the potential to support a continued return to the care pathway by the orthopedic patient. We believe that acceleration of this return of the patient will drive implant demand and create opportunities for Symmetry Medical as OEM customers make capital investments in instruments and cases to capture this growth.

Second, we continue to believe that increasing quality and regulatory demand, including the recent requirement that all contract manufacturers register with the U.S. FDA will drive supplier rationalization by our OEM customers to a smaller number of highly capable strategic partners such as symmetry.

Third, we believe that the profitability pressures on orthopedic customers create opportunities to collaborate with OEMs to reduce supply chain costs through additional outsourcing and supplier consolidation. With less than 15% of the implant cost of goods sold outsourced today, we believe that there is a multibillion-dollar opportunity in the years ahead compared to outsourcing levels and other industry, such as electronics or retail. As customers increase their implant manufacturing outsourcing activities, we believe a trusted supplier such as Symmetry will be well positioned to benefit.

And finally, it is well-known that Johnson & Johnson and Zimmer are expected to launch major knee platforms at AAOS this year with the potential for large capital investments in instruments and cases to support the rollout of these systems later in the year and for several years to come. Symmetry is privileged to support these and other customer product launches and our guidance projects our continued involvement with these projects.

We anticipate that these major knee launches will occur over several years with a more gradual and measured rollout as compared to previous large joint launches. It remains premature, however, to predict the magnitude of our involvement in these programs nor would we be in a position to comment on any one customer specifically. Our guidance does assume that revenue gain from all customer new product launches could increase between $3 million and $15 million in 2013.

In addition, to capitalizing on these external drivers for the OEM Solutions business, we will continue to be highly focused in 2013 on improving our operational efficiency. In 2012, we began to implement the Symmetry Business System, fully deployed Win SPC quality management, unified all of our U.S. instruments facilities in Symmetry Surgical onto one ERP platform and introduced a record number of new products in new intellectual property.

We are beginning to see the initial benefits of the Symmetry Business System and have yet to realize the full upside from the unification of our plants on a single ERP platform, and the shift in our product mix, the higher margin innovative products developed by Symmetry. As mentioned earlier, we delivered nearly a 200 basis point improvement in gross margin as a result of the Symmetry Business System in 2012.

We also increased the sales of products based on Symmetry's proprietary IP to nearly 20% in our instruments segment and to slightly over 30% in our case segment. In 2013, we expect this journey to continue with a goal to achieve three specific things. One, continue the rollout of the Symmetry Business System with an aspiration of 100 to 200 basis point OEM solutions gross margin improvement. Two, integrate our U.S. implant and U.S. case facilities onto our single ERP platform. And three, continue introducing innovative new products that leverage Symmetry IP and deliver a higher gross margin.

If we accomplish these initiatives, our OEM Solutions business will exit the year with a more diverse, higher margin product mix, more efficient operations that will drive improved gross margin and a sophisticated unifying operating infrastructure with the capabilities to support continued growth in an increasingly difficult quality and regulatory environment.

Turning to Symmetry Surgical, we had a strong quarter of above market organic growth in our historical Symmetry Surgical business. During the third quarter, we successfully migrated from Codman's transitional services to our Symmetry Surgical headquartered in Nashville, Tennessee.

And during the fourth quarter, we continued to focus on converting hospitals to new ordering patterns and strengthening our relationship with them as Symmetry Surgical. This effort will continue throughout the first quarter and we'll continue to restrain the growth of the acquired Codman surgical instruments product.

We are confident that with the ERP, infrastructure and integration behind us, our U.S. team will be able to focus on driving growth across our full portfolio of reusable surgical instruments.

In 2013, we believe we will strengthen our position in the marketplace as we complete the integration of the entire Symmetry Surgical business on the one ERP platform in the first quarter and harmonize our U.S. commercial selling force to carry the entire Symmetry Surgical product line into second quarter. These efforts will be complemented as our R&D team enhances our pipeline with innovative new products to meet the needs of our hospital customers.

Outside the U.S., we continued to successfully expand Symmetry Surgical's network of distribution partners with notable new partnerships announced in Italy and Mexico. By establishing direct relationships with distributors, we gain greater control of the relationships and eliminate Codman's transitional services. This type of partnership also allows us to sell our full portfolio of historical SSi products in these countries where we historically had a limited or little presence.

As of today, we have 54 global distributors bringing Symmetry Surgical's products to customers in 107 countries. We believe that we will see enhanced benefits of these global partnerships throughout 2013.

This year, Symmetry Surgical will be focused on completing our ERP infrastructure, harmonizing our sales force, launching new products, developing new Symmetry intellectual property in support of our product pipeline and continuing to drive above-market growth. We believe our sales force and distribution partners have a tremendous opportunity to better leverage our broad and respective products portfolio to drive growth and gain market share.

Before I turn the call over to Fred, I would like to comment on the success of our Symmetry Medical research and development team in 2013. For the second year in a row, we generated a more intellectual property that was created in the five-year period of 2006 to 2010 with 13 patent applications.

Additionally, we launched 18 new products, many of which were of a higher regulatory classification. While the benefit of our efforts did not show up in our P&L immediately, they reflect the importance of innovation as our foundation for future profitable growth.

We encourage you to stop by our booth at the upcoming American Academy of Orthopedic Surgeons or the Academy of Operating Room Nurses conferences to see our innovations and actions.

With that, I would now like to turn the call over to our Chief Financial Officer, Fred Hite, for his financial review. Fred?

Fred L. Hite

Thanks, Tom. Total revenue for the fourth quarter 2012 was $106.6 million compared to $84.5 million in the same period of 2011. Fourth quarter 2012 includes $13.1 million of incremental revenue from the Codman surgical instruments acquisition. Foreign currency exchange rate did not impact the year-over-year comparison.

The year-over-year revenue increase was driven by growth in the company's Symmetry Surgical segment which came in at $28.5 million for the quarter compared to $11.2 million in the fourth quarter of 2011.

Fourth quarter revenue also benefited from the growth in the company's OEM Solutions segment which came in at $78.1 million from the quarter, up from $73.3 million in the same period of 2011, which represent a 6.6% growth rate.

On a sequential basis, total revenue was up 5.6% compared to the third quarter of 2012. OEM Solutions revenue grew 2.6% and Symmetry Surgical revenue grew 14.8% compared to the third quarter of 2012. Total revenue includes $600,000 of favorable foreign exchange impact.

Fourth quarter 2012 revenue in the OEM Solutions segment by category was as follows. Instrument revenue was $30.0 million compared to $27.3 million in the same period last year, up 9.6%. Higher instrument revenue in the fourth quarter 2012 was driven by increased capital purchases and more customer product launch-related demand compared to the prior year period. Instrument revenue was up 1.1% compared to the third quarter of 2012.

Implant revenue was $26.5 million compared to $22.9 million in the same period last year, up by 15.6%. The year-over-year increase was driven by the stronger hip and knee procedure growth and significant year-end customer inventory adjustments in the fourth quarter of 2011 that was much less of an impact in the fourth quarter of 2012. Implant revenue was up 3.2% compared to the third quarter of 2012.

Case revenue was $13.9 million compared to $15.9 million in the same period last year, lower by 12.1%. The decrease in case revenue reflects reduced customer product launch demand in orthopedic market -- continued softness in non-orthopedic customer demand as well as some general share losses as a result of the customer delivery issues back in 2011. Case revenue was down 1.6% compared with the third quarter of 2012.

Other revenue was $7.7 million, up 7.5% as compared to $7.2 million in the same period last year and up 15.6% compared to the third quarter of 2012. Symmetry Surgical revenue was $28.5 million, up 153.6% compared to $11.2 million in the same period last year. Excluding $13.1 million of revenue related to the Codman surgical instruments acquisition and a $2.9 million one-time stocking order, our direct segment was up 10.4% organically versus the prior year.

Our largest customer, excluding the Codman-related transition services sale, accounted for 31% of our fourth quarter 2012 revenue and our largest customers accounted for 32% and 12% of our fourth quarter revenue in 2011.

Gross profit for the fourth quarter of 2012 was $28.9 million compared to $13.8 million in the same period last year. Gross margin percentage for the fourth quarter of 2012 was 27.1% compared to 16.4% in the fourth quarter of 2011. The increase in gross margin was driven by a larger percentage of revenue from the company's higher margin Symmetry Surgical segment.

Gross margin also benefited from improvements in the OEM Solutions gross margin, which was driven by increased leverage of overhead costs due to higher sales volume, improvements in scrap and consumables and efficiencies resulting from the Symmetry Business System.

Selling, general and administrative expenses in the fourth quarter of 2012 were $19.0 million compared to $15.2 million in the same period last year. The increase in selling, general and administrative expenses in the fourth quarter 2012 was primarily due to the inclusion of $3.3 million of expenses related to the acquisition of the surgical instrument business from Codman along with incremental $1.3 million of acquisition-related intangible amortization and added stock compensation expense of $500,000. This was partially offset by a $1.2 million reduction in acquisition-related costs and a $500,000 reduction in management transition expenses.

In addition, the fourth quarter of 2011 included an impairment charge of $1.5 million related to the write-off of the SSi trade-name and SEC-related legal costs of $200,000, both of which did not recur in the fourth quarter of 2012. Facility closure and severance costs were negligible in the fourth quarter of 2012 compared to $200,000 in the fourth quarter of 2011.

Operating income for the fourth quarter of 2012 was $8.7 million compared to an operating loss of $4.1 million in the same period last year. Operating margin for the fourth quarter of 2012 was 8.2% compared to negative 4.8% in the same period last year. Excluding the amortization, impairment of intangible assets, stock compensation expense, acquisition-related costs, management transition costs, facility closure and severance costs, operating income for the fourth quarter of 2012 was $13.7 million, up 403.2% compared to $2.7 million in the same period last year.

Income taxes for the fourth quarter of 2012 was $700,000 compared to income tax benefit of $1.8 million in the year-ago period. Net income for the fourth quarter of 2012 was $2.9 million or $0.08 per diluted share compared to a net loss of $3.2 million or negative $0.09 per diluted share in the same period last year.

On an as adjusted basis, net income for the fourth quarter of 2012 was $6.1 million or $0.17 per diluted share compared to $0.04 per diluted share last year, and compared to 2012 third quarter of $0.18 per diluted share. I would like to refer you to our press release issued this morning for a reconciliation of GAAP to as adjusted amounts.

Earnings per share for the fourth quarter of 2012 reflected a weighted average number of 36,590, 612 diluted shares outstanding compared to a weighted average of 35,691,050 shares outstanding in the year-ago period.

Turning to our balance sheet, cash at the end of the fourth quarter 2012 was $9.8 million, down from $12.4 million in the third quarter of 2012. During the fourth quarter of 2012, we generated $10.7 million of cash from operations and used $1.5 million for capital expenditures, another quarter of strong cash flow. For the total year 2012, we generated $62.7 million of cash from operations and used $10.3 million for capital expenditures.

As of December 31, 2012, our total net debt was $213.1 million, a decrease of $11.5 million in the third quarter of 2012. Our debt ratio was approximately 3.3 times our LTM EBITDA, down from 3.7 at the end of the third quarter and down from 4.3 as of year-end 2011.

As Tom mentioned, we are very pleased with the progress achieved related to cash generation as well as the debt repayment during the quarter and remain committed to leveraging a strong cash flow anticipated from Symmetry Surgical and to continue to utilize lean tools to reduce inventory days on hand to pay down debt and lower our leverage ratio.

Total year 2012 debt reduction with $61 million, which is 37% of our $165 million purchase price for the Codman instruments acquisition completed in December of 2011. For the full year 2012 results, total year revenue was $410.5 million up 14.3% compared to $359.0 million reported in full year 2011.

2012 includes $59.8 million of incremental revenue from the Olsen Medical and Codman surgical instruments acquisitions and a negative foreign currency affect of approximately $3.7 million. Full year 2012 OEM Solutions segment revenue was $303.3 million compared to $319.5 million in the same period last year. The decrease was primarily due to weaker case demand.

Full year Symmetry Surgical segment revenue was $107.2 million, up 171.5% compared to $39.5 million in the same period last year. Excluding the acquisition, related revenue and one-time fourth quarter sales, the Symmetry Surgical segment grew 12.8% organically for the year.

Gross margin percentage for the full year of 2012 was 26.6% compared to 19.8% in the year-ago period. Net income for the full year of 2012 was $9.1 million or $0.25 per diluted share compared to $2.9 million or $0.08 per diluted share for the full year 2011. On an as adjusted basis, full year 2012 was $20.7 million or $0.57 per diluted share compared to $13.6 million or $0.38 per diluted share reported for the full year of 2011.

Now turning to our guidance. For the full year of 2013, we anticipate revenues to be in the range of $420 million to $440 million. This represents approximately $314 million to $331 million of OEM Solutions revenue and $106 million to $109 million of Symmetry Surgical revenue.

These forecasts and revenue numbers include approximately $5 million of sales which were recorded in Symmetry Surgical in 2012 and will be recorded in the OEM Solutions business in 2013, as we transition an OEM customer between the two segments. At the high end, this represents approximately a 7% growth for each segment as well as total Symmetry Medical.

Our full year GAAP and as adjusted diluted earnings per share guidance is expected to be as follows. We anticipate full year 2013 GAAP EPS to be in the range of $0.35 to $0.47 and full year as adjusted EPS to be in the range of $0.64 to $0.76. The GAAP and as adjusted EPS both include the anticipated impact of the Medical Device Tax which we expect to decrease our 2013 net income by approximately $0.03 per share.

We anticipate recording approximately $1.5 million of annual expenses for the Medical Device Tax in the G&A line on our P&L starting in the first quarter of 2013. Excluding the impact of the Medical Device Tax, our as adjusted EPS is expected to grow between 18% and 39% on projected revenue growth between 2% and 7%.

The as adjusted EPS guidance excludes all amortization expense, a non-cash item of approximately $0.16; restricted stock, a non-cash item of approximately $0.08 and acquisition-related costs, severance costs and other costs of approximately $0.05. Together, these items are expected to negatively impact full year 2013 GAAP EPS by approximately $0.29. We also expect to generate approximately $60 million of cash from operations and spend approximately $12 million on capital expenditures.

I will now turn the call back over to Tom.

Thomas J. Sullivan

Thank you, Fred, for that excellent summary and for everything you've done during 2012. In closing, in 2012, we significantly enhanced our position in the market by strengthening the operations of our market-leading OEM Solutions business and by successfully integrating the Codman surgical instrument business to create Symmetry Surgical, a hospital direct subsidiary that has significant upside potential. Together, these two business segments leverage our expertise in surgical instrument manufacturing and research and development, our customer relationships and marketplace knowledge and our corporate infrastructure.

As we look to build on our progress in 2013, we will continue to focus on four simple priorities. First, positioning Symmetry Medical, OEM Solutions to grow and gain market share and benefit from supplier rationalization, increased outsourcing, new product launches and of course any potential increase in patient volume.

Second, improving the OEM Solutions gross margin through the Symmetry Business System and other initiatives such as our ERP consolidation. Third, harmonizing the Symmetry Surgical U.S. commercial selling organization and driving growth by leveraging our broad and well-respected portfolio of products. And four, enhancing cash flow generation and profitability to lower our debt and position us to retire our high interest debt by year-end.

If we accomplish these goals, we believe we will translate into sustainable long-term revenue growth and market share gains, a more diversified innovation-driven company with improved profitability, strong cash flow and reduced leverage and ultimately enhanced shareholder value.

With that, we'd now like to open our call for questions. I'll turn it over to John, our operator. John.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-session. (Operator Instructions). Our first question comes from Matt Miksic from Piper Jaffray. Please go ahead.

Matt Miksic - Piper Jaffray

Hi. Good morning.

Thomas J. Sullivan

Good morning, Matt.

Matt Miksic - Piper Jaffray

So thanks for taking our questions. I had one just on this range of revenues that you gave as a potential impact of these new product launches, Tom.

Thomas J. Sullivan

Yes.

Matt Miksic - Piper Jaffray

I think you've put it out there as 3 million to 15 to OEM Solutions?

Thomas J. Sullivan

That's correct. But that speaks to overall revenue associated with all product launches, not specifically to…

Matt Miksic - Piper Jaffray

Of course.

Thomas J. Sullivan

…to the two very large ones that are out there.

Matt Miksic - Piper Jaffray

Understood. And I'm assuming that there were a number of those last year, so this all brand new, right, you have new product launches every year? My question is, I'm just wondering in that 314 to 331 range you gave which is about, I guess, 4% to 9% if I'm getting that right, which is a pretty big range for OEM Solutions. How much of that 3 to 15 is in there? Is that the range that you've included in your guidance or is that the range that -- is at the top end to maybe help me understand that, help us understand that?

Thomas J. Sullivan

So the range, the 3 million to 15 million range, just to make sure that I'm clear with everyone on that, that is the range for all revenue associated with new product launches. And Matt you were correct in your statement that there's always a certain amount of base and in any given year, our product launches and then new ones come on. We believe that the associated demand for new product launches as a whole will increase that annual sort of revenue stream associated with it between 3 and 15. That 3 to 15 is part of what's driving the range of our guidance from 314 to 331.

The additional factor obviously that's in the overall revenue guidance is going to be associated with patient procedural growth. So if the patient growth comes in stronger, we believe that has the potential to increase capital spending by our OEM customers overall as well as to have a stronger draw on our implant demand. So that 3 to 15 range is in the 314 to 331 guidance along with some other assumptions regarding patient growth that might push it to the higher end.

Matt Miksic - Piper Jaffray

Okay. And that sort of transitioned to the second question which is around that patient growth number. I guess when we look at the orthopedic market -- if we all agree that maybe it's growing in, I don't know, 3% or something like that in total, that from a revenue standpoint understanding these are your customers, these are the OEM revenues, that's net of some pricing. So we would probably characterize that as more along the lines of procedure growth of maybe 5% or something like that. How is that -- maybe explain how with the way you're looking at it is different from the way that we might be looking at it?

Thomas J. Sullivan

As you know, there's not really good solid numbers out there on procedural growth. So we try to make estimates that are consistent over time with how we've looked at it. We believe the long-term demographic growth rate is around 4% for the industry. And I don't think I've seen any reports that speak to the industry being at that demographic growth rate yet. I think everybody would agree that we've seen a drop-off from that demographic growth rate since the economy slowed down in the '09 timeframe. So what we believe is moving into 2013, we're going to get closer to that long-term demographic growth rate. I'd love to see us continue to grow past that, I don't believe that the industry's at it yet.

Matt Miksic - Piper Jaffray

Okay. So your baseline planning assumption is 2% to 3% and that is truly unit growth. That's not unit net of price or anything like that?

Thomas J. Sullivan

That's the assumptions that we're making, yes. Because the price doesn't translate directly back to our revenue as opposed to the procedural growth does. And Matt, we hub it off of do we believe we'll be a demographic growth? And right now, I've not seen any published industry reports to imply that we're back at that equilibrium rate.

Matt Miksic - Piper Jaffray

Great. One question on just the results in your commentary on cases. You talked about some of the changes that you're making there in your cases business line. I guess that was the number implants and instruments kind of came in, in line with our number. Cases were a little bit on the light side. And I wasn't -- I think Fred you referenced just fewer launches, maybe away from orthopedics. Any other color you can provide on why that number was maybe a little softer and what we can expect in the next couple of quarters in terms of trends?

Thomas J. Sullivan

I appreciate that, Matt. And in a combination of the comments that I made and Fred made, certainly we did not see as much launch activity in that business. But also as I said in my call, it's clear that we lost market share in that business during the services issues that we had in 2010 and the first part of 2011. We worked substantially to rectify those in the back half of '11, made substantial capital investments in that business in 2012.

And we believe that we are well positioned to regain any lost market share. What we think we saw in weakness in the end of 2012 were really product launches that we didn't earn the right to participate in smaller launches, customers outside of work, that we didn't earn the right to participate in the development back in the 2010, '11 timeframe. So we're paying the price for the service issues that we had two years ago.

Matt Miksic - Piper Jaffray

That's helpful. Then one final question, I'm sorry to load them up here, but I just want to make sure we hit this on utilization. It strikes me that you've kept your capacity pretty much intact. You've pushed through some manufacturing efficiencies over the past two years. I'm wondering if you could give us an update as to where you are in terms of utilization, understanding that this cycle is going to be different than the last cycle of new products and maybe you'll return to better growth in orthopedics if that's exactly what we do see. So understanding this and historical differences, maybe where -- where have you gone to in sort of good times in orthopedics in terms of utilization? And maybe what's the upside from where you are currently?

Thomas J. Sullivan

We estimate our capacity utilization right now to be in roughly the 60% range. So certainly it is far below what we'd like to see and it's far below what I would call an efficient operating level. We've considered the footprint and appropriate rationalization opportunities, we continue to look at the opportunities that are in the orthopedic spaces. As everybody knows, the long-term demographic growth rate of 4% will really drive the procedural growth. But then what we also believe is that enables our OEM customers to make new product launch investments.

Clearly, there's some big ones coming down the road. We think that it's appropriate to hold that capacity at this point in time because if those opportunities do come to fruition, as we've seen in the past, the industry has a tendency to demand a great deal of capacity in short order. And we believe the combination of incremental outsourcing down the road, supplier rationalizations, the demand from these new products as well as the patience will benefit someone that has the capacity to respond to the OEM needs, particularly that has capacity in a high quality and regulatory trusted environment like Symmetry Medical.

Matt Miksic - Piper Jaffray

I'm sorry, Tom. Where have you gone to before in utilization (inaudible) how high do you go, I guess?

Thomas J. Sullivan

Obviously, you can go to the theoretical maximum. We try to look it over a five-day, three-shift a day operation. We'd like to be in the high 80s, very low 90s utilization of that. That's sort of the perfect world. You go over that if the demand is there. So, we believe that our footprint could do 100 million more in volume. And if you look back at our revenue stream in the 2008, 209 timeframe in the OEM Solutions business, we believe that there -- it's supported nearly 100 million more in revenue then…

Matt Miksic - Piper Jaffray

Excellent, thank you.

Thomas J. Sullivan

…if but opportunity. Thanks for the questions, Matt. Appreciate the coverage. Operator, next question please.

Fred L. Hite

Excuse me, Tom. Before we go to the next question, if I could just go back to the growth rates, Matt, that you were mentioning in the beginning. You are correct that the OEM on a reported basis will be between 4% and 9%. But as I've mentioned in my statements, there is $5 million of revenue in there for 2013 that in 2012 showed up in our Symmetry Surgical business. So we have an OEM customer that we would produce the product on our OEM side, sell it to this (inaudible). They would hold it in inventory and then service that customer out of inventory.

The customer changed their business model and going forward, that's going to go directly from the OEM business to that customer. So our OEM business will then be about $5 million. It takes about $5 million of revenue out of our (inaudible) business. And so when you adjust for that change in a customer, our OEM Solutions is growing up about 2% to 7%. And while our (inaudible) business will be 4% to 7% growth rate. So I just wanted to clarify that for you.

Matt Miksic - Piper Jaffray

Very helpful, very helpful. And that comes out of which – does that come out of instruments, cases or both?

Fred L. Hite

Yeah, it's primarily instruments.

Matt Miksic - Piper Jaffray

Thanks so much.

Operator

Our next question comes from Matthew O'Brien from William Blair. Please go ahead.

Matthew O'Brien - William Blair

Good morning. Thanks for taking the questions.

Thomas J. Sullivan

Good morning, Matt.

Matthew O'Brien - William Blair

Good morning. Just to follow-up a little bit on what Fred was just talking about, when you're excluding that $5 million benefit from the transition and then just digging in a little bit to the OEM business, cases aside, on a [tether] rolling average, it looks like that business has been relatively flat in terms of performance and I know it's been service related historically, but what do you think in -- what's it going to take to really get back up to some of the more aggressive providers in the contract manufacturing space that are benefiting from the consolidation that's going on because of the quality and regulatory requirements? Is that a 2014 event or is it going to take even longer than that?

Thomas J. Sullivan

Good question, Matt. I think a couple of issues that are out there. The first thing is the relatively flatness in the industry or actually the downward trend is really a function of, a, the patience not being there since the economy changed in 2009. And then secondly, reduced capital spending by the OEM customers as they've continued to be under pressure on their P&Ls. So we believe that the industry has been facing a period of contraption during that time period. And I'm actually quite pleased with Symmetry's ability of the revenue over that same time period in the face of what I think are pretty significant reductions in capital spending.

As we look forward now, we believe that the OEMs are continuing to rationalize their supplier base. It goes in fits and starts as to how aggressive they get. We think the catalysts that occurred in October of last year with the FDA requiring contract manufacturers to register on a thorough database will be an accelerant to that change. And we're continuing to work with our customers. We're seeing bid packages for a lot of very small jobs that were out there with small suppliers. So we want to look at that revenue and obviously we want to pursue good market share gains that are profitable for our shareholders as opposed to revenue for the sake of revenue.

But we think that those trends are continuing. How material they are in the short term is unknown at the time. But over the long term, there is definitely a trend to supplier rationalization and we also have the thesis, as I alluded to earlier, that they'll be a trend to increased outsourcing on the implant side of our business, as our OEMs work more and more to lower their overall supply chain costs. And one way to do that is to take advantage of the supplier community, similar to other industries such as electronics or retail.

Matthew O'Brien - William Blair

Okay. So just within that question a little bit, is there some -- when I talk to some of your competitors, they talk about some pretty healthy growth rates, but it sounds like it could be a big expense of profitability. Is there some irrational behavior among your competitors in terms of grabbing business now that they can at some really reduced economics to themselves, because I would say from a capacity perspective you guys would be able to compete with anybody on price?

Thomas J. Sullivan

I think certainly there are other contract manufacturers out there that don't have the breadth of business that we have and any one job might be priced out at a level that's more associated with material and labor and not recognizing the other longer term costs as to really maintaining a high-quality regulatory environment, strict quality controls and the like. And so certainly there are always competitors out there that will price a job at a rate that we don't feel is the right level for our shareholders. So, there potential could be somebody out there just picking up jobs that we fundamentally have not wanted to be a part of.

Matthew O'Brien - William Blair

Okay. Also within the industry, I know there's been some M&A activity of some of the bigger providers out there kind of getting out of the contract manufacturing space, (inaudible) and Teleflex. What kind of impact do you think that will have as far as market share opportunity here in '13 and '14?

Thomas J. Sullivan

There's always a turn in the industry, so to speak. We've seen industrial come into this space and then move back out. We've seen the behaviors of success in the orthopedic industry is a little different than some of the other contract manufacturing industries namely because of the impact of capital spending. It makes it one of the more difficult environments. We think we're successfully positioned to be a part of that.

As I've talked about in previous calls about our interest, we do believe that there are some additional acquisition opportunities out there for us on the OEM front. And we're always looking to strengthen our portfolio, particularly as it relates to some capabilities that we may not have as strong as we'd like and what we can do to better serve our customers. So we're always on the lookout. We believe that there is always going to be M&A activity in this space. It's just sort of a byproduct of the orthopedic contract industry being a little different than other medical device segments.

Matthew O'Brien - William Blair

Okay. And then just two more for me, if you don't mind. Everybody keeps trying to get a sense for the knee opportunity here with the bigger OEMs coming out with new products. But when will you have better clarity in terms of what kind of revenue to expect here in '13, maybe also in '14? And then of the number that you're projecting this year, whatever that may be, what percentage of that do you anticipate you'll capture? And has that number changed -- that percentage changed in recent months?

Thomas J. Sullivan

So the enablers of having better clarity in the marketplace really starts first and foremost with the OEMs. There's three variables out there currently. One is the OEMs have to publicly communicate how aggressively they intend to roll these devices out. Is it going to be 1,000 sets, 5,000 sets, 10,000 sets and over what time period? And obviously, we would never give any kind of guidance around that. That's clearly -- that information will only come publicly from the OEM customers.

So once they communicate what their rollout plans are, that then creates better visibility to the volume potential. Then the next part of the equation is how much will they choose to in-source versus outsource? Clearly, product launches of this magnitude might merit some degree of in-sourcing by any respected OEM. So the second decision will be what is the market opportunity?

And then the third piece of that equation then becomes how much of that market share can we garner with the strength of what Symmetry can bring to those OEM customers? And to speculate on any of those three variables at this juncture would be premature. I think we're all looking forward to AAOS next month to get greater clarity on the starting point as to how aggressively they might bring these products to market.

Matthew O'Brien - William Blair

Okay. So AAOS can be the catalyst there to get a better sense for it. And then I think in the past you've talked about maybe $300 million to $400 million over a three to four-year period in terms of the opportunity. Have those numbers changed? Because you talked a little bit about -- touched more in-sourcing potential?

Thomas J. Sullivan

Yeah. I think the capital spending opportunity, if you just think about, there's 5,000 orthopedic hospitals in the U.S. and any of these large companies might have their products in say 20% to 40% of them, so roughly 2,000 hospitals with instrument kit presence. If there's a handful of kits, you could be talking 10,000 kits to roll this product out in the U.S. And if the cost of the kit is somewhere in the $25,000 range as an estimate, you can easily be talking $0.25 million fairly quickly over -- probably a five-year time span. But that's just back of the envelope numbers. It's obviously -- the OEMs have to determine how much they want to invest, when they want to invest and over what time period they want to stretch that investment out? We're all waiting as you folks are to hear what those plans might be.

Matthew O'Brien - William Blair

Okay. And then just one more for me. The SSi business organically was really strong again this quarter. How much of that was a function of the new products that came out in early 2012? And then should we anticipate organically the new products contributing on such a level this year?

Thomas J. Sullivan

Yeah, I don't think the new products are the driver of that revenue growth in 2012. We're just continuing to get sort of our strength of our pipeline there for the longer term benefit. The success that we saw in the organic SSi business is really just due to a great sales force that's out there executing incredibly well and growing faster than market. And when we look at the growth going forward, we believe that that sales execution, the harmonization we're going to do, new products in the combined portfolio is going to position us to grow we think slightly faster than market. And we view market growth rates in the range of 3% in that business.

Matthew O'Brien - William Blair

Okay. Thanks for taking all the questions.

Thomas J. Sullivan

Thanks, Matt. Operator, next question.

Operator

(Operator Instructions). Our next question comes from James Sidoti from Sidoti & Company. Please go ahead.

James Sidoti - Sidoti & Company

Good morning. Can you hear me?

Thomas J. Sullivan

Yes. Good morning, Jim.

James Sidoti - Sidoti & Company

Great. Thank you. A couple of questions on the expense side. You indicated that your transitioning the Symmetry Surgical business now to your – in your ERP system. I think you did that in the OEM business at '12. Will these costs continue '14, '15 and beyond, or at some point do these costs start to come down? And can you give us some magnitude on what those costs are?

Thomas J. Sullivan

I'll comment on what the plans are and then I'll let Fred comment on the costs, Jim. So a couple of things on the ERP transition. In 2011 on our OEM Solutions business, we integrated the U.S. instrument plants into one ERP system. In 2013, we're going to move the U.S. implant and case businesses into that instrument ERP. So we'll have one ERP system in the U.S. That will conclude in 2013.

On the Symmetry Surgical side, in 2012 we integrated the acquired Codman surgical instruments business into a new ERP platform. And in the first quarter of 2013, we'll move the legacy SSi business into that same platform. So our belief is that by the end of 2013, the "heavy lifting" those speak of establishing these hubs of the ERP capability will be over. And then going forward, it will be more of fine tuning and continuing to update and upgrade that. Fred, do you want to comment on the costs

Fred L. Hite

Yeah. These are relatively inexpensive programs. They're not $5 million massive programs. They're about $1 million a piece of capitalized expense, so 1 million on the OEM side in '11; 1 million on the (inaudible) side in '12. And then there are some consultants and other expenses and they go along with the implementation of those, which do get absorbed through the P&L. But it's not 1 million of the balance for share.

James Sidoti - Sidoti & Company

Okay. And then on the interest expense, I believe you were due to refinance in '13. Can you just give us an update on when you think you will do that and potential savings from that, if that's built into your guidance?

Fred L. Hite

Yeah, absolutely. The interest in the guidance for 2013 assumes we stay as we are. So we have a net -- $65 million of net and that's (inaudible) in December 29, 2013. Once we take that out and replace it with normal net at 4%, there's a $0.10 accretive transaction for us. That's not going to show up until 2014. So we'll continue as we are with our current structure for this year, but we're putting plans in place to make sure we're available to take that out in December 2013 which will benefit '14.

James Sidoti - Sidoti & Company

Okay. Thank you.

Fred L. Hite

Thanks Jim

Thomas J. Sullivan

Thanks Jim.

Operator

Our next question comes from James Terwilliger from Benchmark Company. Please go ahead.

James Terwilliger - The Benchmark Company

Hi, Tom. Can you hear me?

Thomas J. Sullivan

Yes. Hello, James.

James Terwilliger - The Benchmark Company

Hello, Tom. I got two quick questions. The first one is really on the Medical Device Tax. You said previous in the call that the Medical Device Tax hit your adjusted EPS by $0.03. Was that correct?

Thomas J. Sullivan

That's correct.

James Terwilliger - The Benchmark Company

Where does this show up in the model? And at the same time, what is your corporate tax rate assumption for 2013?

Thomas J. Sullivan

I'll let Fred comment. Fred and his team have done an excellent job on the Medical Device Tax. Fred, you want to give Jim some additional color on that and the overall tax rate?

Fred L. Hite

Yeah, absolutely. So you're right, Jim. It's about $0.03 negative impact on us. It's about $1.5 million and it will show up on the G&A line in the P&L, general and administrative as where other excise taxes show up as well. So that will show up 1.5 million on the P&L, $0.03 overall. On the tax rate, we're probably going to be in the 33 range plus or minus in 2013 based on what we see today.

James Terwilliger - The Benchmark Company

Okay, excellent. And then I'm going to switch this – thank you very much. I'm going to switch this back to Tom. Tom, the industry as a whole has been hit with the Medical Device Tax. Are you seeing any type of increase price pressure from your customers trying to push their Medical Device Tax onto you guys?

Thomas J. Sullivan

Not specific to the Medical Device Tax, Jim. I think as everyone knows, our customers are under fairly intense profitability pressures both pricing from their customers as well as other inputs such as the Medical Device Tax. We are always working with our customers to reduce their costs and certainly we can do that by collaborating in the manufacturing processes. The number one thing that we sell that shows up into their cost of goods sold is our implant business. As I've alluded to earlier, the implant business is about an $8 billion opportunity that's out there.

When I think of the pricing pressures or the cost pressures that our OEM customers are under, in my opinion the best way for them to reduce their overall costs or to take better advantage of the outsourcing community, we believe implants are outsourced roughly 15% of that $8 billion today. And if you think of other industries that are under cost pressures such as electronics as an example, the rate of outsourcing is significantly higher. So, we believe the path to improved cost savings and profitability for our customers is that they have to take advantage of the outsourcing community and let us help them in that endeavor as opposed to just being transactionally a percent price reduction only.

James Terwilliger - The Benchmark Company

Thank you. And I've got a second question here as it relates to metal-on-metal hips. And again, I don't want to talk about any one company but maybe when you look at all of the companies that you do business with as it relates to metal-on-metal hips, as you look into 2013 the clinical issues associated with metal-on-metal hips, is that a major headwind for you going into 2013? Or do you think that's more and something that happened in 2011 and 2012 as it relates to your revenue and growth rates?

Thomas J. Sullivan

It's a good question, Jim. There's always -- if any one of our customers are disproportionally affected by something that might put pressure on their demand in the marketplace obviously as it relates to implants that then ripples back to us. But again, our implant business is roughly a third of our OEM Solutions business, the balance are in the capital instrumentation and the cases and then aerospace.

So, it's not a significant piece. Our main focus on implants, as you know, within the forged area of the business and that's really the stem itself. So if there is pressure on the bearing surfaces, what we normally find occurring in the marketplace is a switch over of the metal-on-metal bearing surfaces to other opportunities. The stem is not really affected by that. So we believe that our implant business is still strong and certainly the growth rate that we saw in the fourth quarter reflects that.

James Terwilliger - The Benchmark Company

All right, I'll jump back in queue. Thanks for taking my questions. I thought it was a good fourth quarter and good guidance for 2013. Thanks, guys.

Thomas J. Sullivan

Thanks for your time, James. Appreciate it.

Operator

I'll turn it back to you, Tom Sullivan, for closing remarks.

Thomas J. Sullivan

Thank you, John. I appreciate it. My thanks to all of the questions that we've had. I appreciate everybody's interest in our fourth quarter. I'd also like to just recognize and thank our Symmetry Medical team for the great progress that we've made in 2012. We're clearly excited about 2013 and we look forward to updating you on our progress on the four key initiatives that I've mentioned earlier as we go throughout the year.

With that, thanks everyone for the call today and I hope everyone has a great day. Thank you. Operator?

Operator

Thank you. Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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