Symmetry Medical Inc. Earnings Call Transcript

Apr. 7.08 | About: Symmetry Medical (SMA)

Symmetry Medical Inc., (NYSE:SMA)

F4Q 2007 Earnings Call

February 14, 2008 8:00 am ET

Executives

Nick Laudico-Vice President, Investor Relations

Brian Moore-President and Chief Executive Officer

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

Analysts

Michael Matson-Wachovia Securities

Steven Lichtman-Banc of America Securities

Benjamin Andrew-William Blair & Company

John Crowther-Piper Jaffray

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2007 Symmetry Medical Inc. Earnings Conference Call. My name is Loren and I’ll be your coordinator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I’d now like to turn the presentation over to your host for today’s call Mr. Nick Laudico.

Nick Laudico

Thanks, operator. Joining us on the call today are Brian Moore, President and Chief Executive Officer, Fred L. Hite-Senior Vice President and Chief Financial Officer. By now you should have received a copy of today’s press release. If you have not received a copy, please call R.J. Pellegrino at 646-536-7009 and he will fax or email you a copy. Statements in this conference call regarding Symmetry Medical Inc.’s business and which involve our audit committees investigation of accounting irregularities at our Sheffield, UK operating unit or related statements 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 action. 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 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 generally and changes in government regulation of medical devices and third-party reimbursement practices. We refer you to the risk factors and forward-looking statement sections 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.scc.gov. Before turning the call over to president and CEO Brian Moore, I would like to emphasize Symmetry Medicals policy of not commenting on or discussing individual customers or programs. Brian?

Brian Moore

Thank you, Nick and thank you to everyone for joining us on our fourth quarter 2007 conference call. Due to the ongoing internal review of accounting irregularities Sheffield, UK facility that we announced in October, we are restricted in our financial comments for the fourth quarter. As we outlined in our third quarter conference call, we expect to have audited numbers as soon as the review process is completed and our finance staff and [audiences] and they’re focused on completing our 10-K and we expect to have that document filed in March 2008. Within the third quarter it’s a holder calling in order to provide a general update on our business, comments on the orthopedic environment from our prospective, report top-line results and provide a brief update regarding the accounting irregularity investigation.

Let me start with a comment regarding the audit committee review that is presently underway. The investigation is largely completed, and so far there have been no material changes to the position we have already reported. In particular that the issue is localized to our Sheffield facility and the main focus of management is to work with our auditors to achieve the March filing date.

Turning to Symmetry’s business, we reported preliminary fourth quarter 2007 revenues of $79.1 million and we continue to be encouraged by the overall strength of the orthopedic environment, increasing customer demand we outlined in our last core, continued into the fourth quarter and continues into 2008 and which is driving a increasing organ patent across our global network. Most of the larger orthopedic OEMs have continued to develop large projects and new product launches and I’ve that inventory levels during the fourth quarter. With the increased demand our capacity utilization has also increased, confirming our decision to keep capacity in place during the period of slower industry growth. This increased work load will drive an increase in our gross margins. All of these factors combined give us confidence that 2008 will prove to be a robust year for our business.

Acquisitions have been an important part to our structures to support the growth in our core orthopedic business and we made progress here in the quarter on further integrating the three acquisitions completing during 2007: Clamonta, SSI and TNCO. All three of these acquisitions have served to diversify our business. TNCO has a specialty surgical instrument capability that further broadened our presence into arthroscopic, laparoscopic, sinus and other minimally invasive procedures. TNCO sales will benefit significantly as a result of marketing its products to the Symmetry global sales and distribution network.

SSI allows us to increase our penetration directly into hospitals to establish distribution channels and provides further diversification into other medical markets, such as cardiovascular, ENT and ophthalmology. We see SSI as an important platform to grow this part of our business. Clamonta further strengthened our aerospace business and is well known in the industry for producing quality engineering products for aircraft engines. We remained very encouraged with the progress on all three of these acquisitions completed in ’07 and look forward to their further contribution to our growth into 2008.

We’re also extremely pleased to have completed the acquisition of DePuy's orthopedic manufacturing facility in New Bedford, Massachusetts in January. As part of the acquisition we entered into a supply agreement, which requires DePuy to make a minimum purchase from this facility amounting to $106 million over a four year period and this supply agreement is incremental to our current business with DePuy.

The New Bedford facility further strengthens our leading position as supplier to the orthopedic industry in a number of important ways: It strengthens an already established relationship with one of our major customers; it also provides Symmetry with additional capacity to strengthen our east coast presence through the integration of another skilled work force to our operational group. Most importantly, it provides us with a major increase in capacity just as the market growth is accelerating, which we will be able to use for the benefit of all of our customers. And we very much look forward to working with the New Bedford team to expand its size and portfolio of products and customers.

Our European operation is under new management following the Sheffield issue and we’re pleased to report that the new COO of the European operations, John Hines, is providing the leadership that should ensure that this part of our business can grow and prosper. Under his direction we will continue to provide an improved service to our European customers and most importantly to our USA customers that have operations in Europe.

Asia is an important part of our strategy, so let me develop you with the latest updates in Malaysia. We are progressing very well and we have now case production established and not only achieved the SSI 13485 approval, but we have also recently achieved the approval of one of our major customers. Our objective in Malaysia is to establish a full-service Symmetry facility and we have made solid progress in that direction. Engineers and solid specialists have been recruited in Malaysia and trained in the USA and are now in place to provide a regional service. And this year, we’ll be working on establishing a full regional design and development center with prototype facilities, a forwarding capability and an instrument manufacturing capability. Our aim is to have a full-service facility in place during early 2009 capable of providing a full Total Solutions service for the Asian market.

With that, let me turn the call over to Fred for some additional comments on the financial front. Fred.

Fred Hite

Thanks, Brian. As Brian mentioned our audited numbers are delayed as we work to complete through the restatement process. For the fourth quarter of 2007, we reported preliminary revenue of 79 million and this compares to the third quarter of 2007, when we reported preliminary revenue of 76.5 million. Our cash balance at the end of December 2007 was $12 million and that compares to $6 million at the end of September 2007. Our fourth quarter 2007 results were impacted by expense related to the investigation and restatement, which amounts to $3.4 million. At this time we expect to incur additional expense in 2008 of between 1 and $2 million. This combined expense is higher than we had earlier discussed, of 1.5 to 2.0 million, because of the expanded scope that we discussed on the last call and additional resources, which we have applied, to close out the process as soon as possible. On January 25, 2008, we completed the New Bedford, Massachusetts acquisition. At that time we borrowed an additional $60 million, 45 million was used for the acquisition and the rest, excluding fees, was used to pay down our revolving line of credit. We’ve also entered into a waiver and an amendment to our existing amended and restated credit agreement and also received waivers to remove our earlier reported default status. We remain in close contact with the banks and continue to provide ongoing updates on the results of the restatement. We plan to file our full year 2007 10-K in March of 2008. The 2007 10-K will include restated 2005 and 2006 financials. At that same time we will also be filing our third quarter 2007 10-Q and amended and restated 10-Qs for the first quarter and second quarter of 2007.

Now I will briefly discuss our guidance for the full year of 2008. Based on the current order flow and the momentum we are experiencing at all of our facilities, we expect our business will experience continued strength in 2008. As stated in our press release this morning, we expect full year 2008 revenues to be in the range of 350 to 360 million.

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

Brian Moore

Thank you, Fred. Hopefully, you can again understand the limitations of the information we’re able to disclose on today’s call, but the point we really want to make is that, monumentally soaring the orthopedic industries year in 2007 has continued into early’08, further supporting the growth of our business and we’re very encouraged with the order flows and the new productivity that we’ve seen so far. Now with that, can we hand over to any questions please?

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Michael Matson with Wachovia.

Michael Matson-Wachovia Securities

Hi, thanks for taking my question. On the 10-K, you’re saying it’s going to be filed in March and if I recall correctly, I think you had said the deadline was March 15, so are you still expecting to get that done by March 15th?

Nick Laudico

Yes, March 15th is the deadline. There is an extension that is allowable by the SEC that would take actual filing date to March 28th. So we’ll see as we get down to the March 15th date where we’re at, but if it’s not March 15, then it would be March 28.

Michael Matson-Wachovia Securities

Okay and can you tell us what the currency impact in the quarter was?

Fred Hite

The currency in the quarter was $2 million of revenue, fourth quarter of ’07, compared to fourth quarter of ’06.

Michael Matson-Wachovia Securities

Okay and the acquisition impacts for the various companies that you had acquired?

Fred Hite

Sure. In the fourth quarter of 2007, SSI added $5.6 million, Clamonta added 2.8 million and TNCO added 1.8 million.

Michael Matson-Wachovia Securities

Okay and then in terms of the capacity utilization, Brian mentioned that it had picked up. Where are you at now percentage wise and how does that compare to where things sort of bottomed out?

Fred Hite

Sure. So as we’ve talked in the past, the core business, if you exclude these acquisitions, the core business bottomed out at probably about somewhere between 60 and 65% utilization and they’ve picked up and they’re in the 70 to 75% range, so they’re definitely headed in the right direction, but we have plenty of capacity to continue to grow in 2008 with that core portion of our business. And again, those are assets in place capacity, people would have to be hired, obviously, to utilize those assets, but the building, the equipment, everything is there to execute, it’s just a matter of filling the plants with the people necessary.

Michael Matson-Wachovia Securities

Okay and based on your guidance range, I mean where does that put you at the end of ’08 in terms of capacity? Assuming there are no other acquisitions or anything.

Fred Hite

Exactly so, we’ll still be in the 80 to 85% range at the end of ’08 with those revenues that we discussed.

Michael Matson-Wachovia Securities

Alright, that’s all I’ve got. Thanks a lot.

Fred Hite

Thanks Mike.

Operator

Your next question comes from the line of Steven Lichtman with Banc of America Securities.

Steven Lichtman-Banc of America Securities

Good morning guys.

Fred Hite

Hi, Steve.

Steven Lichtman-Banc of America Securities

During the discussion about Malaysia, you mentioned you got approved from a major customer as well. So are we going to be starting to see you working with a major customer out of that facility in the near future?

Brian Moore

Yes, well all of our major customers hopefully. They’re going through a sequence, Steve, of getting approval as you’re probably aware that when you bring a new facility into your portfolio, the major customers quality and regulatory teams have to go and check it out and make sure that it’s fit for purpose and the first ones been through and kicked the box, how very impressed they were. So we expect that to be a succession now and then we’ll be in, hopefully, full production and able to support and meet all of our major and other customers from there.

Steven Lichtman-Banc of America Securities

Great and you talked about large projects from some of your larger customers in the past and that they were starting to ramp that up. Can you tell me about where we are in that process, are you still in sort of prototyping of some of those projects?

Brian Moore

As we always, with our business, Steve, we have a wide portfolio, some in prototyping and some in production. What we’re seeing at the moment is a lot of production demand for two main reasons: one the larger REM’s are becoming more aggressive starting this year and secondly, just to remind everyone we’re running up to the AAOS, which is the main show for the orthopedic sector, which is in San Francisco in March 5-7, so people are preparing for that show and getting ready for, hopefully, demand that flows from the show. And just a note for any of our investors, we will be there, so would be very happy to host you on our booth if you want to come along and visit us.

Steven Lichtman-Banc of America Securities

And, the comments on the fourth quarter, you mentioned that you saw, I guess, some of the typical seasonality on the inventories, but now as we enter into ’08, we’re starting to see that rebuild again?

Brian Moore

Yes there is demand across the whole board, all sectors, all customers and all of our activities are showing increased demand.

Steven Lichtman-Banc of America Securities

Okay and Fred, again, where should we think about gross margins getting, you know, over the medium to longer term?

Fred Hite

Yes, obviously we’d like to give you some numbers, for third and fourth quarter we can’t do that, but as we increase the volume, the utilization improves and the gross margins improve and what we’ve talked about in the past is somewhere between that 25 and 30% rate, around 27ish, you know, as we build through some of this volume and as we grow the business across the second half of ’07 and into ’08.

Steven Lichtman-Banc of America Securities

And as we think about SSI becoming a slightly larger portion of sales, does that not carry higher gross margin?

Fred Hite

Yes, that’s a good point. That helps the overall business. That portion of our business does have higher gross margin, it also has higher SG&A, as you would think with the distribution business. So they’re calling it 21 million in annualized sales, they have about 25 sales people and that compares to all of the rest of our business at 250 million ad 25 sale people. So their model is a little different than the rest of our business. They’re going to have a higher SG&A as a percentage of sales and they’ll also have a higher gross margin as a percentage of sales.

Steven Lichtman-Banc of America Securities

Okay and those expenses associated with the restatement that you talk about for ’08, I would guess pretty much weigh it mostly in the first quarter here?

Fred Hite

Oh absolutely, yes.

Steven Lichtman-Banc of America Securities

Okay and any sort of read on CapEx in 2008?

Fred Hite

The CapEx should be pretty modest. It was very modest in 2007 and that will continue to be modest in 2008, compared to what we’ve done in years past, but one area of focus for CapEx in 2008 will be Malaysia.

Steven Lichtman-Banc of America Securities

Okay, so not much growth off of ’07 levels?

Fred Hite

Correct.

Steven Lichtman-Banc of America Securities

Okay, great. Thanks guys.

Fred Hite

Thanks, Steve.

Brian Moore

Thank you, Steve.

Operator

And your next question comes from the line of Ben Andrew with William Blair.

Benjamin Andrew-William Blair & Company

Hi, good morning gentlemen.

Fred Hite

Hi, Ben.

Benjamin Andrew-William Blair & Company

I just wanted to follow up on a couple of things. If you think about the Malaysia opportunity, Brian, talk about the process of converting a customer to production there and maybe if you can, your cost of manufacturing. Does it entail a price reduction or cost reduction for the customer to help compel them over there, or just maybe the process, if you would?

Brian Moore

Well the process of getting the customers over there, there are two main aspects. There are local customers that we supply from the local position, obviously and the pricing and general arrangements for that are very much local business conditions and we will aim to be competitive and do what we have to do to win the business. And the local customers broadly fall into two groups: there are our traditional customers that have operations over there and there are new customers that we’re finding as a result of being over there. Both of those dynamics are encouraging and move forward. And depending on the size of the customer, the regulatory audit we have to go through may be greater or lesser. But, one of the advantages we’re seeing at the moment is that there is a general trend from our major customers to increase their regulatory and audits functions and we at Symmetry see a major benefit from that, because clearly we see ourselves as having the capability and the capacity to provide a good regulatory environment. In terms of bringing product back from Malaysia, we certainly will be doing that and that, if you like, is our low-cost strategy. So, at the moment, that is limited to cases only and some of the case products we’re bringing back from Malaysia at an enhanced, sort of, cost and wherever we can we try to pass that on to our customers, providing, of course, that they engage with us on a value proposition and they don’t just chase price without recognizing the importance of value that we can give them by Total Solutions, speed to market and all those things.

Benjamin Andrew-William Blair & Company

So if you think about where that facility and where that general effort will be, say at the end of ‘08 or at the end of ‘09, how much of the product do you think would stay local versus come back? Is it 10% or is it, would it be more like 50, say at the end of ’09?

Brian Moore

Well we don’t actually have precise numbers on that, but certainly most of it will stay local. Already most of it goes into Japan from Malaysia, it’s about 80-20 at the moment, so as we ramp up we would expect most of that facilities output to feed local demand and local delivery.

Benjamin Andrew-William Blair & Company

Okay. That’s all I had, thanks.

Brian Moore

Thanks, Ben.

Operator

(Operator Instructions) And your next question comes from the line of John Crowther with Piper Jaffray.

John Crowther-Piper Jaffray

Thank you for taking my question.

Brian Moore

Hi, John.

John Crowther-Piper Jaffray

So, just a quick question on commodity prices; have you seen any impact on that over this last quarter?

Brian Moore

We have three main groups to purchase titanium, cobalt chrome and plastics. Titanium seems to be relatively stable, having had a fairly major price hike a couple of years ago. Cobalt chrome is going up, but fortunately that’s not a major part of our business and wherever we can, we try and build that into passing onto our customers and plastics we probably say are impacted by all prices. We have reasonable long-term agreements with those so that price increases are fairly nominal.

John Crowther-Piper Jaffray

Okay, thank you. And I know you guys are kind of restricted on this, but could you characterize any, you know, performance among your different business groups, maybe something that stood out in each of them?

Brian Moore

Well, one of the nice things about Symmetry is that we have a pretty broad portfolio and we attempt to keep all of them fairly profitable and that is the case at the moment. There is no one growing particularly ahead of any of the others. The orthopedic side has clearly, probably, shown a bit higher demand than some of the other medical device sectors, but, again, all of our sectors are experiencing demand at the moment.

John Crowther-Piper Jaffray

Great. Thank you very much.

Brian Moore

You’re welcome.

Operator

(Operator Instructions) And there are no further questions in the queue. I will now turn the call back over to management for closing remarks.

Brian Moore

Thank you very much, operator. Well can I just say thank you to everyone for your support. We’ve been on the road in the last month or so, in New York, busting quite a few investors. We are very encouraged with the positive attitude and the working with us on the Sheffield issue and hopefully we can get back to normal fairly quickly and produce some good results for the year. Thank you very much and to just again remind you, anyone who wishes to come to the IIOS in San Francisco, we would be very pleased and happy to see you. Thank you.

Operator

Thank you for your participation in today’s conference. You may now disconnect. 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!