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Symmetry Medical Inc. (NYSE:SMA)

Q3 2013 Earnings Call

October 31, 2013 08:00 am ET

Executives

Tom Sullivan – President & Chief Executive Officer

Fred Hite – Senior Vice President & Chief Financial Officer

Carol Ruth – The Ruth Group (NYSE:IR)

Analysts

Young Li – Piper Jaffray

Matthew O’Brien – William Blair

Jim Sidoti – Sidoti & Company

Operator

Welcome to the Q3 2013 Symmetry Medical Inc. Earnings Conference Call. My name is Larissa and I’ll be your operator for today’s call. (Operator instructions.) Please note this conference is being recorded. I’ll now turn the call over to Carol Ruth of The Ruth Group. 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,” “impends,” 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 expectation. Factors that could cause or contribute to such differences include but are not limited to the loss of one of our customers; the development of new products or product innovations by our competitors; product liability; changes in management; changes in conditions effecting 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” section 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 follows a policy of not commenting or discussing individual customers or programs. Tom?

Tom Sullivan

Thank you, Carol, and thank you everyone for joining us today for Symmetry Medical’s Q3 2013 Conference Call. I would like to begin today’s call with an expression of gratitude to our Symmetry teammates and first responders who were called upon during the fire at our Sheffield, United Kingdom facility during September, 2013. We are thankful that no one was injured and grateful for their efforts to combine the damage to the assets shop. Thank you.

We had a challenging Q3 that was impacted by several unexpected factors and revenue weakness. In the OEM Solutions segment these included operational issues at our dedicated aerospace subsidiary in the United Kingdom, Clamonta Ltd.; lower than anticipated instrument volume; and the fire at our Sheffield manufacturing plant. In the Symmetry Surgical segment we have not yet realized an anticipated return to growth in the United States following the completion of the operational transition of the Codman surgical instruments business during Q3 2012. As we outlined in our preliminary release press release (inaudible) in the quarter. The entire Symmetry team is focused on addressing these issues along with our ongoing commitment to providing a high level of quality, customer service and operational excellence.

I will begin today’s call with a quick review of our results followed by an operational update, our progress driving growth in Symmetry Surgical and operational improvements including the ongoing implementation of the Symmetry business system.

Total revenue for Q3 was $98 million, down 3% year-over-year and down 4% sequentially. Revenue in our OEM Solutions business was down 0.5% year-over-year and down 5.0% sequentially reflecting the issues I’ve previously summarized partially offset by higher sales of cases. Normalized for these anomalies and our strong Q2 implant sales we believe our results reflected a stabilized and possible signs of improved orthopedic procedure volume which we’re also seeing in our customers’ results.

Symmetry Surgical sales decreased 10% year-over-year and were off less than 1% on a sequential basis, reflecting a stabilization of performance but not a return to growth as we had anticipated. Excluding the impact of a former Symmetry Surgical customer to direct purchases from Symmetry Medical OEM Solutions in 2013, OEM Solutions revenue was down 2% year-over-year and Symmetry Surgical revenue was down 6% year-over-year.

Gross margin in Q3 2013 was 25% compared to 28% in Q3 last year. The decrease in gross margin reflects a lower proportion of our revenue from our higher-margin Symmetry Surgical business, the operational issues at Clamonta Ltd., lower instrument revenue, OEM Solutions’ customer cost reduction efforts and eight days of facility downtime during September, and continued forging impact as a result of the fire at our Sheffield plant.

Sequentially gross margin is down from 26.1% in Q2 driven by the Clamonta operational issues, the Sheffield fire, and lower revenue. We are encouraged however by the continued positive contribution of our Symmetry business system improvements year-over-year to help offset other gross margin pressures.

Together, the lower revenue and gross margin had a meaningful impact on our profitability in the quarter. Adjusted earnings per share was $0.08, down from $0.18 in the same period last year. We expect a continued impact in Q4. Nonetheless we generated $14.7 million in cash flow from operations during the quarter, reduced our debt by $21.8 million and our leverage ratio ended at 3.28x LTM EBITDA.

Revenue for our OEM Solutions segment declined slightly year-over-year due to sales reductions in both our instruments and aerospace categories. Instrument sales were down 8% and were lower than our expectations heading into the quarter. Outside of customer investments in larger product launches we are not seeing significant capital spending on instruments and cases. We are participating in recent new knee platform launch activity; however, it is a lower level than we originally targeted for our Instruments segment especially when compared with the case segment.

Additionally, while we are seeing supplier rationalization packages for instrument sourcing it has not yet translated into any significant volumes but has created incremental pricing pressure in the marketplace. Based on projected capital spending, sluggish supplier rationalization and our current order activity we have recalibrated our expected instrument volume to account for the current trend and a continued deliberate instrument set rollout by our customers on the knee launches.

On the case side we had another strong quarter with large new product launches. There are some positive signs of improvement in orthopedic procedural volumes which could be a catalyst for increased investments in instruments and cases going forward; however, at this time it’s too early to determine whether the Q3 trend will continue and what if any will be the impact on capital investments by our customers.

In Q1 this year we identified operational issues at our UK-based Clamonta Ltd. subsidiary, which services the aerospace industry. We allocated additional resources from elsewhere in the organization to assist Calmonta and believed we’re on an improving trajectory throughout Q2. Unfortunately, during Q3 we realized that these issues required further financial and managerial resources and the transition of senior management at this site.

We have invested several months working with the Clamonta team to improve operational effectiveness at this site and have begun to see progress and increasing throughput to meet the customer demand which is up significantly year-over-year. While we are encouraged by the progress, the effort has required substantial involvement of senior management and has put significant pressure on our earnings.

While we expect some improvement in Q4 risk remains and Clamonta will continue to weigh on profitability. We are collaborating with Clamonta’s customers to create a mutual beneficial plan to respond to the increase in demand going forward. We will continue to monitor the situation and take the appropriate action.

At our Sheffield plant our team was able to rapidly and effectively respond to the fire that destroyed our asset shop facility on September 13th and caused the full plant to be closed for eight days while we confirmed its safety.

The asset shop functions in conjunction with our forging operations at the Sheffield plant. Post-forging, most parts are immersed in acidic baths to facilitate the removal of material from the forging process. A forged part can go through multiple iterations of the process. The disruption stalled a full week of production from the entire facility and delayed implant orders to certain customers and impacted implant category growth in the quarter, which came in at 2%. Excluding the delayed orders and strong Q2 sales, our implant growth would have been more in line with the mid-single digit growth reported by our customers.

We remain grateful that no one was injured and I would again like to commend the first responders from the local Sheffield fire brigade and our Symmetry teammates for their professional response to the fire. Once we learned of the fire we deployed our business continuity plan to manage our response, containment, assessment, and recovery.

We have already implemented the short-term portion of the plan and constructed a temporary asset shop facility that is operational, and have submitted validation paperwork with our customers. Accordingly, in mid-October we resumed implant manufacturing operations for many product families and hope to address delayed orders and return to a normal schedule as soon as possible. As for the long-term plan we are planning to construct a permanent asset shop facility on open space at the site that can be seamlessly integrated into the existing operation.

While we are pleased with the quick return to operations at Sheffield we expect our Q4 results to continue to be impacted due to the delays in delivery caused by the disruption. Overall we are pleased that the global resources of Symmetry Medical and our comprehensive business continuity planning has helped us to lessen the impact of this type of disaster on our customers – a key advantage when doing business with Symmetry Medical.

As I discussed, OEM Solutions gross margin was impacted by several issues during the quarter. Nevertheless we continued our efforts to impellent the Symmetry business system which will help offset some of the margin pressure and position Symmetry for improved results in 2014 and beyond. This includes the deployment of our company-wide ERP platform, automated quality and regulatory assurance systems, lean manufacturing best practices, and management protocols designed to advance overall operational efficiency.

During the quarter we upgraded our US case facility to our company-wide ERP platform. For the first time we now have all our US OEM Solutions manufacturing facilities unified on a single ERP platform. This is a major accomplishment that will translate to more efficient materials procurement, workflow, inventory management, and resource allocation.

Most importantly the ERP platform along with our other operational initiatives will position Symmetry to better utilize our infrastructure to gain incremental market share based on improved customer service, quality, and collaborative capabilities. The Symmetry business system remains on track to deliver the projected 100 to 200 basis points of gross margin improvement in 2013.

Symmetry Surgical had a quarter of stabilizing results in our US business with a slight year-over-year revenue reduction and a 2% sequential erosion. Outside the US sales were up sequentially 5% but still off 27% versus year-ago. It is important to note that the US transition occurred in Q3 2012 and the majority of O-US transitions occurred throughout Q4 2012 and Q1 2013.

In the US we are facing a competitive environment and believe competition may have capitalized on opportunities to serve customers as a result of their need to transition ordering patterns to us. We have a tactical plan to drive growth by capitalizing on smaller geographic territories and more frequent customer interaction that will leverage our recently harmonized and trained US sales force. We believe we have a strong team and product portfolio that will allow us to gradually regain market share from existing customers and win new customers.

We are similarly positive on the long-term outlook for our international business although it is taking longer than anticipated for our non-US distributors to gain traction in their local markets. We continue to work collaboratively on a country-by-country basis and are encouraged by the tender opportunities we see.

Additionally we continue our efforts to finalize the remaining country transitions and to register our historical SSi and Olsen product lines to allow our distributors to sell our comprehensive product portfolio. Longer-term we expect this investment will translate to momentum in the international markets which are critical to our growth strategy.

Overall, despite some near-term issues we remain confident in the long-term outlook for our business. In our OEM Solutions business we are positioned to increase revenue as customers consolidate their business to fewer strategic partners who can bring them innovation and increase their use of outsourcing for implant manufacturing. Additionally, our Symmetry business system and any incremental volume should further improve segment gross margins.

We are beginning to see some positive signs of improvement in orthopedic procedural volumes which is a tailwind for our business. On the Symmetry Surgical segment, we believe our comprehensive product portfolio and broad sales coverage will allow us to achieve above market growth once we have moved past the market share losses incurred during these transitions. On the financial front we remain committed to reducing our debt including the focus to refinance to lower interest rates.

Before I turn the call over to our Chief Financial Officer Fred Hite for his financial review, I would also like to share that the FDA recently concluded a Q-site inspection of our Manchester, New Hampshire facility focused on quality controls, CAPA, management controls and process controls. We appreciate the FDA’s diligence and are pleased to report that the inspection was concluded with no Form 483 findings issued.

With that I would now like to turn the call over to Fred Hite. Fred?

Fred Hite

Thanks, Tom. Total revenue for Q3 2013 was $98.0 million compared to $100.9 million in the same period in 2012. The year-over-year revenue change was driven by lower sales in the company’s Symmetry Surgical segment which came in at $22.2 million in Q3 2012 compared to $24.8 million in Q3 2012. Sales were also down about 0.5% in our OEM Solutions segment, $75.8 million compared to $76.1 million in the prior year. Foreign currency exchange rates had a positive impact of approximately $400,000 on the year-over-year revenue comparison.

On a sequential basis total revenue was down 3.9% compared to Q2 2013 with OEM Solutions revenue down 4.8% and Symmetry Surgical revenue down 0.4%. The sequential comparison includes approximately $200,000 of favorable foreign exchange impact.

Q3 2013 revenue for the OEM Solutions segment was categorized by the following: instruments revenue was $27.2 million compared to $29.6 million in the same period last year. The decrease in instrument revenue in Q3 2013 reflects lower than anticipated buying from large, new product launches and continued slower supplier rationalization efforts. On a sequential basis instrument revenue was down 3.1% compared to Q2 2013.

Implant revenue was $26.1 million compared to $25.6 million in the same period last year, up 1.9%. Implant revenue was down 7.2% compared to Q2 2013. The year-over-year increase was driven by a stable to slightly improving procedure growth while the sequential decline was driven by strong Q2 results that benefited from the timing of stocking orders and inventory adjustments by certain customers.

Case revenue was $17.0 million compared to $14.2 million in the same period last year, up 19.4%. The year-over-year increase in case revenues was driven by new product launch related volume. Case revenue was down 0.8% compared to Q2 2013, reflecting relatively stable new product launch related volume.

Other revenue was $5.5 million, down 17.1% as compared to $6.7 million in the same period last year, and down 12.8% compared to Q2 2013. The year-over-year and sequential decline was driven by the operational issues at our Clamonta Ltd. subsidiary that Tom had discussed in his remarks.

Symmetry Surgical revenues was $22.2 million, down 10.4% compared to $24.8 million in the same period last year. The year-over-year decrease was primarily the result of country-specific market share loss during the transition to distributors outside of the US. On a sequential basis, Symmetry Surgical revenue was down 0.4% compared to Q2 2013 reflecting the stabilization of the business. Our largest customer accounted for 31% of our Q3 2013 revenue while our largest customer accounted for 30% of our Q3 2012 revenue excluding the acquisition-related transitional services agreement.

Gross profit for Q3 2013 was $24.5 million compared to $28.2 million in Q3 2012. Q3 2013 gross profit was unfavorably impacted by approximately $1.4 million due to Clamonta Ltd. operational issues, approximately $1.3 million from lower Symmetry Surgical revenue, and approximately $800,000 due to the Sheffield fire. That $800,000 includes three pieces: approximately $400,000 due to a lack of absorption of overhead due to the facility being down for eight days, approximately $300,000 due to sales that will be delayed until the first half of 2014, and inventory and equipment write off plus incremental cleanup net of insurance payments of approximately $100,000.

Gross margin percentages for Q3 2013 was 25.0% compared to 28.0% in Q3 2012. The gross margin was driven by lower percentage of revenue from our higher-margin Symmetry Surgical segment as compared to the same period last year, along with the unfavorable impact of the Clamonta Ltd. operational issues and the Sheffield fire situation. OEM Solutions gross margin was also unfavorably impacted by lower instrument revenue partially offset by favorable case revenue.

Selling, general and administrative expenses in Q3 2013 were $17.8 million compared to $16.8 million in the same period last year. The increase in SG&A in Q3 2013 was primarily due to an increase in self-insured healthcare claims of $1.3 million, Symmetry Surgical catalog costs of $600,000, and $200,000 of medical device excise tax. These increases were partially offset by a reduction of $400,000 in stock-based compensation expense, $300,000 in acquisition-related costs, $300,000 in amortization expense, and $300,000 in lower compensation expense.

As outlined in our press release the company is in the process of performing its annual impairment test for goodwill. At this time we have determined that impairment exists for certain reporting units. The preliminary impairment is $51.6 million for goodwill and intangible assets. We recorded a pretax non-cash charge during Q3 in the amount of $31.8 million related to the OEM Solutions segment and $19.8 million related to the Symmetry Surgical segment.

The impairment in the OEM Solutions is primarily driven by a reduced outlook on revenue and profitability related to the instrument production for future customer capital expenditures related to product launches and instrument replenishments, as well as our current and expected operational issues at the Clamonta Ltd. subsidiary which services the aerospace industry. The impairment in the Symmetry Surgical is primarily driven by lower revenue due to the previously disclosed integration challenges related to the 2011 acquisition which we have not recovered from as quickly as previously expected.

Operating loss for Q3 2013 was $46.5 million compared to operating income of $10.2 million in the same period last year. Operating margin for Q3 2013 was negative 47.5% compared to 10.1% in the same period last year. Excluding non-cash charges for stock compensation expense; amortization of intangible assets; asset impairment charges as well as charges for management transition costs, acquisition-related costs, facility closure and severance; Symmetry Surgical catalog costs; and legal entity restructuring costs operating income for Q3 2013 was $9.1 million compared to $14.0 million in the same period last year.

The year-over-year as adjusted operating income was primarily driven by the reduced gross profit previously mentioned. Other expenses, primarily realized and unrealized foreign exchange, was $800,000 of expense in Q3 2013 as compared to a favorable $100,000 in the same period last year. Income tax benefit for Q3 2013 was $17.2 million compared to income tax expense of $1.9 million in the year-ago period driven by the decrease in pretax income primarily as a result of the asset impairment charge as well as the net reduction in reserves for uncertain tax positions.

Net loss for Q3 2013 was $34.5 million or $0.95 per share compared to a net income of $3.7 million or $0.10 per diluted share in the same period last year. As adjusted, net income for Q3 2013 was $3.1 million or $0.08 per diluted share compared to $0.18 per diluted share last year. 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 Q3 2013 reflected a weighted average number of 36,345,426 dilutes shares outstanding compared to a weighted average of 36,512,341 shares outstanding in the year-ago period.

Turning to our balance sheet, cash at the end of the quarter was $4.9 million, down from $12.5 million at the end of Q2. During Q3 2013 we generated $14.7 million of cash from operations and used a net $1.0 million for capital expenditures. As of September 28, 2013, our total net debt was $182.2 million, reflecting a reduction of $21.8 million in Q3. Our debt ratio is approximately 3.8x our LTM EBITDA. As Tom mentioned we remain committed to paying down our debt and refinancing our higher interest debt.

Now turning to guidance. For the full year 2013 we are updating the full-year financial guidance based on our current trends in our business and the continued impact of operational issues at Clamonta Ltd. and the disruption caused by the Sheffield fire. We anticipate revenue to be in the range of $398 million to $402 million.

On our full-year GAAP and as adjusted diluted earnings per share has been updated to reflect the impact of the Clamonta operational issues and the disruption caused by the Sheffield fire, along with our continued outlook for lower than anticipated instrument volume and slower than anticipated return to growth at Symmetry Surgical we anticipate full-year 2013 GAAP loss per share to be in the range of $0.94 to $0.90 and full-year as adjusted EPS to be in the range of $0.28 to $0.32.

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 $0.02 per share compared to prior-year results. This as adjusted EPS guidance removes the impact of all amortization expense, a noncash item of approximately $0.16; estimated asset impairment charges of approximately $1.08; the estimated net benefit from the net release of tax reserves for uncertain tax position of approximately $0.14; restricted stock, a noncash item of approximately $0.05; and acquisition-related costs, severance costs and other costs of approximately $0.07.

Together these items are expected to negatively impact full-year 2013 GAAP EPS by approximately $1.22. We also expect to generate approximately $40 million of cash from operations and spend approximately $10 million on capital expenditures. I will now turn the call back to Tom.

Tom Sullivan

Thanks, Fred. In closing we are making tangible progress to address the issues experienced in Q3 and are continuing to execute on our long-term growth and margin expansion strategy.

Over the remainder of the year we will focus on continued improvement at our Clamonta subsidiary; utilization of the temporary asset shop at Sheffield to resume normal manufacturing activity and catch up on customer demand while also positioning the facility for our long-term integration of a permanent asset shop; improvement of OEM Solutions gross margin through the Symmetry business system and better utilization of our infrastructure; growth of the Symmetry Surgical segment including leveraging the harmonized US sales force to capitalize on cross-selling opportunities; and finally leverage our cash flow generation to lower our debt and allow us to retire our high interest debt.

If we accomplish these goals we will be in a good position to improve our financial results in 2014 and further position Symmetry to benefit from its leadership position in the marketplace. We’d now like to open the call for questions and I’ll turn it over to Larissa, our Operator. Larissa?

Question-and-Answer Session

Operator

Thank you, and I’ll begin the question-and-answer session. (Operator instructions.) We have a question from Matt Miksic from Piper Jaffray.

Young Li – Piper Jaffray

Hi guys, this is Young Li in for Matt, thanks for taking our questions. So I appreciate the update on the common integration but what else had to be done with the integration work to help stabilize the business, and is that more in the US or O-US?

Tom Sullivan

In the US, Young, the integration activities are completed and it’s a question of driving growth and taking market share back. So in the US it’s executional mode on day-to-day activity and it’s one of the reasons why we’re encouraged by the sequential performance of that business that we have stabilized, that we’re not seeing further erosion but clearly we need to be in a place of driving growth in the US marketplace.

What we don’t know is what is the overall market growth rate in the US at this point in time, and there’s not a lot of good comparable data out there from other companies. So sequentially we are feeling good that erosion has stopped but certainly we want to see growth coming out of the US.

Outside the US there remains some countries that we expect to convert in Q4, predominantly in Asia and in South America. We also have a lot of activities going on to register our historical SSi and Olsen products in international markets around the world. These were not sold internationally prior to our acquisition in 2011, and we believe the addition of them to the portfolio in many countries will give us a great range of product choices for those distributors to offer their customers. So we still have work to further strengthen our international businesses and that will continue throughout Q4 and into next year.

Young Li – Piper Jaffray

Alright great, thanks. Thanks for the update on the Sheffield fire but what kind of additional color can you provide in terms of the effect of the fire on other business dynamics like margin and utilization, and when do you expect the model to recover there/ Is that more of an early- to mid-2014 event?

Tom Sullivan

Well there’s a couple different aspects to the answer to that, Young. The first is that the fire destroyed the asset shop which completely disrupted flow out of the facility while we verified the safety of the plant and the remainder operations. So that delayed production across the facility and obviously resulted in overhead costs that Fred has described.

As the rest of the facility then went operational we continued to have disruption to our forging operation until the temporary asset shop was back online, and we’re seeing that occurring literally as we speak. So we’re starting to see a return to volume on the forging side but clearly we have a pretty large backlog that we expect is going to take us some time to move out. So we would expect to see weaker volume because of that going through the balance of this year and potentially into early next year as we catch up.

So those two events result in a lack of absorption and then obviously we’ll have the costs that we incur that are beyond what insurance would cover as we complete the new asset shop and move the business into that. We would expect that will occur sometime in 2014 but it’s too early at this point in time to project exactly when we’ll be back in normal operation within the new asset shop.

Young Li – Piper Jaffray

Okay, great. Thanks. And one last question: so I guess a relatively new technology that we’re hearing more and more about recently is 3D printing. Have you looked at incorporating this technology into your platform and does it make sense for you at some point?

Tom Sullivan

3D printing has been around for a number of years now. Obviously we use it in product development as it relates to development of plastic models but 3D metal printing is a newer commercially available technology. We’ve seen it in operation since probably the mid-2000’s. We do not have that capability in-house yet although we are considering installing it or partnering with somebody that has it as we look at different ways to serve our customers going forward.

Young Li – Piper Jaffray

Alright, great. That’s all for us, thank you.

Tom Sullivan

Thank you.

Operator

We have a question from Matthew O’Brien from William Blair.

Matthew O’Brien – William Blair

Good morning. I was hoping you can talk about the different components that led to the shortfall in the quarter. I think, Tom, you started to reference one as far as the fire goes but just the three different buckets there that contributed to the little bit softer than we expected results for the quarter.

Tom Sullivan

So Matt, just to make sure that I understand the question are you talking contributing to the revenue weakness or the margin weakness?

Matthew O’Brien – William Blair

Revenue weakness. [It’s pretty hard] to figure out the margin side.

Tom Sullivan

Yeah, so the first thing obviously was the fire as we described and the Clamonta issues that affected production out of our aerospace subsidiary. The instrument volume overall was down pretty substantially year-over-year at 8% and down 3% sequentially, and that’s a function that we don’t believe there is still strong capital spending out there. And our participation on the two larger launches, which are really fueling the only growth we see in instruments right now, is not as great as we had hoped it would be – clearly not as great when you compare it to the performance we’re seeing in our case division.

So at this juncture we think it’s a combination of market slowness in overall instruments excluding the product launches that are out there, our lack of participation at the level we would have liked on those product launches as well as some insourcing of that opportunity by some of the OEMs. And then the one upside that is out there for instruments is the supplier rationalization activities.

We do believe there’s a market share opportunity on that front and we’re seeing tenders for supplier rationalization and we’re participating in those tenders. And we’re winning some of those but these are often smaller volume, lots of codes that don’t have a material impact on growth immediately. Over the long term they’re a positive contributor but also carry a disproportionate amount of costs as you structure your validation first run loss of those new products that you’re bringing into your plants.

So the instruments side is clearly where the revenue weakness was the greatest on the OEM Solutions front, and then on Symmetry Surgical year-over-year predominantly driven by outside the US. Does that answer your question, Matt?

Matthew O’Brien – William Blair

It does. I was kind of looking for the contribution from each of those areas but I think generally speaking that should do it. As far as the disconnect between cases and instruments goes, can you just help us understand the case performance continues to be really strong. Instruments are softer than you expected. Why is the disconnect so large? And then is your outlook for your participation in the two new launches diminished at this point? I think that was a several hundred million dollar opportunity and we didn’t know what percentage you could get, but now looking forward do you think that percentage may be a bit lower going forward?

Tom Sullivan

Yeah, great question. So again, when we talk about these large product launches there’s usually a couple of factors that affect the opportunity. One is how much money the OEMs want to spend and how quickly they want to deploy those products, and as we’ve talked about we do believe it’s going to be a long-term multi-year, four-, five-year deliberate ramp up and deliberate ramp down as the OEMs deploy it – unlike in the past where it’s been more of an initial spike in the marketplace.

Then the second thing that the OEMs go through is do they insource it or do they make it with outside strategic providers like ourselves. Clearly in the case business that is predominantly outsourced whereas on the instruments side they certainly have a lot more capabilities to make those in-house. So we would imagine that there is a little bit more instrument insourcing than there would be on the case side.

And then when it is outsourced the question becomes how much of the market share of that can you win? We feel very good about our participation in the case launches. We are represented on both of those products and we are a significant contributor on one of them. So to your question of the differences between the instruments revenue and the cases revenue it’s really that the cases are well-represented on these product launches whereas the instrument business is less than well-represented; and it’s also that the instruments may have been more insourced than they were outsourced.

But we are certainly not pleased with the level of participation we have on the instrument launches at this time and we’re working hard to change that as go into 2014.

Matthew O’Brien – William Blair

Okay. And then a couple more if I may: you mentioned the slight uptick or improvement in implant volumes. Do you have any sense for, and I know visibility here for you is fairly limited but the strength of that uptick – are you hearing anything anecdotally about a little bit more volume in (inaudible) or do you think it’s just more of a function of economic improvement?

Tom Sullivan

Yeah, we see the same market data that you folks see and I think you folks will probably do a great job analyzing that. From our perspective we believe that there’s been a positive improvement on the implant side of the business. Obviously our sequential numbers don’t show it because our Q2 was particularly strong and then we were affected by the fire, but we believe the customer results are showing a strengthening of that. The reasons behind that, is it the Affordable Care Act, is it the economy? Is it that patients just can’t put the procedures off any longer? That’s all subject to speculation but we do share the belief that the market is improving and we’re pleased to see that.

Matthew O’Brien – William Blair

Okay, great. In some of the conversations you’re having with your customers, are you getting the sense that it’s a [durable] uptick or do you think it’s still a little too speculative at this point on their part, and maybe we saw a little bit of a recovery here in Q3 and we maybe won’t be as durable as we head into ’14?

Tom Sullivan

Yeah, we’re not seeing any signaling from our OEM customers as in regards to whether it’s temporary or permanent at this point in time. What we’re seeing is consumption that we believe is driving increase implant revenue.

Matthew O’Brien – William Blair

Okay, and one last one. You mentioned the Symmetry Surgical business and some of the share losses you’ve seen there. Can you quantify the amount of share that you think you’ve lost at this point? And how do you go about getting that back? I know you mentioned execution – just a little bit more color on exactly what that means. Are you going to have to spend a little bit more and so on? Thank you.

Tom Sullivan

Yeah, that’s a good question, Matt. It’s really hard because there’s not a lot of really good data out there regarding the general reusable instrument category in which we participate. We’ve historically looked at it as approximately a $1 billion category and certainly our revenue is down nearly $10 million year-over-year would be our projection. If you take a look at that, that would imply that we’ve lost a point of market share if you just go straight by that.

It’s a little hard to tell because there’s the US dynamic and the O-US dynamic but we certainly believe our market share is somewhere right around 10% and it’s probably eroded a little bit as part of the transition. And we’ll now look to recover that. Historically our SSi sales force was very good at driving growth faster than market. We were always in the high-single digits or double digits and we believe that as we integrate these sales forces and leverage the best of all of our capabilities we can return to faster than market growth. How quickly we’ll be able to make that up it’s way too early to project at this time.

Matthew O’Brien – William Blair

Okay, thank you.

Tom Sullivan

Thanks, Matt.

Operator

Thank you. We have a question from Jim Sidoti at Sidoti & Company.

Jim Sidoti – Sidoti & Company

Good morning. Just another follow-up on the disparity between case sales and instrument sales. Can you just let us know were the orthopedic customers buying the cases or were those more to device companies outside the orthopedic space?

Tom Sullivan

We’re seeing good growth outside of orthopedic but the big driver of revenue were the new knee product launches.

Jim Sidoti – Sidoti & Company

Okay, alright. And you said Codman sales, I believe you said in Europe they were down about 20%, Symmetry Surgical sales? Is that right?

Tom Sullivan

We said Symmetry Surgical sales internationally were off I believe about 25% year-over-year and up 5% sequentially, but that’s total international. We don’t break it out by region, Jim.

Jim Sidoti – Sidoti & Company

Okay. So what are you doing… It seems like in the US you’ve anniversaried the transition, you’ve made more customer calls and that business is stabilized. Are you doing similar things in Europe or is it more getting products registered or you know, what steps are you taking?

Tom Sullivan

Yeah, that’s a great question. So outside the US obviously we’re starting to see some anniversaries of countries that we have converted over to a Symmetry Surgical distributor earlier than Q4 last year, and in some of those countries we’re seeing some encouraging signs where we’re seeing actual revenue growth year-over-year. So we are pleased that where we can get the full bag in place, get the distributor trained and give them some time to get traction we believe they have a compelling offering for their local marketplace customers.

What we’re continuing to do is to obviously complete the transitions to ensure that all the legacy products are on the regulatory authorization and then add in the historical SSi and Olsen to really round out that product line. Particularly outside the US where it’s extremely price competitive we believe the historical SSi and Olsen lines offer some very attractive products to our distributors that they wouldn’t have had access to in the past.

So to drive growth overseas it’s really a question of get the distributor up and running, all the appropriate regulatory authorizations, get them trained and get things like our catalog in their hands for them to win in their local marketplaces. And all of those activities are going on as we speak. We believe that execution combined with tender opportunities in those countries that are building a lot of new ORs creates some great opportunities for us, but again, we have not seen the full traction in the company results outside the US yet.

Jim Sidoti – Sidoti & Company

Alright. And then a last question: if you look at the Q4 guidance it looks like you expect revenue to be up between $1 million and $4 million sequentially from Q3. Do you think that’s more on the OEM side or on the Symmetry Surgical side?

Tom Sullivan

I think if it’s driven by revenue it’s usually driven more by the OEM side of the business, but we would like to see sequential growth in both sides of the business.

Jim Sidoti – Sidoti & Company

And that’s a good sign to see growth from Q3 to Q4. Usually those numbers are kind of flat, right?

Tom Sullivan

It depends. A lot of it is how the customers are going to spend capital at the end of the year so a lot of it is a swing on that front. We just believe as we look at the order book that’s out there that we should have a slightly better potentially Q4 than we had in Q3. There’s also some recovery issues associated with the fire in the aerospace plant.

Jim Sidoti – Sidoti & Company

Alright. Are there any insurance payments included in the guidance for Q4?

Tom Sullivan

Fred, can you speak to that?

Fred Hite

Yeah, sure. So in Q3 the only expense left was the $100,000 of deductible so that’s cleared. In Q4 any expenses that we will occur will be put on the balance sheet until we get paid from the insurance company so there’s no benefits that are coming in Q4. Conversely there’s no expenses that should flow through either.

Jim Sidoti – Sidoti & Company

Alright, thank you.

Tom Sullivan

Thanks, Jim.

Operator

And we have no further questions.

Tom Sullivan

Thank you, Larissa. Let’s wait one second and see if there’s any other questions…

Operator

(Operator instructions.)

Tom Sullivan

Well Larissa, with that I would like to thank everyone for joining us today for the Q3 Symmetry Medical Conference Call. I appreciate your interest and I look forward to us continuing to try to deliver and execute the plans that we’ve described, and I wish everyone on the call a Happy Halloween. Thanks very much and have a great and safe day.

Operator

Thank you. Ladies and gentlemen, this concludes this conference. Thank you for participating, you may now disconnect.

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