Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Symmetry Medical, Inc. (NYSE:SMA)

Q4 2008 Earnings Call

February 24, 2009 09:00 AM ET

Executives

Carol Ruth - Founder, President and Chief Executive Officer of The Ruth Group

Brian S. Moore - President and Chief Executive Officer

Fred L. Hite - Senior Vice President and Chief Financial Officer

Analysts

Benjamin Andrew - William Blair & Company

Matt Miksic - Piper Jaffray

Operator

Good day ladies and gentlemen and welcome to the Symmetry Medical Incorporated Fourth quarter Earnings Conference Call. My name is Mary, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder this call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Carol Ruth, Investor Relations. Please proceed.

Carol Ruth

Thank you, Operator. Joining us on the call today are Brian Moore, President and Chief Executive Officer, and Fred Hite, Senior Vice President and Chief Financial Officer.

Statements in this conference call regarding Symmetry Medical Inc.'s business which are not historical facts may be forward-looking statements that involve risks and uncertainties within the Safe Harbor provisions 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 predicative 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 are 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 risk factors and the forward-looking statement section in 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 President and Chief Executive Officer, Brian Moore, I would like to emphasize Symmetry Medical's policy of not commenting or discussing individual customers or programs. Brian?

Brian S. Moore

Thank you, Carol. And thank you everyone for joining us on our fourth quarter 2008 investor conference call.

We're very pleased with our performance in the fourth quarter which reflects solid order intake from our orthopedic customers. This OEM demand is reflected in over 30% year-on-year revenue growth on a constant currency basis.

Our customers are still telling us that they expect modest growth in 2009, so we remain relatively optimistic. However, the economic situation causes us to maintain a very prudent management approach. Consequently our major focus in 2009 is to deliver improved bottom line performance.

We're particularly encouraged to have the accounts and tax issues at our Sheffield, UK facility largely behind us. The elimination of these issues will positively impact our 2009 profitability and Fred will cover this fairly complex subject in more detail later.

Aside from Sheffield, our 2008 financial performance reflect a considerable progress in other parts of our business. We believe that we have further strengthened our position as a leading supply to the orthopedic industry. We believe our business is stronger than ever with a wider market reach and a more global perspective. We are pleased with the successful integration of the New Bedford acquisition from DePuy, which in turn has also strengthened our relationships with our largest customer.

The New Bedford facility performance was outstanding throughout the entire year. Beside from this strengthening our relationship with DePuy, we have made progress on diversifying and expanding New Bedford's customer base. During Q4, we added another major OEM customer and now serve a total of three major Orthopedic OEMs from New Bedford. We're pleased with the progress achieved and expect a ramp up in revenues at this facility in 2009.

Our Malaysian operation is progressing well and we're adding more equipment to manufacture instruments as well as cases. And we recently agreed a long-term contract with an Asian OEM that is expected to drive significant order volume at that facility.

This project highlights our main strategy for developing Malaysia which is to address the wider Asian market with Symmetry's total range of products and our full total solution service. We consequently expect Malaysia to become a more strategic part of our operations with respect to the balance of the Asian market, and to also provide additional benefits as a lower cost source of manufacturing.

Turning to our Sheffield operations, we're satisfied with the success of the initiatives undertaken throughout the year that resulted in continued efficiency and cost improvements. Throughout the year, we significantly reduced the operating loss at Sheffield from a $3.9 million loss in the second quarter of 2008 to an $800,000 loss in fourth quarter of 2008. And we're particularly encouraged that the unit achieved positive gross margins for the fourth quarter in 2008 and in December, was very close to a breakeven operating income.

The management team at the facility has done a tremendous job in successfully complementing... completing the majority of the initiatives that will get Sheffield back to targeted profitability levels. Sheffield will continue to benefit from the impact of our increased selling prices, improved operating efficiencies and reduced personnel costs. We remain on track to realize the full annualized material cost savings in April when the long-term material contract negotiated by the previous management team is terminated.

Our plan to utilize the forging capacity at Sheffield with the introduction of incremental work from the USA is going exceptionally well. And the UK and USA management teams are working pretty well together to achieve the significant upside expected at Sheffield. This initiative will also eliminate the need for significant CapEx in the USA for 2009.

The new ERP system at Sheffield is scheduled go live at the end of February, and over the time is expected to generate many improvements. We believe there is an opportunity to deliver further significant improvements at Sheffield facility as there are many improvement plans in place to add a momentum.

Looking to 2009, we are optimistic about the many opportunities we are seeing as a result of our strong position in the current orthopedic market and its continued long-term growth trends. While the long-term fundamentals of the orthopedic market remain sound, we need to assess the possible impact the current economic climate might have on the deferment of lightened demand from the baby boomer population.

We believe that our business model, global coverage and strong cash flow place us in a strong position to meet the requirements of our larger customers, who need to develop a cost effective supply chain with fewer but larger suppliers that can deliver worldwide manufacturing and procurement efficiencies. Our expectation is to gain share in these market conditions.

Despite our optimism, we are well aware that in the current economic environment things can change rapidly. And therefore, management is cautious and focused on cash generation and cost control. Our cash position and banking facilities will allow us to take advantage of market opportunities as they present themselves.

Given that we continue to experience solid short-term demand coupled with our cautiously optimistic approach, for 2009 we expect revenues to be in the range of $405 million to $420 million. On a constant currency basis, this would be for the full year 2009, an increase of between 2% to 6% over the full year 2008 revenues.

Although we expect to see continued revenue growth throughout the year, if the dollar continues to strengthen against the pound, it will impact our top line. Fred will provide more details concerning our 2009 guidance during his remarks.

The main and overriding focus in 2009 will be to deliver a significant bottom line improvement compared to last year which will be boosted by the elimination of circa $16 million one-off charges in 2008 mainly arising from the Sheffield situation. Most important, management focus will be freed from the distractions attached to the restatements and will become more focused on internal efficiency and cost improvements.

I would like to hand over to Fred for a more detailed review of financials and 2009 guidance. Fred?

Fred L. Hite

Thanks Brian. As Brian stated, we are pleased with our performance in the fourth quarter reflecting the continued strength of our business and position in the orthopedic industry. As we move forward into 2009, we will continue to focus on improving the bottom line results and expect to benefit from the elimination of several unfavorable items that will be behind us.

Revenue from the fourth quarter 2008 was $99.7 million, up 23.6% from $80.7 million reported in the same period 2007. On a constant currency basis, fourth quarter 2008 revenue was $105.6 million, up 30.9% over the year-ago period. This includes revenue of $12.9 million from the New Bedford manufacturing facility acquired from the DePuy Orthopaedics in January 2008. Excluding this acquisition, we achieved organic revenue growth of 7.7% or 15.0% on a constant currency basis over the fourth quarter of 2007.

Fourth quarter 2008 revenue by business segment was as follows. Instrument revenue was $44.4 million, up 56.1% from the fourth quarter of 2007 revenue, up $28.5 million. Instrument revenue includes $11.1 million from New Bedford and excluding this acquisition, we achieved 17.1% organic growth.

Implant revenue was $29.6 million, up 27.3% from the fourth quarter 2007 revenue, up $23.2 million. Implant revenue includes $1.7 million from the New Bedford acquisition.

Case revenue was $18.5 million compared to $19.2 million in the fourth quarter of 2007. Case revenue in the quarter was impacted by softness in the non-orthopedic medical markets driven by our customers' reaction to the current economic climate.

Other revenue was $7.2 million compared to $9.8 million in the same period last year. Revenue in the quarter was driven by a reduction in aerospace customer demand as a result of the macroeconomic environment, as well as the unfavorable impact from foreign currency.

Segmented by geography, fourth quarter 2008 revenue breaks down as follows. Revenue to United States was $76.4 million, up 46.6% from the fourth quarter of 2007, driven by both organic growth and the addition of our New Bedford facility. Revenue to the United Kingdom was $9.3 million, down 40% compared to the fourth quarter of 2007, driven by lower aerospace demand as well as unfavorable impact of foreign exchange.

Revenue to Ireland was $7.4 million, up 41.0% compared to the fourth quarter of 2007. And revenue to other foreign countries decreased 15.8%, to $6.5 million. Our top five customers represented 63.3% of our revenues for the fourth quarter 2008, up from 53.9% in 2007, primarily as a result of the New Bedford acquisition.

Our two largest customers accounted for 35.5% and 10.6% of our fourth quarter 2008 revenue, while they accounted for 15.8% and 11.0% of our fourth quarter 2007 revenue. This change was also primarily a result of the New Bedford acquisition.

Gross profits for the fourth quarter 2008 was $23.3 million, a 57.4% increase from the gross profits of $14.8 million in the fourth quarter of 2007. Gross margin percentage for the fourth quarter 2008 was 23.4%, compared to 18.4% for the fourth quarter 2007 and 22.9% in the third quarter of 2008.

The Sheffield operation reported positive gross margin for the fourth quarter 2008, compared to negative gross margins for the first three quarters of the year. Excluding Sheffield, the company generated gross margins of 26.2% in the fourth quarter, compared to 27.4% in the third quarter. This reduction is the result of multiple holidays and plant shutdowns during the fourth quarter which causes less output as well as the lower sales volume in the fourth quarter compared to the third quarter with relatively the same amount of fixed costs. For the full year 2008, gross margin excluding Sheffield was 28.2%.

Fourth quarter 2008, selling general and administrative expenses were $13.9 million, compared to $11.3 million in the fourth quarter 2007. The two primary drivers for the year-over-year increase include non-cash stock-based compensation and the addition of the New Bedford facility which was acquired in January 2008.

We are pleased to report that the remaining professional fees and expenses related to the review of the restatement at Sheffield decreased to $100,000 during the fourth quarter of 2008, compared to $900,000 in the third quarter of 2008. We believe the investigation related costs are now largely behind us.

Operating income for the fourth quarter of 2008 was $9.5 million, a 163.9% increase over the operating income of $3.6 million for the fourth quarter of 2007. Operating income was impacted by an operating loss at Sheffield of $800,000. We are however encouraged to have narrowed the unit's operating loss from $3.9 million in the second quarter of 2008 to $800,000 in the fourth quarter of 2008. And we expect continuous improvement at the facility throughout 2009.

For the fourth quarter 2008, we reported net income of $11.3 million or $0.32 per diluted share. This compares to a net loss of $5.4 million or $0.16 per diluted share for the fourth quarter of 2007. Fourth quarter 2008 net income was positively impacted by income tax benefits of $8.7 million, primarily from the realization of losses on the company's initial investments in the Sheffield UK operations, partially offset by the related tax provisions for uncertain tax positions.

Fourth quarter net income was also adversely impacted by the provision of $1.8 million for tax valuation allowances associated with the company's UK operations. The net impact of the above items on the fourth quarter 2008 results was $6.9 million or $0.20 per diluted share. In addition, these items will generate approximately $17 million of improved cash between the fourth quarter of 2008 and the fourth quarter of 2009.

In addition to this, we received $2.5 million of cash in the UK during the fourth quarter on reclaimed taxes from 2003 to 2006. Comparing fourth quarter 2008 to fourth quarter 2007, foreign exchange reduced our sales by $5.9 million, reduced our gross margins by $600,000 and no impact on operating income and increased our net income by $800,000.

As you may recall, in the third quarter when the British pound moved from 2.00 to 1.77, we reported an unfavorable impact of several million dollars from non-cash foreign exchange losses. During the fourth quarter, we eliminated the majority of our translation exposure and this significantly reduced the non-cash foreign exchange gains and losses that were seen on the income statement. This reduced fluctuation was evidenced in the fourth quarter of 2008, even though the British pound moved from 1.77 to 1.4 during the quarter.

Because the majority of our translation exposure was removed, we had to unwind both of our British pound hedge positions. This in turn converted our $4.1 million unrealized gain into a realized gain and generated $4.1 million of cash during the fourth quarter of 2008. So the fourth quarter 2008 cash from operations was very strong at around $20 million. And this compares to a total year 2008 cash from operations of $25 million.

Now turning to full year results; full year revenue was $42.3 million, up 45.5% over the prior period or up 46.4% on an organic basis. Gross profit was $100.4 million, up 90.9% over prior year. Gross margin was 23.7% compared to 18.1% for the total year 2007.

Operating income was $42.0 million compared to $13.1 million for total year 2007. Income before taxes was $31.3 million compared to $4.9 million for total year 2007 and net income was $24 million compared to $100,000 loss in 2007.

For the full year 2008, net income was positively impacted by income tax benefits primarily from the realization of losses on the company's initial investment in the Sheffield UK operations, partially offset by additional tax provisions for uncertain tax positions for this item and other items. The net impact was $8 million. Full year net income was also adversely impacted by the provision of $3 million for tax valuation allowances associated with the company's UK operations. The net impact of the above items on the full year result was $5.0 million or $0.14 per diluted share.

Given the current economic environment, we're keeping our eye on potential risks and spending time evaluating potential opportunities created by our strong balance sheet and our business model. For example, in January 2009, we locked in a very favorable interest rate hedge. We locked in the interest rate for $64 million of our current outstanding debt and an all-in interest rate of 3.58% through June of 2011. This is estimated to save us over $3.5 million of cash and expense during that time.

It's also worth noting that we are applying hedge accounting for this transaction, so the fluctuation in valuation will not generate variances in our income statement as we have experienced in the past with other current interest rate hedges. The weighted average number of diluted shares outstanding during the fourth quarter of 2008 was 35,368,601.

Now, I'll briefly discuss our guidance for the full year 2009. Our guidance is based on current order flow and a customer demand we're seeing in our facilities as well as the current currency rates. As stated in our press release, we expect revenue to be in the range of $405 million to $420 million. On a constant currency basis, this is an increase of 2% to 6%. On the bottom line, we expect full year 2009 diluted earnings per share between $0.75 and $0.85.

As it relates to our Sheffield unit, we expect to be near breakeven during the first half of 2009, before reaching profitability in the second half of 2009. While we do plan on modest sales growth in 2009 on a constant currency basis, we see significant earnings upside in 2009 as many unfavorable items that impacted our 2008 performance are not expected to repeat. We will no longer be impacted by over $9 million of operating loss at our Sheffield facility, as the facility delivers improved results in 2009.

We will also see improved profits of around $5 million due to the elimination of fees related to the Sheffield restatement process. And with the significant reduction in our foreign currency translation exposure, we expect to avoid approximately $2 million of unfavorable impact that we saw in 2008. This short list adds to approximately $60 million on a pretax basis and $11 million improvements on net income or $0.30 of incremental EPS for 2009.

I will now turn the call over to Brian for closing comments.

Brian S. Moore

Thanks Fred. And great job to explain (ph) those tax issues in Q4. We clearly live in interesting times, but we believe our business is excellent, very well positioned. I am pleased to be working with a very capable and positive effective (ph) management team. And we are seeing reasonably good demand at the moment. So even with an uncertain economy, we are focusing on cash and cost. But our main focus, and we fully expect to achieve our objective, is to improve our bottom line performance in 2009 over 2008.

So with that, I would like to take any questions please.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Ben Andrew, William Blair.

Benjamin Andrew - William Blair & Company

Hi. Good morning gentlemen.

Brian Moore

Good morning.

Benjamin Andrew - William Blair & Company

Hi, I guess the first question is Fred, given the $0.30 that you kind of laid out of improvement versus I guess it's an adjusted $0.48 number for 2008, if we take up to $0.20 in Q4. That basically gets you to the middle-year range of earnings just adding that on. So you're just $0.78 if you will, in the middle of your earnings target range with some modest low-single digit top line. Maybe talk about why you're not anticipating stronger performance on that operating side, given the other things that you did go through in terms of opportunities. Is it a function of other significant headwinds in parts of the business or just conservatism?

Fred Hite

Yeah, so two points. First of all, the $0.20 was the favorable impact in the fourth quarter. But you can't use that as the total year impact. The total year impact it's actually $0.14, because we did have some other unfavorable items in the first half of the year. So it's really $0.14 of the total year adjustment on that.

Yes, to your point it is modest improvement with that 30%. We obviously, we have to do the operational performance of getting Sheffield from where's that to continued improving performance. And then, there is tax rate of 35%... for the 35, 36% for 2009, which does hurt us a little bit. And some of it is probably a little conservative, given the current economic climate that we have out there right now.

Benjamin Andrew - William Blair & Company

Okay. And Brain maybe you talk about what you're hearing from customers and from the fields. People tend to view you guys as leading indicator of procedure growth. And when I here inventory adjustments, it makes me think lack of demand. So what's wrong with that thesis and maybe where are the customers thought process at this point in terms of smaller orders, large orders, intensity orders all the things that really drive your top line.

Brian Moore

Okay the are two demands sort of areas from our customers; the fundamental implant demand which is device procedures and they are telling us that that is single digit sort of growth going forward 3, 4, 6%. And the other demand of course is marketing activity, which drives sales of cases and instruments. And if you look at today's market, the people who are doing relatively well, if you like the strategic that have a good cash position, and that has two advantages for us, first of all a large of our customers are seeing this is an opportunity to take share. So they are improving and increasing their marking activities and that drives instrument sales. And in our world, they are also strategic. So we can against competitors, take advantage of this in terms of cash and opportunities and low debts in our balance sheet.

So the good news is procedure is still there. People joints (ph) are still wearing that of course. So it's just a case of when that comes through the system. And on the side of the marketing activities, certain customers are being very aggressive, others are being fairly cautious. And the only area that we have to reflect on is visibility, because we never have more than two or three quarters at any time. But at the moment, we probably can say a good half year and in the second half, we're not sure what will happen.

Fred Hite

One other I'd say Ben on your inventory comment, if you look at the inventory of our customers in the fourth quarter of 2008 on a day's basis, it was flat to the third quarter of 2008. So if that would have spiked to much higher days that obviously would have been concerned. But it was encouraging to see that at a flat basis for the fourth quarter of '08.

Brian Moore

Yeah I think the other thing Ben, when we had the large inventory correction a couple of years back, one of the things that we recognized in our customers is there was a tremendous imbalance in the inventory. They didn't understand what they have exactly. So when in the case of a couple of met forward everything back to base. There are some items that got several years supply often, others that come three weeks up. And I think our customers in them a lot more sophisticated in terms of their inventory management and they are more aware of how to strategically deploy it. And I'm not aware of any conversations that we've had on inventory corrections suppressing demand. It's only what we're seeing from the analysis of the inventories.

Benjamin Andrew - William Blair & Company

Okay and then last Brian I guess, if you think back to the last quarter or maybe the last couple of quarters, you did feel a fair bit of optimism about customer demand and order size really kind of driving need for your services. Am I right to detect a down shift there relative to?

Brian Moore

We have a very optimistic team, we will behave in a cautious way, on other contradiction. But all these are mind set. And I think that's a healthy position to be. If you take everything you read in the newspapers and just going through the fundamentality then you will create a self-fulfilling strategy (ph). So we're still optimistic, we're still seeing demand. Some customers on certain programs are very aggressive.

And just to give you an example of... a practical example, a couple of weeks ago one of our customers had a fairly large program, multi-million dollar program. It involved them selling very quickly. It involved them spending 700,000 of CapEx. We were able in a matter of hours to not only get the approvals right though from operations through CO, CFO support, but we have the 700K, we just show it down and that program is now up and running. And that's an example of either, demand that is there and the fact that we as a strategic within our space can respond very quickly and aggressively to those sort of situations. Most of our competitors couldn't just pull down 700,000 in an afternoon basically and start the capital program.

Fred Hite

To that point, at the end of the third quarter we had $33 million drawn on our line of credit. At the end of the fourth quarter, it was $18 million drawn on the line of credit. And it's a $40 million line of credit. So the $700,000, Brian just mentioned, is obviously funded out of just operation cash flow not using line of credit. But if something were to come up, we do have the capability to use that definitely to our advantage here in this environment.

Benjamin Andrew - William Blair & Company

Okay. Thank you.

Fred Hite

Thank you, Ben.

Brian Moore

Thanks Ben.

Operator: (Operators Instructions). Our next question comes from the line of Matt Miksic of Piper Jaffray.

Matt Miksic - Piper Jaffray

Hi. Thanks for taking the question. Can you hear me okay?

Brian Moore

Yeah. Hi Matt.

Matt Miksic - Piper Jaffray

So just kind on the guidance and I guess you have commented on a couple of different ways. It seems everyone is taking a conservative view to 2009. I guess I'm just trying to figure out how much of sort of conservatism around things that you having sort of see a whole lot of that you are concerned about for orthopedics. It's kind of baked into this number. So is there 200 basis points of growth, is there 400 basis points of growth. If you could put some color around that that will be helpful?

Fred Hite

So, as Brain mentioned, we typically have two to three quarters of visibility with some view into that fourth quarter, looking forward. In today's environment, we can see pretty solidly the first and second quarter. I think there's some more questions what is going to happen in the third and fourth quarter. So in my mind, I built in some conservative factor just for the unknown that could arise in the third and fourth quarter of 2009.

So the constant currency is hurting us by a $27 million. I think it is... so the high end our growth rate is 6%. And from what I read and what I hear from our customers, that's pretty consistent with what they're talking about as growth on a constant currency basis for 2009. So based on a conservative view of the world and our customers' statements for 2009, that's why we put the high end where we did.

Brian Moore

And the other thing Matt, those comments will reflect the top line of course. In terms of the bottom line, we still have great opportunity. We have the reversal of the one-offs. And the other thing is that we've just come through a period of fairly aggressive growth. And during the period of growth, our main focus is to get product at the door. So we're aware of certain situations internally that we can improve our efficiency rationalization. So, we're very confident almost despite the top-line market conditions that we will achieve by significant upside on the bottom line.

Matt Miksic - Piper Jaffray

Just to make sure I understand, it sounds like when you say you have visibility into the first and second quarter Fred, that's first and second quarter of sort of projected 6 percent-ish kind of end market orthopedic growth and then potentially something later in the back half? Is that the way you're thinking about it?

Fred Hite

No, I've got the 6% is pretty consistent throughout 2009. It does have a little higher growth in the first half of the year, because we can obviously see and touch and feel it. But it's not overly dramatic.

Matt Miksic - Piper Jaffray

Okay. And then within that also, if you wouldn't mind I know it's not as big part of your business, but any update on the trends you're seeing from some of the spine market player, some of the smaller players there either on the instruments or the implant side any changes in activity there?

Brian Moore

On the orthopedics, or any other side of the business?

Matt Miksic - Piper Jaffray

Spine. On the spine.

Brian Moore

Yes, we are seeing growth maintaining. We are being very watchful on some of the smaller companies, clearly watching their robustness as economic entities if you will. But we still see it is high demand. We would expect there is going to be some degree of rationalization, shake out whatever you call it in that sector. And so we're just watching carefully to say how, if, when that happens thus will impact us.

Fred Hite

The other thing I would say is, as we talked about on our last call we have now developed a new cell, high-precision cell that is selling into that spinal market. So even if there were a slowdown in that spinal market, we have the ability to... we are now producing new products that we had not done in the past. And it will allow us to continue to grow into that space.

Brian Moore

And that is doing very well and we are gaining share and doing all the things you would expect from our position with a new products offering.

Matt Miksic - Piper Jaffray

And that's pushing into the precision implants in addition to maybe what it has been more of an instrument business for you. Is that --

Brian Moore

I mean that's very high precision and high tolerance part.

Matt Miksic - Piper Jaffray

Okay. And then last thing, just speak to the guidance and the outlook. You talked before about this multiyear cycle that we're still... if you could give us an idea of where we are and how you think about '09? In other words is '09 going to cause the cycle to end sooner or is '09 potentially going to be sort of a pause, before the cycle flushes out. Any color you can provide on where you think you are there?

Brian Moore

We don't actually know. But if you would have asked me the question a year ago, I would say we're just moving into a two to three year period. And this would be may be second year as of three or four. And we can see some of our large OEMs are still on that cycle, others have just touched the brace of it and taking a view. So I'll answer that question better I think towards the end of the year. But some customers are still on the big cycle if you'd like and others have just taken a more cautious view.

Fred Hite

And one other thing I have to add is, we've talked about this on our call both in the second quarter and the third quarter that, we are working and have visibility on some large projects for 2010 that we have never had that much visibility on projects before. It's got instruments, cases, implants, very large projects that will help drive our business through 2009, and throughout 2010. So setting aside the macro cycle, there is some very good news for just underling demand of our business.

(Multiple Speakers)

Matt Miksic - Piper Jaffray

Alright. Just to add on that comment, you're talking about projects being sort of large shipped (ph) systems that will come to market this year or next?

Brian Moore

Yeah. That's right.

Matt Miksic - Piper Jaffray

Okay. Then just a couple of reasons, one was on the guidance. I just want to make you understand the reversal of the charges that you talked about. It looks like $11 million net benefit if I heard that right in 2009 over 2008 that is one timer. That's in your numbers is that correct and I guess the second part of question is the flex which has a number of potential opportunity here in '09 is around other cost cutting efforts that you see and aware of but not yet sort of baked into that number. Is that the right way to think about it?

Fred Hite

So, to answer the question; yes, the number was $11 million as the estimate of unfavorable items in 2008 that will not impact in 2009. The prediction that those will not repeat are included in our guidance of the $0.75 to $0.85. And the range difference, $0.75 to $0.85 is primarily driven by the top line, the 405 to 420 with a little bit of unfavorable margin in the lower end, obviously as volume were to slip backwards a little bit, only grow 2% we're not going to get the leverage that we would if volume is growing at 6% on a constant currency basis.

Matt Miksic - Piper Jaffray

And then the cost cutting, where is that efficiencies around the new ERP system or supply chain or other things as you can do. Is that a potential opportunity here to do a bit better or is that also baked into your guidance?

Fred Hite

No, that would be a bit in the guidance but most of it will be an upside to the operation throughout the year. We are working with our operating process plans to look at all of our manufacturing worldwide. We are putting more aggression into Malaysia of course investment. We slowed up on that a bit last year because of the banking situation arising from Sheffield. We're now going flat as on that one. And we are looking at all of our U.S. operations. And of course, one of the bright products of Sheffield is that they did create a large amount of surplus capacity based on false numbers in the forging area. So we're able to take some of the additional demand from the states and put that into Sheffield which has two advantages clearly, it gives Sheffield a volume upside. But it's also defers CapEx and creates operating efficiencies in United States.

And the other area we're looking at is Ireland. That does create opportunities for us. We have to take into account now the pound, the euro and the dollar and by looking all these operating efficiencies the cash loss situation and the currencies. We're hopeful that could we get some upsides throughout the year bringing all those things together.

Brian Moore

Yeah and I'd also add that throughout 2008 Sheffield has had dramatic improvement. But it has been a little slower than we would have... then we initially thought. We're trying to change a 20-year old culture at that facility and they are making great strides. But it does... it is going, it goes a little slower than we would have initially thought it to do. In 2009, we have a pretty conservative forecast in there for the Sheffield facility. Clearly, we have them improving but we're not expecting that's going to be instant improvement in the first quarter of '09, it's a gradual uptick throughout the year.

Matt Miksic - Piper Jaffray

And then last little I have been into is on the aerospace side. I am not sure if I missed the comments you might have made earlier. In the third quarter, you have this sort of inventory adjustment from Rolls-Royce. I was wondering, where that was for Q4 and how're you thinking about that for 2009 as part of the Sheffield operations?

Brian Moore

Our 2009 sort of forecast is based on like this Rolls-Royce figures for the year. You might have noticed that Rolls-Royce put some pretty good figures out a couple of weeks ago, so they pick good cash position, good demand. The guidance and the forecast is based on a pretty modest outlook for aerospace. And we're still not certain how that's going to play out in the year. But we're prepared if it goes down to contain it within our guidance.

Matt Miksic - Piper Jaffray

Do you find Q4 better or worse than Q3.

Brian Moore

I am sorry. I am not sure if you mentioned it?

Fred Hite

Brian was specifically talking about 2009, there that portion of your question. In 2008, the fourth quarter, the volume was down compared to the prior year. And some of that was continued inventory corrections not inventory corrections, but supply chain flow changes that they put in place. So as Brain said, I think we've got a pretty conservative view of that side of the business as well for 2009.

Matt Miksic - Piper Jaffray

Great. Thank you very much for taking the questions?

Brian Moore

Thank you, Matt.

Fred Hite

Thanks Matt.

Operator: (Operator Instructions) We have a follow up question from Ben Andrew of William Blair.

Benjamin Andrew - William Blair & Company

That was quick. I just wanted to touch base a little bit on the gross margin side and see sort of what your thought process is there. You kind of walked through Sheffield. Absent Sheffield, should the rest of the business be relatively steady or are there significant changes in utilization rates versus kind of where you had built out capacity and capabilities that would maybe push that down in '09 with the revenue guidance?

Fred Hite

So, we've got pretty steady state. The totally excluding Sheffield was 28.2%. And that's kind of what we've got modeled in the 2009 view. We do have, obviously, some inflation coming through just normal business comps Ben (ph) inflation and what not that we have to offset and we've to continually offset with efficiencies. But again it's pretty consistent. And then Sheffield was 2% gross margin in the fourth quarter of 2008 and we have that slowly growing throughout 2009.

Benjamin Andrew - William Blair & Company

Okay. And then Fred, maybe talk a moment about aerospace. How bad is that do you think relative to say fourth quarter trajectory? Does '09 look worse than the fourth quarter or you're looking for maybe some stabilization?

Fred Hite

No, I think definitely stabilization. And maybe a slight uptick from that fourth quarter as some of those were adjustments. So I would say flat to kind of that type of run rate for '09.

Brian Moore

And there are two components to our aerospace activity Ben; the U.K. which is predominantly an established mature supplier, so it's following and tracking the market trends. But we have made quite a bit of progress in United States with our Jet facility in terms of entering the aerospace market. So that is a business that's actually taking share albeit very modest in what is a huge markets. So we would expect to see some growth coming through our United States facility and fairly flat modeling in our more mature UK facility.

Benjamin Andrew - William Blair & Company

Okay, great. Thank you.

Operator: There are no other questions. I would like to turn the call to Brian Moore, for closing remarks.

Brian Moore

Well thank you everybody. We appreciate your support and clearly we have a challenging year ahead, but we're optimistic that we've being very cautious in the way we execute our optimism. And we look forward to future course with some good news.

We are at Vegas at the moment for the Annual Orthopedic Show. So if any of you are in town or wish to come, we have a booth there. You would be very welcome, look to see you and give you a walk through our facilities in terms of plants and our product lines and meet some of the people. Thank you very much.

Operator: Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Symmetry Medical Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts