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Executives

David Hable - President and Chief Executive Officer

Pamela Boone - Executive Vice President and Chief Financial Officer

Analysts

Steven Crowley - Craig-Hallum

Korosh Saba - Stephens, Inc.

Joe Munda - Sidoti & Company

Larry Haimovitch - HMTC

James Terwilliger - Wunderlich

Synergetics USA, Inc. (SURG) Q4 2013 Earnings Conference Call October 1, 2013 5:00 PM ET

Operator

Good evening, ladies and gentlemen, and welcome to the fourth quarter fiscal 2013 earnings call. (Operator Instructions)

Synergetics would like to remind listeners that certain comments made during this conference call may be forward-looking statements for the purpose of Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by words such as believe, expect, anticipate, plan, potential, continue or similar expressions. Such forward-looking statements include risks and uncertainties, and there are important facts that could cause actual results to differ materially from those expressed or implied in such forward-looking statements. These facts, risks and uncertainties are discussed in Synergetics' Annual Report on Form 10-K for the year ended July 31, 2013, filed October 1, 2013, as updated from time-to-time in our filings with the Securities and Exchange Commission.

I would now like to turn the call over to David Hable, Synergetics' Chief Executive Officer. Please go ahead.

David Hable

Thank you, and good evening, everyone. With me on the line today is Pam Boone, our CFO. The press release was issued today after the market closed outlining our earnings for the fourth quarter and fiscal year 2013 ended July 31.

Here is the agenda for today's call. I will provide a high level overview of our fourth quarter performance. And then I'll share a brief summary of our fiscal year performance, before turning it over to Pam for some detailed financial color. I will return to provide an update on the commercialization of VersaVIT and share some thoughts on fiscal year '14. We will then conduct a question-and-answer session.

Before turning to our financial results, I want to make a comment on our press release that we issued separately this afternoon, which announce the closing of our King of Prussia facility and our intention to consolidate manufacturing here in O'Fallon.

The -- what we call east facility manufactures our bipolar electrosurgery generators, which we will transition here over upcoming months, in which we expect to be complete by the end of calendar 2014. This activity is part of our broader focus on streamlining process and shifting to a lower cost operating model.

By centralizing manufacturing operations, we expect to improve production per employee, reduce operating costs and identify efficiencies, all while maintaining the world-class service levels our OEM partners demand. These activities are expected to cost the company approximately $900,000 over the next 14 months.

The company expects the announced activities to result in a reduction in operating expense of more than $1 million on annualized basis, beginning in the fiscal year 2016. I want to take a moment to thank our employees in Pennsylvania and wish them well in the future.

Now turning to financial results. We reported a record fourth quarter with revenues of $17.9 million, reflecting growth of 5.9% driven by strong growth in OEM sales and positive sales growth in ophthalmic business compared to the prior year. Ophthalmology posted growth in both the U.S. and international markets again this quarter, and fueled by contributions from the commercialization of our VersaVIT system, which offset continued topline headwinds in our base business for the second quarter in a row. OEM sales improved nicely driven by continued strength in disposable and capital demand from Codman and Stryker.

Fourth quarter operating profit declined driven by lower gross margins and incremental sales and marketing expenses related to our VersaVIT commercialization compared to the prior year. Finally, despites softer margin, fourth quarter operating performance drove strong cash flow, which is indicative of the strong sustainable characteristics of this business.

Looking back over the fiscal year period, it really is a tale of two halves. Total revenues increased 4.6% to $62.8 million, but we posted nearly 9% growth in the second half of 2013 after flattish growth in the first half of the year. We posted low-double-digit growth in our OEM and neuro business this year, but again this was also a tale of two halves, with second half performance meaningfully stronger than the first half of the year.

On the ophthalmology side, we posted low-single-digit growth internationally, and sales were basically flat in the U.S. First of it was a standout contributor to ophthalmic growth in fiscal 2013 as sales of boxes and associated disposables helped offset the weakness we faced in our base business during the year.

On the profitability side, we reported lower gross and operating margins compared to the prior year period, which Pam will describe in more detail during her prepared remarks. We are pleased with the $3.6 million we generated in cash flow from operations this year, 70% of which we generated in the fourth quarter alone, which helped us fund our acquisition of M.I.S.S. Ophthalmics without impacting our overall balance sheet condition this year.

So all-in-all, a good year for Synergetics, especially considering the challenging first half of the year with a meaningful progress in the key areas of focus for the company, specifically in driving strong organic revenue growth with the commercialization of our innovative vitrectomy machine and the associated disposables and topline contributions from growing order volumes from our marketing partners over time.

We also took steps towards improving our operating profitability this year with our acquisition of our U.K. distributor in July, and our plans to consolidate our manufacturing operations here in St. Louis, which we announced today. Finally, we begin fiscal year 2014 with the addition to our Board of Directors. We look forward to leveraging Bob Blankemeyer's experience in growing med-tech companies to support our own strategic growth objectives going forward.

Now for a closer look at our fourth quarter performance. Beginning with the OEM business, sales to our marketing partners increased 8.7%. Both Codman and Stryker contributed to the increase in OEM sales this quarter with product sales to our largest OEM partners increasing 21.1% year-over-year driven by solid growth in sales of both capital equipment and disposables in the period.

As noted in our press release this afternoon, fourth quarter OEM sales were impacted by difficult comparison last year driven by a $700,000 initial stocking order to Mobius that didn't occur this year. Our OEM business remains healthy. We have strong relationships with our two marketing partners, who will drive sustainable mid-to-high single-digit revenue growth on an annual basis. Additionally, as I shared with you last quarter, we instituted structural improvements to our OEM forecasting process to improve our topline visibility in this important portion of our business.

Turning to our ophthalmology business, sales increased 2.9% driven by the combination of 1.3% international growth and 4.4% growth domestically. Let me start with the U.S. market first. As I mentioned earlier, VersaVIT sales growth offset continued pressure we are seeing in our base business. As we have discussed in previous quarters, some of our largest disposable product lines, those that are associated with the existing installed base of older generation vitrectomy machines, continue to face a challenging competitive environment.

Importantly, while these market dynamics in our base business remain challenging, the environment did not materially worsen in the fourth quarter, and in fact, we posted year-over-year growth in the rest of our base business that is not directly exposed to these competitive issues.

The competitive pressure largely consists of aggressive pricing, including product giveaways, which is driving revenue headwinds in the mid-single digits over the course of the year. Despite these topline headwinds, we are pleased to report our second quarter in a row of positive domestic ophthalmology growth during the period. This was entirely due to our progress with the commercialization of our VersaVIT system. I'll provide additional color on our progress with VersaVIT shortly.

On the international ophthalmology side, sales increased 1.3% driven by sales of VersaVIT systems impacts, contributions from our acquisition of M.I.S.S. Ophthalmics, and strong order growth in Canada, which offset lower volumes in emerging markets compared to the prior year.

With that, I'll turn the call over to Pam for a detailed review of our financial results. Pam?

Pamela Boone

Thanks, Dave. Sales in the fourth quarter increased 5.9% to a record $17.9 million versus $16.9 million in the prior-year period. Total sales increased 9.8% sequentially in the fourth quarter. U.S. sales increased 7.6% to $13.3 million, while international sales increased 1.2% to $4.5 million.

International sales represented approximately 25% of total company sales this quarter with the balance of 75% coming from domestic sales. Our international sales mix last year was approximately 27%.

Total company sales by product category; Disposables and capital equipment reflected 5% increase in sales of disposables year-over-year and a 11.2% increase in sales of capital equipment. Disposable sales accounted for approximately 81% of total sales in the fourth quarter.

The increase in disposables revenue was primarily attributable to orders from our largest OEM partner, Codman, whose bipolar forceps and other disposable products were important contributors again this quarter. This was partially offset by competitive pressures in three of our largest product lines in our base ophthalmic business, laser and illumination probes and our diamond dusted membrane scrapers.

Capital equipment sales increased 11.2%, driven by strong order volume from our OEM partners and sales of our VersaVIT system. Codman electrosurgery generators was the strongest product line in the period, which reported 22% growth. Stryker pain control generators also contributed to overall capital equipment sales growth compared to the prior-year period.

Turning to a review of fourth quarter performance in our two main businesses, ophthalmic and OEM, which represented approximately 53% and 46% of total company sales respectively this quarter. Total ophthalmic sales increased 2.9% to $9.4 million this quarter compared with sales of $9.2 million last year. Total ophthalmic sales performance this quarter was driven primarily by a 4.4% increase in the U.S. and to a lesser extent a 1.3% increase internationally.

Ophthalmic sales, both domestic and international, benefited from increased sales of VersaVIT vitrectomy systems and procedural kits this quarter. Importantly, the contributions from VersaVIT offset the continued pressure we are seeing in our base business driving positive growth in the ophthalmic business worldwide.

We continue to face competitive pressure in our base ophthalmic business. However, I want to provide additional color that maybe helpful when evaluating our reported results for this business.

Specifically, we are seeing competitive pressure in three of our largest product lines, which together represent approximately 60% of base ophthalmic sales overall. The remaining 40% of our base ophthalmic business is performing quite well. This portion of our base ophthalmic business posted flattish growth in the fourth quarter compared to the prior year driven by high single-digit growth domestically and high single-digit declines internationally.

Contributions from our acquisition of M.I.S.S. Ophthalmics and additional sales from distributors in Canada offset the weaker growth in base business sales internationally in the fourth quarter. Excluding the contributions from the acquisition of our U.K. distributor M.I.S.S. Ophthalmics in the period, international ophthalmic sales were flat year-over-year.

Regarding the contributions to total ophthalmic growth from VersaVIT systems impacts, we saw contributions from sales of boxes, both in the U.S. and internationally again this quarter. Although, the mix of placements versus sales continues to be higher domestically compared to international markets.

We were pleased with order volumes for our disposable packs and related accessories in the fourth quarter, which near-term we believe represents an encouraging sign of overall market acceptance of our machine in longer-term, represents a driver of revenue growth for the company as utilization ramps over time.

Shifting to our other main business, OEM, sales increased 8.7% to $8.2 million compared with $7.5 million last year. OEM sales performance was driven primarily by 21% growth in product sales to our two largest OEM partners, Codman and Stryker. Importantly, fourth quarter growth was impacted by a difficult comparison in the prior year period, given by the initial stocking orders from Mobius of approximately $700,000, which did not occur in the fourth quarter this year.

We continue to expect solid growth performance from our OEM business going forward, albeit with periods of modest volatility, as we respond to demand trends quarter-to-quarter. On a rolling four-quarter basis, our OEM business posted year-over-year growth of 10.4%.

Now for a brief review of the rest of the P&L for the fourth quarter of 2013. Gross profit for the fourth quarter declined 1% to $9.7 million or 54.2% of sales compared with $9.8 million or 58.2% of sales in the year ago period. The year-over-year decline in gross margin was driven by product mix shift in our ophthalmic business, higher OEM sales mix and foreign currency.

Total commercial expenses increased 9% to $7.4 million or 41.2% of sales compared to $6.9 million or 48.7% of sales last year. Total commercial expense growth was driven by a 13% increase in selling and marketing expenses to $3.4 million by a 3.9% increase in G&A expense to $2.9 million, offset slightly by a 2.5% decline in R&D expense to $1 million compared to the prior year.

Q4 commercial expenses also include a $129,000 expenses related to the medical device excise tax, which went into effect in January of 2013 and additional expenses related to our acquisition of M.I.S.S. Ophthalmics, both of which were not included in the prior year period reported results. The majority of this sequential increase in commercial expenses was driven by incremental cost related to the acquisition of M.I.S.S.

Reported 4Q operating income was $2.2 million compared with operating income of $2.9 million in the fourth quarter of fiscal 2012. Operating income was impacted primarily by the increase in cost of goods sold and to a lesser extent the growth in operating expenses.

Reported net income declined 26% to $1.4 million or $0.06 per diluted share from $1.9 million or $0.08 per diluted share for the same period of fiscal 2012. Earnings before interest, taxes, depreciation and amortization or EBITDA totaled $2.6 million in the fourth quarter of fiscal 2013, down 19% year-over-year.

Turning to the balance sheet. At yearend we had $12.5 million in cash and no debt. Our DSO ratio is 84 days, up 72 days at the end of fiscal year '12, driven primarily by the sales progression during the year and the addition of the M.I.S.S. receivables. Our inventory position was $14.8 million, down 5% year-over-year.

This inventory balance represents a 178 days of inventory on hand versus the 224 days last year. Excluding the additional inventory from our acquisition of M.I.S.S. Ophthalmics, our days of inventory on hand was 174 at yearend. Cash generated from operations in the quarter was $2.5 million, reflecting solid performance and a more efficient use of working capital, particularly inventory.

Total cash provided by operations during fiscal year 2013 was $3.7 million compared to cash usage from operations of $2.4 million during fiscal 2012. The year-over-year change was driven primarily by the absence of a $5.8 million tax payment related to the Alcon settlement agreement, which occurred in the second quarter of 2012, and the working capital benefit associated with the write-off of excess inventory in the second quarter of fiscal 2013.

Now, I'll turn the call back to Dave to provide an update on our progress in the commercialization of VersaVIT.

David Hable

Thanks, Pam. We continue to be encouraged with both the overall market response for and the early adoption of our innovative portable vitrectomy machine, VersaVIT. Our progress continues to validate that our machine addresses our currently unmet clinical need and the feedback of our sales people is consistent. Surgeons value the clinical effectiveness, the cost benefit equation and increasingly the ease-of-use that our VersaVIT technology provides.

The simplicity of setup and easy-of-use continues to resonate with conditions. These features facilitate procedure turnover, which translates in more procedures within a given period of time. Further, the machine's remarkably smaller footprint is an added benefit, as the industry continues to focus on surgical center optimization. We know we have the right product to meet our retina surgeon customers need.

The worldwide vitrectomy market has estimated approximately $425 million annually, including both machines and associated disposable packs. Data suggest annual market growth rates in the mid single-digits driven by agent demographics, a growing diabetic population and the structural shift and procedures from the hospital to the ambulatory surgery center or ASC. For Synergetics, VersaVIT represents the right product in the right market and we are confident we have the right strategy to drive strong topline growth in the future.

Now turning to our strategy to drive market adoption and sustainable growth and utilization. As we gain experience in the field, we are continuing to refine which segments represent the most productive targets for our VersaVIT technology, and have identified high volume ASCs and select larger teaching institutions, particularly those with retina teaching programs.

Both of these markets offer unique and interesting opportunities, which we address into our commercialization efforts importantly, while evaluation times vary among our target segments, we are leveraging our sales experience to optimize our sales processes and continue to prove our overall sales effectiveness.

So for a quick review of our progress to date. First, we continue to increase the number of evaluations in progress around the country, particularly as our mix of target customers evolve, as we gain more field experience.

Secondly, we remain focused on closing each evaluation as quickly as efficiently as possible. Our average evaluation time through the fourth quarter remains at roughly 15 weeks. Recall that evaluation times include the need to test units on a wide variety of procedures. We refer to this as a clinical evaluation time by the increasing use of committee based purchasing decisions, which we call the administrative evaluation time. We are working to bring the clinical evaluation period down, while the administration portion remains a tougher nut to crack.

Third, we have competed more than 3,700 retina procedures, including evaluations with VersaVIT, which was up more than 54% sequentially, and clearly the strongest evidence of the powerful market acceptance of our innovative technology. In the fourth quarter, 31 of our VersaVIT customers placed orders for our VersaVIT disposables, having completed their internal requirements to effect the transition.

These accounts represent the group of system that have converted to VersaVIT, burned through their competitive and demo inventory and found themselves in a position to order disposables for their daily usage. We share this example as a clearest illustration of our early success in commercializing VersaVIT.

Let me be clear, we are squarely focused on driving disposable volumes in the future and we expect that these sales represent an increasing percentage of our total ophthalmology results going forward. The pace of the growth will be measured over the next few quarters. We are committed to getting these evaluations right the first time and we have invested in field support to ensure our customers are maximizing the utility of the device.

Finally, we anticipate our VersaVIT system to gain share, vitrectomy procedures going forward through increasing the number of evaluations underway, growing our installed base and expanding utilization. Additionally, these successful procedure completed represents another opportunity for surgeon feedback, improved clinical validation of the technology and clinical credibility of the sales force, which will improve effectiveness and continue to shorten the time from evaluation to close.

In summary, we are pleased with our progress on VersaVIT thus far and we are particularly pleased with seeing VersaVIT reinvigorate our growth in ophthalmology, both domestically and internationally, again in the fourth quarter. It is important to remember that we remain in the early days of our launch and as we have shared in past calls, we have entered the market that hasn't seen a new competitor in a long time.

We have stimulated an increasingly vigorous competitive response, which has resulted primarily in discounting, as we gain traction with VersaVIT. We remain confident that we have unique technical attributes that will be very difficult to duplicate in the near-to-mid future. As such, we are approaching this strategically and with purpose. We are laser focused on building an installed base of VersaVIT machines with a goal of driving disposables over time.

Before opening the call to questions, I would like to share a few thoughts on fiscal 2014. As you know, we do not provide formal financial guidance, but we'd like to provide additional directional information to claim the company's profile over the next 12 months.

To that end, as I mentioned earlier, our OEM business remain strong with solid demand indications, as evidence by the $1.4 million backlog we have at the end of the fourth quarter. On the ophthalmology side, we expect similar dynamics next year that we faced this year, especially mid single-digit headwinds in base business, offset by revenue contributions from the continued progress and rolling out VersaVIT.

On the margin front, we expect to face continued pressure on gross margins driven by the pricing dynamics and mix shift related to competitive activity. And finally, we expect our commercial expenses to be higher, as we continue to invest in both personnel and marketing programs to drive further progress in the launch of our VersaVIT.

In the past, we provided operating margin goal of 20%. I want to be clear that this remains our goal and we believe we will drive to that over time. However, given our current and planned investment in commercial activities, we do not expect to achieve this level in fiscal '14. We expect to see operating margin expansion toward the end of this fiscal year and into fiscal year '15.

With that, we'll open up the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And we have Steven Crowley from Craig-Hallum on line with a question, please go ahead.

Steven Crowley - Craig-Hallum

In terms of a question related to the strength in the ophthalmology business and the different nature of that business, as it becomes more run rate VersaVIT-driven by consumable product driven. I am wondering, one, there has been some seasonality historically in the business from Q4 to Q1 in your fiscal years, will that become dampened as the engine of VersaVIT cranks up? So how should we think about the kind of decline that could be where you start 2014, and what impact did M.I.S.S. have on what you just reported and what is it likely to contribute next year?

David Hable

Steve, there is a bunch of questions in there.

Steven Crowley - Craig-Hallum

No, actually it was one question. Let's be clear, it's all about ophthalmology?

David Hable

Well, I'll try to hit. I'm not sure I got all those. I'll try to hit on those. So, yes, I think we would expect the seasonality to be dampened over time. A lot of that seasonality was driven in the past by the capital equipment element of the historical business, which we fully expect to the diluted over time by the advance of disposables. The M.I.S.S. contribution, Pam can give you the exact number. It was modest in the fourth quarter.

Pamela Boone

It was modest, but I'm going to draw your attention back to the M.I.S.S. press release. M.I.S.S. completed their fiscal year end March 31, 2013, with $3.1 million with $1.1 million coming from us. So, about $2 million in incremental sales and we basically owned M.I.S.S. for about three weeks. And that corresponds almost entirely to the number that it contributed. And we also said that international sales would have been flat without the M.I.S.S. contribution.

Steven Crowley - Craig-Hallum

Now in terms of the landscape for that ophthalmology business, you've given us quite a bit of color on the continuing battle out there, but that you are winning those hand-to-hand combat exchanges, and it's starting to stack up to a meaningful number of customers. Was it 31 that you gave us?

David Hable

Yes.

Steven Crowley - Craig-Hallum

31 disposable customers. Can you give us some sense for whether or not the number in the pipeline that are yet to flip, so agreed to come with you, but are yet to flip to being fully kind of deployed and utilized. How much bigger is that funnel versus what's come out of the funnel so far?

David Hable

So what's in the funnel versus the 31 that have actually reordered or --?

Steven Crowley - Craig-Hallum

In the funnel, I'm talking about, again, customers who have committed to you or they're more than just prospects, Dave, I guess. There's that intermediate group and then there is the prospect funnel. I got to believe that's considerably larger, but I think we want to have --?

David Hable

Yes. It is considerably larger. I'm trying to not give you an exact number on those, what's in the pipeline, but it is significantly larger. The evaluations as I hopefully pointed out have been difficult to collapse in time overall, so that's been a contributing factor as much time as we've spent trying to collapse those evaluations. And the hand-to-hand combat you referred to, it is both in our base business and on VersaVIT and related disposables, and we feel we are winning at both levels on an increasing rate.

Steven Crowley - Craig-Hallum

On the competitive landscape with Bausch & Lomb being acquired and Alcon continuing to show signs, one of my other followed companies in the space has just had a very nice personnel addition from Alcon announced this morning. Are those indicative – Well, first of all, is that indicative of what you continue to see at Alcon, if there is some change in personnel? And what are you seeing about P&L?

David Hable

So I don't want to talk about what we see for a specific company, but what we do generally see is both the companies you mentioned have a volatility factor associated with their ownership by pharmaceutical companies, and it's logical that is reflected in changes in personnel.

The major takeaway, I ask everybody to walk away with is that it is a volatile market as a result of this ownership and consequent direction that it is something we are understanding at a micro level, and hopefully will have a positive impact on the business long-term.

Operator

And we have Korosh Saba from Stephens, Inc. on line with a question, please go ahead.

Korosh Saba - Stephens, Inc.

I was just wondering, can we get some color around your eval pipeline for VersaVIT, and what kind of feedback and pull-through you guys are seeing? And then as it relates, I know you guys had accelerator come on and then they recently launched PR referral initiative, what kind of feedback you're getting there?

David Hable

So a number of questions. So the feedback, first of all, on the pipeline is uniformly positive. Our articulated assumption that the machine can be used for the vast majority of people is holding up the vast majority of procedures. We have identified next-generation features that we believe will enhance the unit, and we have planned to develop those features and commercialize those. For obvious competitive reasons, I won't detail that. But we feel increasingly confident that we've got a durable product that resonates with the customer's needs.

We have identified any potential durability robustness issues in the components and have made changes. So we have reacted to any information we get coming in from the field. And so, it's all been a lot of stuff to tell you the truth that we have been doing on the run, but we feel we have a product that is resonating at an increasing rate as that's evidenced by a number of increasing evaluations, the positive word of mouth and the increasing number of reorders. So, we feel great about the pipeline as the bottom line on the whole thing.

Korosh Saba - Stephens, Inc.

If I could just get a follow-up real quick. As we look at to ESCRS, you're coming up. Can you just give us a sense on what your thoughts are on the international environment and maybe your ability to grow or take share? And then just kind of thoughts around the competitive environment over there.

David Hable

So it's very different, a lot more competitors, lot more local competitors in the vitrectomy machine and pack market. Our best intelligence is that they are all focused on the high-end piece of that market and consequent machines. We have been able to identify no competitive developments of a VersaVIT style machine, but there are more competitors. Placement in that international marketplace has been the placement of machines has been the norm, which is different in the U.S. and some of the macro volatility revolves around the economic conditions, which vary on a country-by-country basis.

Operator

And we have Joe Munda from Sidoti & Company on line with a question, please go ahead.

Joe Munda - Sidoti & Company

Dave and Pam, real quick, the OEM growth that you're exhibiting here, is this a level of growth that we can expect to continue as well as how it relates to gross margin? You're saying you're getting pressured, is it more from VersaVIT or is it more from sales through OEM?

David Hable

So I'll break that into two pieces. So sticking with the OEM side, we reported 8.7% growth, but hopefully you caught that. This quarter had a tough comp, because of the $700,000 in Mobius we did in the fourth quarter of '12. So if you look at Codman sales and Stryker sales, basically the product sales are going out the door with over 21%. And I've continued to say that that is not going to be sustainable in the future. But given my visibility to the underlying demand as evidenced in their forecast, which we really see on a daily basis, I'm confident that we're going to do really well in the next couple of quarters in the foreseeable future.

So that's the OEM side. On the pricing competition side it actually breaks down into two areas, on VersaVIT machines and packs. So on the vitrectomy machine and pack area, we've seen competitors react in terms of pricing pressure. And on the base disposable side, we see not only discounting, but we also see the giveaway of three samples that equate to our base business products, in the interest of driving evaluations. And that happens on a sporadic base, it doesn't happen every territory, but it's a tool that competition uses on a fairly regular basis.

Joe Munda - Sidoti & Company

Now, I'm a little confused by the situation, because it seems like the competitor is giving away the product, but you guys are still able to sell VersaVIT successfully, and then sell the disposables that go along with it. So I'm just a little confused here as to you're still projecting that low single-digit growth, but is the bulk of that low single-digit growth going to be VersaVIT related or is it going to be you guys being able to overcome some of those situations with larger competitor?

David Hable

Joe, which low single-digit growth you're referring to?

Joe Munda - Sidoti & Company

Well, I'm saying ophthalmology as a whole. What you guys did, let's say 3% right this quarter. That's what I'm saying. You've seen headwinds, but you're saying, you're going to be able to kind of navigate through. And it's seems like VersaVIT is the product that's going to help you navigate some of those headwinds, but it seems like your largest competitor is knocking it off and what stops them from knocking down the price on the machine itself and not giving away the disposables?

David Hable

So they've reduced the cost of the machine, reduced the cost of disposables and they've given away products to drive these evaluations and that giveaway relates to our base business. So that's a little confusing dynamic.

Joe Munda - Sidoti & Company

Yes, so I mean will VersaVIT continue -- I guess will VersaVIT continue at its pace that it currently has based on the headwinds that you're seeing on the giveaways on the disposable side, that's really what I'm getting to.

David Hable

So we actually expect the progress of VersaVIT to accelerate over time. Despite the discounting on these machines, there's still a good delta between where they started at and what the net price is for the customer. So there is still is a price difference. The bottomline in all that is we expect VersaVIT do increasingly very well.

Joe Munda - Sidoti & Company

And then I had just one quick follow-up, one for Pam, one for Dave. Dave, you guys talked, or Pam, you guys talks about the investment in personnel on the SG&A side. What's the number of direct sales people you're at? And what will that level of SG&A, are we going to see similar level that we saw this quarter of the $6.4 million play out or is that going to ramp up as we go forward?

Pamela Boone

We're at 23 territory mangers right now. And we're planning to add as this stated in our K, three filed application specialists to help increase the number of procedures that VersaVIT is being used on. So we will continue to increase our sales and marketing albeit at a lessened rate than what we did in fiscal 2013.

David Hable

So three reps were added at the beginning of 2013, and through the course of '13 we added these application specialists that Pam referred to. And those expenses will continue on into future years, but we have no plans to add additional sales reps or applications specialists at this time.

Joe Munda - Sidoti & Company

And then Pam, I guess on the restructuring with the Valley Forge plant or facility. Is that going to be heavily weighted towards one quarter or another? I know you guys mentioned calendar '14. Are we going to see like a $500,000 restructuring charge, let's say, in the second quarter of fiscal '14 or is it going to be more evenly spread out?

Pamela Boone

Well, unfortunately the accounting has changed on restructuring charges. A few years ago, you would have accrued the whole thing at announcement and then gone against that reserve. Now, it's really pay as you go. So it'd be pretty evenly spread. The cost of the $900,000 will be pretty evenly spread over the 14 months with some concentration at the end as people stay for their stay bonuses and that type of thing. But it will run over the 14 months through December of 2014, which is basically our fiscal year 2015 at that point in time. So we have seven months to start to get some o the payback of the $1 million savings from January through July of 2015.

Operator

We have a Larry Haimovitch from HMTC on line with a question, please go ahead.

Larry Haimovitch - HMTC

The takeaway I am getting from a high level, but what I've heard from the call, reading your press release is, the VersaVIT is clearly your engine, clearly the driver as we go forward. But it will have to overcome some of the headwinds of the legacy ophthalmic business and I guess ophthalmic laser business. Is that a fair takeaway from what you're trying to communicate to us?

David Hable

So we've had this legacy business, and Larry, I think you're referring laser probes and not the physical laser, which is competitive pressure. And we're offsetting that pressure with positive sales growth on the VersaVIT type.

Larry Haimovitch - HMTC

My follow-up question then for you Dave would be, could you get into a little more color about the specific competitive issues you're facing? Is it a specific competitor or is the whole market just not growing as much? Is your product not as competitive from the technology standpoint as it used to be? It would be helpful if you could provide a little bit colored flavor on that question for me please?

David Hable

So first of all the market is shifting fairly dramatically from hospitals to ASCs, and so the historical line of our competitors has been towards hospital orientated high cost, high feature technology standpoint machines. So we've relative to the competitiveness at feature set we find it very competitive. And so as we move into this ASC, all institutions are trying to be more efficient, generate lower cost and be more efficient, they find or finding that a unit that is easier to set up, easier to use, less complicated to operate is a benefit, more competitive because it allows them to do more procedures overtime bottomline.

Some of the attributes of VersaVIT is its supportability. We really haven't got into yet in terms of seeing its competitive nature. So lot of the competitive response that we've seen as in the form of discounting to make this, previously what we categorized as expensive technology more affordable and trying to accelerate the penetration of their systems by mechanisms like offering free laser probes for the course of the evaluation to make that a more appealing composition to potential customer.

Larry Haimovitch - HMTC

And let me just sneak in one other quick one if I could. There was some reference to diamond scrapers, and the fact that there was more competition there and I wondered if you could provide a little color there?

David Hable

So that is a base business product, so that falls under the base business category. There are few price discounters out there, but it's not a dynamic that's related to this VersaVIT equation.

Operator

And we have James Terwilliger from Wunderlich online with the question, please go ahead.

James Terwilliger - Wunderlich

My first question is really focused on the M.I.S.S. acquisition. Could you update me on in terms of the integration of the acquisition? I know there would have been little impact in terms of the quarter due to the timing of when it close, but I just want to get an update on how the integration is going? Any expense reduction initiative that you see in that particular transaction and at the same time, did you lose any customers or product lines because I am under the impression that was a distributor selling your products, but other products and I guess one of the risks there would be one of their customers just pulls the product line.

David Hable

I will answer a piece of that, the last piece of that then I'll turn it over to Pam and let her talk about in more detail. No, we haven't lose any customers. The majority of M.I.S.S. sales were Synergetics sales, but to the best of our knowledge and looking at Pam we haven't lost any customers in the overall scheme of things. Pam, a little color on the M.I.S.S integration.

Pamela Boone

So not a whole lot happened in the last 23 days of July except for trying to gather all their financial information and get into ours, but since that time we've been working very diligently to get them assimilating on to our system. They will become our European distribution center for our direct markets first.

And we're planning rolling that our over the next months, getting the inventory over there for them to supply our direct market and yes we do expect synergies from that. And we do expect those to be flowing in the second half of the year. We acquired a great team over there that are helping us daily with this with this assimilation.

David Hable

Yes. So they've actually been here. And James, as you maybe now recall we had leased facilities, warehouse facilities in France and Italy that we can retire and that's part of the synergies that Pam was referring to.

James Terwilliger - Wunderlich

Now I think that was a very attractive acquisition. I'm going to sneak in one more question, real quick. We've talked on this call about the sales force for the VersaVIT and the different territory managers. When you look at your average sales rep and I know this is hard, what would be the range? How many VersaVIT customers could one sales rep cover? I know that would vary by geographic region, but what would be a good range, how many VersaVIT customers could the average sales rep cover?

David Hable

So I would say that the average sales the Synergetics' sales rep could manage two to three evaluations concurrently. That is a way I would say to look at it. They can stimulate interest in the unit, make competitive sales calls, setup evaluations, but in terms of managing the actual number of evaluations that's my rough guess.

But now we're working to reduce the amount of time they have to spend managing those evaluations. That's what these utilization specialists is all about. They're clinical people that can drive the day-to-day usage of the machine once it's in place. So that's expensive sales time to have a rep doing that for a week.

Operator

And we have Steven Crowley from Craig-Hallum on line with question, please go ahead.

Steven Crowley - Craig-Hallum

An important question I think for clarification purposes, because there is some confusion that I'm picking up on this call. This phenomenon of giveaways to prompt evaluation of vitrectomy systems, and reducing prices on consumable products, those giveaways in price reductions, are they predominantly or even exclusively -- predominantly, probably in your base business, not the vitrectomy packs for systems that compete with the VersaVIT or are you seeing giveaways in substantial discounting in the vitrectomy packs not just the systems?

David Hable

We are not seeing giveaways in the packs. We are seeing discounting on the packs. The giveaways apply mostly to the base business.

Steven Crowley - Craig-Hallum

And in terms of that base business where you've seen headwind as you've characterized, what can you do either from a product enhancement or technology standpoint to protect that space or what can you do from a sales and marketing strategy or tactic standpoint to protect that space, talk to us about how you're dealing in the field with that?

David Hable

So from a product standpoint, we have the very specific plans to enhance those products, revitalize those and hopefully make those a more competitive. For competitive reasons, obviously I can't lay that out. From a sales standpoint, and the sales management standpoint, it's power sales blocking and tackling.

And we have been engaged in that throughout the fourth quarter, which boils down to identifying accounts where we've lost the business, developing an account plan to go back in there and try to get it. In some cases it can be giving them more service or whatever the case maybe, making them aware of our offering. So that has had a definable impact even in the fourth quarter. So even though we saw on an annualize basis, mid-single digit erosion that was meaningfully less in the fourth quarter of last year, '13.

Steven Crowley - Craig-Hallum

And then in terms of the pack pricing pressure, how would you characterize it? Is it noticeable in some instances, but manageable? Is it wildly different, such that it is really concerning and a huge impediment in some accounts? How can you characterize that picture for us?

David Hable

It's definitely noticeable and it's meaningfully variable on a geographical basis. So we see different pricing in different parts of the country basically. And as I said before it seems to be more sales and sales management really, but it's definitely a factor and that is a tool that competition is using to deal with our initiatives.

Operator

And we have no further questions at this time.

David Hable

Well, in summary, we feel that fiscal 2013 was a very solid year for Synergetics, especially considering the challenging first half of the year. Our strong relationships with our OEM partners build topline growth. And thanks to our progress on launching VersaVIT this year, we were able to offset the revenue headwinds in our base ophthalmic business.

While our margins were pressured by a combination of competitive pricing and higher operating expenses, we generated strong cash flows from operations, which helped us fund an acquisition, while impacting our overall balance sheet condition.

The early market response to VersaVIT remains strong. We are pleased with the revenue contributions from VersaVIT adoption, particularly with respect to the reordering of packs in recent quarters from our installed base that supports ongoing daily usage.

We have the right product, serving the right market, supported by the right strategy for growth in our ophthalmic business. We expect sustainable growth in our OEM business for the foreseeable future. And Synergetics is well-positioned for return to increasingly strong operating and financial performance, which we fully intend on turning into improved shareholder returns.

We appreciate your continuing interest in the company. And thanks for your time tonight. Talk to you later. Bye-bye.

Operator

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

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