Symmetry Medical's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Symmetry Medical (SMA)
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Symmetry Medical Inc. (NYSE:SMA) Q4 2013 Earnings Conference Call February 20, 2014 8:00 AM ET


Carol Ruth - IR

Tom Sullivan - President and CEO

Fred Hite - SVP and CFO


Matthew O'Brien - William Blair

Matt Miksic - Piper Jaffray

Jim Sidoti - Sidoti & Company


Welcome to the Fourth Quarter 2013 Conference Call. My name is Paulette, and I’ll be your operator for today’s call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I’ll now turn the call over to Carol Ruth. Carol 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 fact, may be forward-looking statements that involve risks and uncertainties within the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are predictive in nature and are frequently identified by the use of terms such as may, will, should, expect, believe, anticipate, plan, estimate, intend and similar words indicating possible future expectations, events, or actions.

Such predictive statements are not guarantees of future performance and actual results and outcomes could differ materially from our current 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 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 10K 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

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

Tom Sullivan

Thank you, Carol, and thank you everyone for joining us today for Symmetry Medical’s fourth quarter and full-year 2013 Conference Call. While 2013 was a challenging year for Symmetry, I’m encouraged with the progress we made in several areas of the business, and I’m looking forward to the opportunities we have ahead of us in 2014.

During the fourth quarter we achieved modest sequential improvement in both revenue and as adjusted EPS as we continue to execute on our long-term growth and profitability strategy, we are also focusing on two of the unexpected factors that arose during the third quarter; the operational issues at Clamonta Ltd, and the fire at our Sheffield manufacturing plant.

We have stabilized these situations and are implementing actions to improve results at Clamonta, and to increase throughput in temporary asset shop at Sheffield, while moving forward with plans to build a permanent replacement at the site. Outside of these two issues, we made good progress in improving OEM solutions efficiency and in Symmetry Surgical, had continued stability and we completed the transition process to our international distribution network. We closed the year by successfully amending our credit facility, enabling us to save $7 million annually through the elimination of our higher rate mezzanine debt.

I will begin today's call with a quick review of our results and 2014 guidance, followed by an operational update and key initiatives for 2014, including restoring growth in Symmetry Surgical, the ongoing implementation of the Symmetry business system. Total revenue for the fourth quarter was $101.2 million, down 5% year-over-year but up 3% sequentially. Excluding a onetime sale of $2.9 million in the fourth quarter of 2013, total revenue was down 2.4% versus year ago.

Revenue on our OEM Solutions business was up 1% year-over-year and 4% sequentially reflecting our efforts to progress the business against a backdrop but stable to improving orthopedic procedure volumes. This was offset by the operational issues we experienced at Clamonta, the delay of volume through our Sheffield facility as a result of the recovery from the fire at the asset shop and slower instrument sales. Including the impact of a Symmetry Surgical customer changing to direct purchases from OEM solutions, year-over-year revenue was down 1.8%.

Symmetry Surgical sales decreased 21% year-over-year. Excluding the impact of a former Symmetry Surgical customer changing to direct purchases from Symmetry Medical OEM solutions in 2013, Symmetry Surgical revenue was down 4.4% year-over-year. On a sequential basis Symmetry Surgical sales were up 1.4% as we terminated the final country specific transition services agreement and are now focused on ramping up our international distribution network.

Gross margin in the fourth quarter 2013 was 25.5%, compared to 27.1% in the fourth quarter of 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 Limited, lower instrument revenue and OEM solutions customer cost reduction efforts, partially offset by the positive impact of the Symmetry Business System. Sequentially gross margin improved from 25.0% in the third quarter, driven by higher revenue and product mix as well as a diminished impact of the Clamonta operational issues and the Sheffield fire.

We are encouraged with the continued positive contribution of our Symmetry Business System, which exceeded our 100 basis point of margin improvement objective and it's helping to offset other gross margin pressures. Adjusted EPS was $0.10, down $0.17 in the same period last year but up from $0.08 in the third quarter 2013. We generated $11.8 million in cash flow from operations during the quarter, reduced our debt by $8.4 million and our leverage ratio ended at 3.13 times the LTM EBITDA.

As we look to 2014, we expect to drive improved revenue results by executing our strategic initiatives with EPS rising at a higher rate than revenue that we strive to restart growth in Symmetry Surgical in the U.S. and continue to improve operating efficiency and gross margin with the Symmetry Business System.

In 2014, EPS will also benefit by approximately $0.10 due to the refinancing of our debt and elimination of the higher interest rate mezzanine facility. Based on our assessment of the business and opportunities, we are providing 2014 financial guidance of revenue in the range of $408 million to $418 million. We believe underlying procedural growth rates for the full year will be in the range of 3% to 4% with knee slightly stronger than hips and both strengthening over the course of the year.

As referenced by our OEM customers and independent studies, we believe the higher fourth quarter procedural growth seen in our core OEM solutions market was an anomaly resulting from concerns with insurance coverage post the Affordable Care Act, and it is too early to project this rate continuing into 2014.

On the Symmetry Surgical side, our guidance assumes low single-digit growth in the worldwide direct-to-hospital general instrument market. On the bottom-line, we anticipate adjusted EPS for 2014 in the range of $0.48 to $0.54 per share, which represents a 41% to 59% bottom-line growth. Although we do not provide quarterly guidance, we believe the risk of reduced procedural volume in the first quarter due to the strong demand experienced in the fourth quarter of 2013, coupled with restrained capital spending by OEM solutions customers and so the projected market growth is more certain, could put pressure on revenue in the first half.

In addition, volume coupled with normal fourth quarter manufacturing inefficiencies for product shipped in Q1 and significant first quarter weather impacts of our plants in the Midwest and Northeast will put pressure on EPS in the earlier part of the year.

I would now like to share with you specific of fourth quarter operational updates and key initiatives for 2014. In our OEM solutions segment, during the fourth quarter we continue to experience lower year-over-year sales in the instrument narrow space categories. Instrument sales were down 4% with trends from the third quarter continuing into the fourth. Specifically we are not seeing significant capital spending on instruments and cases except for customer investments in larger product launches which have been delivered in nature. In addition, our participation in these recent new need platform product launch activities continue to be lower than we originally targeted relative to the instrument segment. There also continues to pressure on margins as the industry absorbs the impact of supplier rationalization packages for instrument sourcing.

In the long-term, we believe the supplier rationalization will be a tailwind for Symmetry because of our significant capabilities leading quality and regulatory systems and establish customer relationships, all of which would allow us to gain incremental market share. However supplier rationalization has not yet translated into any significant volume and initial validation around some newly captured opportunities opted or not at the longer term desired gross margin level.

In the course of our efforts to improve efficiencies in this environment, in late January we initiated consultation proceedings at our instrument facility in Cheltenham, United Kingdom to consider our options in an effort to streamline our footprint and improve our cost structure. The Cheltenham plant fiscal 2013 revenue was approximately $5 million and it generated an operating loss for the company. During the last month, we have engaged collaboratively with the Cheltenham employees with regard to options for ongoing viability of the plant. Recently, we have been informed by representatives of the employees at Cheltenham that they realized there is not viable alternative other than facility closure and we will now end this stage with the consultation process. The company will now collaborate with our customers and employees to finalize a detailed plan which will ensure that we will continue to provide required services to our customers while we transition their products to other Symmetry facilities as part of an orderly wind down of manufacturing at the site.

Regarding our broader manufacturing infrastructure, we continually evaluate our footprint to determine which capabilities are required to serve our customers and provide an appropriate return to our shareholders. At this time, we do not have anything further to announce.

On the case side, we experienced a strong quarter of growth in excess of 20% associated with large new product launches. We expect these opportunities to continue at current levels in 2014 and if procedural volumes accelerate there could be a catalyst for increased investments in instrument sets and cases going forward by our OEM solution customers. We may have a better sense for this trend based on customers’ activity levels at double [ph] AOS in early March and following the first quarter results in the April- May timeframe.

Our Aerospace business continued to experience revenue challenges with sales down 16% versus a year ago as a result of the operational issues at our UK based Clamonta Limited subsidiary. As a reminder, we identified the issues during the first quarter and began providing additional resources from elsewhere in the Symmetry family of companies to assist Clamonta. We believe we are on an improving trajectory throughout the second quarter but unfortunately during the third quarter we realized that these issues required further financial and managerial resources and the transition of senior management at the site. This had a significant impact on earnings in the third quarter. During the fourth quarter, we continue to feel this impact but we have begun to see progress and increasing throughput and efficiencies.

Importantly we have worked closely with Clamonta’s main customer to create a mutually beneficial plan that will enable Clamonta to continue to serve them thus driving towards making it a more sustainable business longer term. The remains significant work to be done. However we are encouraged with the progress during the later fourth quarter and early 2014.

Our implant sales were flat year-over-year after a strong 2012 results and up 2% sequentially, while our sales were negatively impacted by the fire at our Sheffield plant as we have not yet fully recovered shipment volume as a result of the fire. We also believe that customers continue to run through inventory that was purchased in the second quarter. Our internal estimates show that customer implant inventories are at their lowest days of supply level in years.

Regarding our Sheffield plant, following the fire we returned to normal operations in mid-October through the use of the temporary acid shop facility. This allowed us to begin completing orders delayed by the fire in the revalidation period. We expect to fully catch up on delayed throughput during the first quarter of 2014. We’re also moving forward with a long-term plan to reduce the temporary acid shop with a new permanent facility that will be seamlessly integrated into the existing operations. We expect this to be completed in late 2014.

Overall we are pleased that the global resources at Symmetry Medical and our comprehensive business continuity planning had helped to lessen the impact of this type of issue on our customers. We believe this is a significant competitive advantage to doing business with Symmetry Medical. As I mentioned OEM solutions gross margin continue to benefit from the implementation of the Symmetry Business System during the fourth quarter. This was also the first full quarter with a fully deployed companywide ERP platform for all of our U.S. facilities, a major milestone for the company.

We continue to benefit from statistical quality control, lean manufacturing best practices and management protocols designed to advance overall operational efficiency. We believe these factors will position Symmetry to better utilize our infrastructure and gain incremental market share based on customer service, quality and collaborative capabilities. In 2014 we expect the Symmetry business system to deliver another 100 basis points of gross margin improvement, achieving the 200 to 500 basis point improvement we projected in early 2012.

In our Symmetry Surgical segment we saw a continuation of the third quarter trend with stable sequential results in the U.S. and international businesses. Year-over-year we were up 2% in the U.S. and 18% internationally. For the year our U.S. business was up 5% excluding the customer who transferred to buying direct from OEM solutions with growth in our legacy SSI product lines, acquired Olsen line and products which we distribute for others, offset by weakness in the surgical instrument products acquired in late 2011. Our international business was up 30% for the year versus 2012.

In 2014 our goal in the U.S. will be to restart growth by focusing on improved sales execution for our broad portfolio, bringing our customers value to our contractual relationships, driving our Olsen line and new product introductions. We have a strong team and portfolio which should allow us to begin the journey of gradually regaining market share from existing customers and winning new business. We will also work to optimize our product offering as we analyze our own branded products as well as the products we distribute for others to ensure we have the right mix for the near and long-term.

On the international side of our business we expect some ongoing weakness in market for year one transition related issues are ongoing and our distributors are working to register all of our products and gain traction in their local markets. And markets for the transition have been complete including the registration of our historical SSI and Olsen product lines. We are seeing good opportunities with the combined product portfolio.

During the fourth quarter we completed to move to our transition services agreement with Johnson & Johnson and are now direct with all of our distributor partners. We are using the previous owners’ regulatory licenses in Mexico, Brazil and China. However our distributors have access to them until they expire. This final step gives us confidence in the long-term outlook for the international portion of Symmetry Surgical's business, including growth in the second half which combined with projected low growth in the U.S. positions Symmetry Surgical to contribute to improve consolidated results, driving up margins and profitability with a higher mix of Symmetry Surgical sales.

Overall we exit the year with positive momentum in addressing some key concerns that arose in the second half of 2013. We were able to contain and stabilize these issues while still executing on our broader operational initiatives, which together position us for improved results in 2014.

In the OEM segment we expect procedure volumes to improve slightly compared to 2013, which along with the continued rollout of the large new launches and emerging trend towards supplier rationalization will support top line growth. Incremental spending by OEM customers in a period of market growth could create an additional upside.

We will combine this volume benefit with incremental operational efficiencies from the Symmetry business system to improve -- deliver improve segment gross margins. 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 would move pass the market share losses incurred during these transitions. Strategically we remain committed to further reducing our debt while searching for potential business development opportunities aimed at improving the long-term outlook for both our OEM solutions and Symmetry Surgical businesses.

Before I turn the call over to our Chief Financial Officer, Fred Hite, I would like to announce the retirement of our Senior Vice President of Quality and Regulatory and Chief Compliance Officer, Darren Martin. Darren has had a wonder 24 year career at Symmetry and his leadership and friendship will be missed. Concurrently we are pleased to announce the promotion of Steve Hinora, a 26 year Symmetry veteran to the leadership role as our Senior VP of Quality and Regulatory. My congratulations to both Darin and Steve.

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

Fred Hite

Thanks, Tom. Total revenue for the fourth quarter 2013 was $111.2 million, compared to $106.6 million in the same period of 2012. The year-over-year revenue change was driven by lower sales in the Company’s Symmetry Surgical segment which came in at $22.6 million in fourth quarter of 2013 compared to $28.5 million in the fourth quarter of 2012. Sales were up 0.7% in our OEM Solutions segment at $78.6 million compared to $78.1 million in the prior year. Foreign currency exchange rates had a positive impact of approximately $600,000 on the year-over-year total revenue comparison.

On a sequential basis, total revenue was up 3.2% compared to third quarter of 2013 with OEM Solutions revenue up 3.8% and Symmetry Surgical revenue up 1.4%. The sequential comparison includes approximately $900,000 of favorable foreign exchange impact.

Fourth quarter 2013 revenue in the OEM Solutions segment by category was as follows. Instrument revenue was $28.8 million compared to $30.0 million in the same period last year. The decrease in instrument revenue in the fourth quarter of 2013 reflects lower than anticipated volume from the large new product launches and continued slower realized benefit of the supplier rationalization efforts. On a sequential basis instrument revenue was up 5.7%, compared to the third quarter of 2013.

Implant revenue was $26.5 million flat, compared to the same period last year. Implant revenue was up 1.6% compared to the third quarter of 2013. This reflects stable to slightly improving procedural growth, particularly in the sequential comparison.

Case revenue was $16.9 million compared to $13.9 million in the same period last year, up 21.1%. The year-over-year increase in case revenue was driven by new product launch related volume. Case revenue was down 0.6% compared to the third quarter of 2013, reflecting relatively stable new product launch related volume.

Other revenue was $6.4 million, down 16.2% as compared to $7.7 million in the same period last year. The year-over-year decline was driven by the operational issues at our Clamonta subsidiary that Tom discussed in his remarks. On a sequential basis other revenue was up 16.9% compared to the third quarter of 2013 reflecting a quarter-over-quarter improvement in the operational issues at Clamonta.

Symmetry Surgical revenues was $22.6 million, down 20.8% compared to $28.5 million in the same period last year. The fourth quarter of 2012 included a one-time purchase of $2.9 million by an OEM solutions customer who was served by Symmetry Surgical. Excluding the one-time purchase Symmetry Surgical segment revenue decreased by 11.8% year-over-year, primarily due to a slower than expected return to growth with ongoing impact of transition to distributorships outside of the U.S.

On a sequential basis Symmetry Surgical revenue was up 1.4% compared to the third quarter of 2013, reflecting continued stabilization of the business. Our largest customer accounted for 33% of our fourth quarter 2013 revenue, while our largest customer accounted for 31% of our fourth quarter 2012 revenue, excluding the acquisition-related transitional services agreement.

Gross profit for the fourth quarter 2013 was $25.8 million, compared to $28.9 million in the fourth quarter of 2012. Gross margin percentage for the fourth quarter 2013 was 25.5%, compared to 27.1% in the fourth quarter of 2012. The gross margin was driven by lower percentage of revenue from a higher margin Symmetry Surgical segment, as compared to the same period last year, along with the unfavorable impact of the Clamonta operational issues, partially offset by the continued benefit of Symmetry Business System.

Selling, general and administrative expenses in the fourth quarter of 2013 were $16.7 million compared to $19.0 million in the same period last year. The decrease in the fourth quarter 2013 was primarily due to the reductions of $2.0 million in acquisition related costs, $0.2 million stock-based compensation expense, $0.1 million in the amortization expense and $0.1 million in management transition cost. This was partially offset by $400,000 of Symmetry Surgical infrastructure additional cost as well as $100,000 of medical device excise tax.

Operating income for the fourth quarter 2013 was $7.5 million, compared to $8.7 million in the same period last year. Operating margin for the fourth quarter 2013 was 7.5%, compared to 8.2% in the same period last year. Excluding charges for stock compensation expenses, amortization of intangible assets, asset impairment charges, as well as charges for management transition costs, acquisition-related costs, product retail cost and facility closure and severance cost; operating income for the fourth quarter 2013 was $10.9 million, compared to $13.7 million in the same period last year. The decrease was primarily driven by lower revenue in the symmetry Surgical Segment.

Interest expense for the fourth quarter 2013 was $4.2 million, compared to interest expense of $4.7 million in the same period last year. This decrease was driven by the Company’s focus on using free cash flow to reduce debt. The fourth quarter 2013 also included a one-time loss on debt extinguishment charge of $4.5 million related to the elimination of the Company’s mezzanine debt in late December of 2013. Income tax for the fourth quarter of 2013 was $300,000, compared to $700,000 in the year ago period. Fourth quarter 2013 tax expense on negative pretax income was driven by the jurisdiction in which the income was earned as compared to the jurisdiction which incurred losses.

Net loss for the fourth quarter 2013 was $2.2 million, or $0.06 compared to a net income $2.9 million or $0.08 per diluted share in the same period last year as adjusted net income for the fourth quarter of 2013 was $3.6 million or $0.10 per diluted share, compared to $0.17 per diluted share last year. I’d like you to refer you to our press release issued this morning for a reconciliation of GAAP as adjusted amounts. Earnings per share for the fourth quarter 2013 reflected a weighted average number of 36,372,952 diluted shares outstanding, compared to a weighted average of 36,590,612 shares outstanding in the year ago period.

Turning to our balance sheet, cash at the end of the fourth quarter was $7.4 million, up from $4.9 million at the end of the third quarter 2013. During the fourth quarter of 2013, we generated $11.8 million of cash from operations and used $2.2 million for capital expenditures. As of December 28, 2013, our total net debt was $173.4 million, reflecting a reduction of $8.4 million in the fourth quarter and our debt ratio was approximately 3.13 times our LT and EBITDA which is at a lower level than required in both our new and our old financial covenants.

Total year 2013 debt reduction was $39.7 million. During 2012, we reduced total debt by $61 million. Over the past two years, we've paid off approximately 60% of our $165 million purchase price for the Codman instrument acquisition completed in December of 2011. As Tom mentioned, we remained committed to paying down our debt and lowering our leverage ratio.

For the full year 2013 results, total year revenue was $400.0 million, compared to $410.5 million reported in full year 2012. Foreign currency exchange rates had a positive impact of approximately $700,000 on a year-over-year revenue comparison. Full year 2013 OEM solution segment revenue was $310.8 million, up 2.5% compared to $303.3 million in the same period last year. The increase is primarily due to strong case and implant customer demand, partially offset by lower instrument segment demand and operational issues at the Company’s subsidiary, Clamonta Ltd, which restricted output.

Full year Symmetry Surgery segment revenue was $89.2 million, down 16.8% compared to $107.2 million last year, primarily due to the transition related sales disruptions to the integration of the Codman surgical instrument business into Symmetry Surgical. Excluding the one-time purchase of $2.9 million by the OEM Solutions customer who was served by Symmetry Surgical, segment revenue decreased by 14.4% year-over-year.

Gross margin percentage for the full year 2013 was 25.5%, compared to 26.6% last year. Net loss for the full year of 2013 was $35.8 million, or $0.99 per diluted share, compared to net income of $9.1 million, or $0.25 per diluted share for the full year 2012. On an as adjusted basis, full year 2013 was $12.4 million or $0.34 per diluted share, compared to $20.7 million or $0.57 per diluted share reported for the full year of 2012.

Now turning to our guidance, for the full year 2014 we anticipate revenues to be in the range of $408 million to $418 million. This represents approximately $319 million to $325 million of OEM solutions revenue and $89 million to $93 million of Symmetry Surgical revenue. At the high end, this represents approximately a 5% growth for each segment as well as total Symmetry Medical. Our full year GAAP and as adjusted diluted earnings per share guidance is expected to be as follows. We anticipate full year 2014 GAAP EPS to be in the $0.26 to $0.32 range and full year as adjusted EPS to be in the range of $0.48 to $0.54. The GAAP and as adjusted EPS both include the anticipated impact of medical device tax, which we expect to decrease our 2014 net income by approximately $0.02 per share.

The as adjusted EPS removes the impact of all amortization expenses and non-cash item of approximately $0.14, stock compensation expense, a non-cash item of approximately $0.06, and other expenses of approximately $0.02. Together these items are expected to negatively impact full year 2014 GAAP EPS by $0.22. We also expect to generate approximately $40 million of cash from operations and spend approximately $15 million on capital expenditures.

I will now turn the call back to Tom.

Tom Sullivan

Thanks Fred. In summary in 2014 the key initiatives for the Company will be to one, capitalize on the strengthening market in orthopedics to grow revenue; two, improve OEM solutions gross margin through the Symmetry business system and better utilization of our infrastructure; three, grow the Symmetry Surgical segment both in the U.S. and in the back half for the year in international markets; four, improve the operational performance at our Clamonta subsidiary and broaden its customer base for the long-term benefit of that business, and five leverage cash flow generation to lower our debt and enable strategic acquisitions. Specifically in OEM solutions we see capabilities that will strengthen our leadership position in orthopedics or diversify our offerings into adjacent contract manufacturing markets.

In Symmetry Surgical we seek individual innovations or product lines that are not competitive with our OEM customers, that can be optimized in our current Symmetry Surgical channel. 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 shareholders from its leadership position in the market.

We’d now like to open the call for questions and I’ll turn it over to our operator. Paulette.

Question-And-Answer Session


Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from Matthew O'Brien from William Blair. Please go ahead, Matthew.

Matthew O'Brien - William Blair

I was hoping to start off Tom with your commentary about just the general orthopedic market. I think you mentioned Q4 was a little bit of an anomaly especially with some things at the end of the year and them, what you are seeing here through January so far that makes you a bit cautious on Q1? And then generally speaking versus 2013, are you anticipating volumes will be slightly better than we saw in the U.S. last year or just more stable?

Tom Sullivan

We’re not commenting on anything on what we’re seeing directly as a company. I am commenting more on the publicly available information from both our customers as well as industry studies. And I think everybody agrees that the fourth quarter was significantly stronger than the historical norm and there has been a wide range of speculation that it was a pull forward as people were concerned about coverage with the Affordable Care Act in the New Year. But every study points to the fact that the fourth quarter was harder than I think that any of us expected. There has been a general consensus also that that probably means the first quarter, maybe the first half might slow down, certainly compared to the fourth quarter but not be at the longer term rate that we expect the year to be, which is getting closer to that true demographic level -- we believe demographically its 4% to 5% procedural growth market. We think we’re getting closer to that level but still not at full demographic penetration.

Matthew O'Brien - William Blair

And then with the guidance on OEM solutions, is it fair to think that the case business will continue to generate something like double-digit growth in 2014, given the continued rollout of those newer systems? And what gets implants and instruments to accelerate somewhat from what we saw over the last couple of years.

Tom Sullivan

Great question. On the case business we don’t give guidance for the specific business segments, but I will comment that on the case business we expect the launches that we’re benefiting from to continue to roll out at a deliberate level. So that doesn’t necessarily mean that you’d see double-digit growth cost by this launch but more of a maintenance level of that volume in 2014 to potentially nearing 2013. The question for another substantial double-digit catalyst to the case business is more of either all of the OEMs start to invest more capital in the face of growth in the overall marketplace or for the second leg of those launches as they move into revision systems to be made available to the market and for us to gain opportunities on those when they do come available. I don’t believe that those are catalysts that we see in 2014.

Regarding the instrument business, I really view that as a question of when will the OEM start to invest in instruments again to take growth. Clearly you've already heard us speak to the large product launches, 2013 was a disappointment for us in that regards. We are in there hopefully fighting to gain some opportunities on those going forward. So that would be a positive catalyst for us. But overall the instrument market I believe is still looking for greater capital investment by a wider range of participants in the orthopedic market.

And then finally in the implant business, for us that’s really the procedural growth and seeing the OEM customers benefiting from increased use of their products in the hospital environment, we are encouraged that we believe the industry ended 2013 at a lower level of inventory from a days of supply perspective than they had traditionally been at. So potentially that might be a catalyst but at this point in time it’s too early to tell.

Matthew O'Brien - William Blair

And then two more from me if I may, sorry if this is a little bit blunt. You mentioned being disappointed in not getting some of those new system instrument or getting some of that new system instrument business. Can you give us a sense for what you think wrong there and why you didn’t get that? And then there is another bigger system that's being launched here in 2014 and any kind of sense for your ability to compete for that business?

Tom Sullivan

I can’t comment on customer specifically, so I can’t comment on singular system that you are referencing for ‘14 for sure. But what I would tell you, Matt is that I think I have gone into the detail on this on a call maybe one or two quarters ago. Clearly we underestimated the potential for in-sourcing in that space. We also underestimated the importance of plastics in that space. So four, five years ago when these sets were being developed, we didn’t have plastics capability. So we missed out on being in some of those very early discussions and then I certainly also believe some of the performances of the company from a service perspective back in 2010, when these systems were really starting to develop, probably had a hangover effect of our participation on them at this point in time.

Matthew O'Brien - William Blair

Okay. And then just one more. Tom, you've been talking about and we have been hearing about supplier rationalization. I think it’s going on a couple of years now. Just when do you think that you will start to see somewhat of an inflection point or a tipping point when you start to benefit from that and then if the market does come back, I mean why would some of these suppliers get pushed to the side versus be able to kind of hang in there for a while longer and not create the tailwind that you are hoping?

Tom Sullivan

A couple of reasons, Matt, one thing I would tell you is that we are seeing supplier rationalization and I believe we are benefiting from it. And in the prepared remarks we did specifically mention that we are seeing these opportunities. We are winning opportunities but winning them initially put pressure on margin because you have to do first article runs and qualification runs and it’s not really at the long term gross margin level that you would like. And because it’s small runs upfront that is not really beneficial from a shareholders perspective, you don’t see the revenue impacting. You got to win a lot of small ones in order to have it financially move the needle from a revenue perspective. So, supplier rationalization is a reality of our industry. We really see it coming in sort of several phases. The OEMs are selecting what we believe are their strategic partners then they are looking at the other end of the spectrum, companies that they have to get out of today and they are moving I think aggressively out of some of those and that’s some of the packages that we are seeing.

And then you start to get into grey zone of a business's supplier that we don’t want to give any new work to, not sure it’s worth the time and investment to move it over. So supplier rationalization in some degree happening by attrition of them not getting new opportunities going forward. The other thing that’s out there that we see and it ties to the second part of your question and that is when will they go away so to speak. The issue is if the industry heats up and the OEMs want to reach back and put more instrumentation out of existing sets, that’s often already being made in their legacy supply base. So they might keep some around for that purpose. So, it’s never as easy as any of us would like but supplier rationalization is a reality in today's market and we are seeing it. It’s just not financially moving the needle.


Next question comes from Matt Miksic from Piper Jaffray, Matt, please go ahead.

Matt Miksic - Piper Jaffray

So, wanted to follow up a little bit on this opportunity around the sort of trends in the market. So putting aside what the theories are about Q4 and obviously I think we're all expecting some moderation or seasonality or something here in the first quarter and you described potentially the first half. I guess what are you seeing OEMs do in preparation for that. Just looking at the business historically, if I remember, there was always sort of adjustment down in the back half of the year, in the fourth quarter of the year on the implant side and then given the strong Q4, I just wondered are you seeing buying ahead to replenish -- what sort of activity you are seeing near-term?

Tom Sullivan

It’s a really good question Matt. I think you almost have to turn the dial back here to the second quarter. We had a particularly strong second quarter and we called it out and said, it looked to be like some MRP driven buying that potentially the customers had up their forecast a little bit in the back half of the year and that’s sent a rush of a buy signal into the supply community. And we call that out specifically because second quarter was so strong. I think what we saw in the third quarter with the days of supply -- we have internally tracked this for years, the days of supply being so low ending the year, we really think that the growth that was seen by the customers in the fourth quarter was somewhat of a surprise. So the question probably is on everybody’s mind right now is, is that growth going to continue and do they change their forecast or do they wait to see if in fact there is a trough following the sort of strength that we saw in the fourth quarter.

I think everybody is in a wait and see, both on their implant supply as well as on their instrument and case capital spending. I harken back my first year here at Symmetry in 2011 and everybody had positive outlooks for the industry and with spending capital pretty aggressively at the very beginning of the year. And then when midyear got here and it’s clear that patients weren’t there yet, the procedural growth wasn’t there, we saw capital budgets slashed up to 50% and obviously we felt that pain pretty quickly. I think right now everybody is being very measured both, in their inventory and in their capital spending until there was a little bit more clarity in the marketplace.

Matt Miksic - Piper Jaffray

That’s fair. That consistent with what we’re hearing and seeing as well as you mentioned in the other OEM suppliers or manufactures. Putting aside kind of instant flows of the quarter-to-quarter, what we do and what happens in Q4 and Q1 or Q2, has the market, let's say to you point it does go a little bit higher here again in 2014 over ’13 on an annual basis. I guess -- looking at what we’ve learned from instrument in-sourcing than happened last year, how do you feel about in a prospect for implant in-sourcing or how well are you positioned to sort of backfill some of that demand as customers rebuild their inventory to respond to demand?

Tom Sullivan

Clearly we’ve seen three plus years of OEM customers looking to take advantage of their infrastructure because of the slowdown in the industry. So I’ve got to believe that they’re pretty well -- they've brought in what they can to this point in time. So if the industry starts to heat up a little bit, might they have the capacity in-house to respond to that. Historically, it’s been no and whenever the industry gets hot that's usually a period when the contract industry sees growth but it is on the capital side and on implant side. Certainly, if their capital budgets go up significantly, we would think that the contract business would have an ability to compete pretty aggressively for that.

On the implant side, I think that you see a lot of heating up of their plants on the finishing side of the business but again most of the OEMs do not do their own forging and I think the industry from the forging perspective would benefit if there is growth on products that are forged because for the most part that is fully outsourced. Casting is little bit different of an issue. Most implants are casted internally with the handful of us that do, do casting. You probably don’t see as strong of a catalyst there.

Matt Miksic - Piper Jaffray

So maybe some improvement in hips would be good for your implant side of the business; is that a fair way to look at it?

Tom Sullivan

Hip growth, given that hips are more predominately forged than knees, hip growth being strong would be good. I think the difference between hip and knee that we see in the marketplace -- knees always grow faster when the patients are coming back. They always shrink quicker when the patients are delaying. So we do expect that hips would be growing less than knees but it’s a fairly small difference. So both of them being good as a good thing.

Matt Miksic - Piper Jaffray

Okay and then one question if I could on the Symmetry Surgical business. If I remember that order that either or Fred called out during the prepared remarks was like a $3 million order last year. That was in Symmetrical Surgical, wasn’t that?

Tom Sullivan

Yes, we had an OEM solutions customer who had Symmetry Surgical distributing their products and at the end of the year because of the implementation of medical device tax that customer basically bought back all of that inventory. So there was a one-time order of $2.9 million. So you’re right with the $3 million number. And then in addition to that, that order obviously didn’t repeat and then that customer’s purchases going forward were now in the OEM numbers in 2013.

Matt Miksic - Piper Jaffray

Okay so if we think about the trends I guess in Q3 and Q4 and Symmetry Surgical, I think you’ve talked about stability in the U.S. business. Is the U.S. business now -- is it flat sequentially? Is it growing sequentially or year-over-year? Maybe some color on U.S. international would be helpful?

Tom Sullivan

Yes, both of the businesses U.S. and international grew sequentially, very low single digits, but there was that continued theme of stabilization that we've seen and in fact if you look at the four quarters for 2013, they were all pretty consistent and the fourth quarter was actually the largest of the four quarters, but we did have sequential growth domestically and aboard in the fourth quarter. Year-over-year the U.S. still eroded slightly. I think the number's about the 2% or so. It was an erosion. So we don’t think that we’re back to where we want to be. We’d like to see growth coming out of the U.S. and we have to continue to focus on that execution.

Outside the U.S. a lot of countries didn’t anniversary till the first or second quarter. So we’re still up against some comps under the previous transition services distribution agreement with the company that sold us that business. So we’re looking to get through that anniversary process and see growth internationally in the back half and we'd like to drive growth overall in the U.S. throughout 2014, but clearly we have to take that first step by stopping the erosion and causing growth going forward.

Matt Miksic - Piper Jaffray

And then if I could just last one question on -- we talk about leverage and absorption and your fixed capacity dedicated to these OEM businesses, they're quite off and I’m just looking at the sense of where you are in terms of past utilization? What opportunity is there remaining to sort of drive leverage and absorption as these businesses do improve with the market?

Tom Sullivan

If you look back to sort of our peak period back in '08 or '09 timeframe when the OEM business was closer to $400 million, we still fundamentally have that same infrastructure and in fact we’ve added capital to it since that point in time. So we’re pretty much running flat out back then.

So if you just used that time sort of basic math, it will tell you that our utilization today is probably in the 60s. I think you would see us a little bit better utilized on the case in the implant side and a little less utilized on the instrument side. And that’s obviously one of the reasons why we’ve made a very difficult decision to move into consultation and move forward with potential closure of one of our dedicated instrument plans in Cheltenham, UK. So I think we have to take a close look at that infrastructure. Certainly the orthopedic industry has a historical pattern that whenever capital flows ,it flows very quickly. We want to be cautious in a period of time where the industry has potential growth coming back to it from a capital spend side. But nonetheless we want to make sure that we are effectively using that footprint, particularly in our instrument business.


(Operator Instructions) And our next question comes from Jim Sidoti from Sidoti & Company, Jim please go ahead.

Jim Sidoti - Sidoti & Company

So just want to follow up on a couple of things you talked about. The asset base plant in Sheffield, just want to be clear, the temporary facility is up and running and you expect a permanent field to be up by the end of the year, is that right?

Tom Sullivan

Yes, the temporary facility was in place in October and it was validated by our customer shortly thereafter and it has been in production since then and what we did see is it’s fully running right now and our throughput is growing. We just haven’t burned off the backlog of having our forges be basically shut down for about a month until we had the asset back. So we’ll catch up on that sort of backlog in the first quarter and then sometime in the back half of the year the new facility which is going to be built on existing land that we already own adjacent to our forge and in fact in a better location will be constructed throughout this year and go live at the end of the year and then we would take down the temporary facility we built.

Jim Sidoti - Sidoti & Company

And the charge for the prepayment of the debt in the quarter, Fred, was that about $0.08 to EPS?

Fred Hite

So we had two pieces of that. The total of it was $4.5 million. $2.7 million of it was cash which was interest expense, the premium and the rest of it was amortization writing off the initial cost of the debt. So this $4.5 million after tax, hang on a second I can tell you. Yes, it was about $0.08.

Jim Sidoti - Sidoti & Company

And then as far as the Symmetry Surgical Sales go, you indicated that you were down maybe a couple of percent year-over-year in the U.S. What was that number outside the U.S.?

Fred Hite

It was down higher than that. Hold on a second let me go back and look so I can give you the exact number. I want to say 18%; yes 18% year over year, Jim. 2% in the U.S., 18% OUS.

Jim Sidoti - Sidoti & Company

Okay. So as we look ahead into 2014, it sounds like you’re pretty confident that the worst is over in the U.S. and that you should start to see growth outside the U.S. in the second half of the year. Does that sound about right?

Fred Hite

Well I think, when I look at OUS, we're looking at basically the trends that we saw inside the U.S. where that transition period had a hiccup and then you started to stabilize it sequentially. So we’d like to see that stabilization continue outside the US and then see growth return. In the U.S. I can’t in good faith use the word confident until I can prove to the street that we’re growing that business again. So right now our focus is on good execution, though we’d like to believe that we are positioned to do what we’ve historically done, which is to grow that business faster than market and in fact if I even look in the U.S. this year and I look at the different product lines that we had, our historical FSI product line, the required Olsen product line as well as the products that we distribute for some other manufacturers, those businesses all grew faster than market. Our challenge is the businesses we acquired in late 2011 did not grow and in fact was a substantial drag on that. So we know how to grow the business. What we've got to do is grow the business across the entire portfolio.

Jim Sidoti - Sidoti & Company

And then last question, if you listen to calls three, four years ago, whenever you guys talked about strong case sales, that usually was a precursor to a pickup in implants and instrumentation. Has something changed or do you still think that trend is still there?

Tom Sullivan

Usually the instruments precede cases. Cases are sort of the last part of the big capital spend. I think what you’re seeing right now is our case business is disproportionately benefiting from the fact that we have a stronger presence on the two large launches than we do on the instrument side. So I wouldn’t read as a change in the signal so to speak as much as we're underrepresented on the instrument launches and we are overrepresented on the case launches.


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

Tom Sullivan

Well thank you Paulette and thanks to everyone for asking such great questions this morning. I’d like to close today’s call by thanking all of you for joining us for this update and on behalf of our Symmetry teammates around the world, thank you for the interest in our company. We look forward to working together to create a great 2014. And with that I wish everyone have a great day. Thank you.


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

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