Symmetry Medical's (SMA) CEO Tom Sullivan on Q2 2014 Results - Earnings Call Transcript

| About: Symmetry Medical (SMA)
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Symmetry Medical Inc. (NYSE:SMA) Q2 2014 Earnings Conference Call August 5, 2014 8:00 AM ET


Carol Ruth - Investor Relations

Tom Sullivan - President and Chief Executive Officer

Fred Hite - Senior Vice President and Chief Financial Officer


Matt Miksic - Piper Jaffray

Matthew O'Brien - William Blair

Jim Sidoti - Sidoti & Company


Good morning and welcome to the Symmetry Second Quarter Financial Results and Proposed Transaction. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session. Please note that this conference is being recorded.

I will now turn it over to Ms. Carol Ruth. Carol you may begin.

Carol Ruth

Thank you, operator, and thank you, everyone, for participating in today's conference call to discuss Symmetry Medical's second quarter 2014 financial results and the proposed transaction announced this morning that it had entered into a definitive agreement to sell its OEM Solutions business to Tecomet and concurrently transfer to Symmetry Medical, Inc.'s shareholders ownership of a new company holding its Symmetry Surgical business.

Symmetry issued a press release this morning, outlining the proposed transaction, and it is available on the Investor Relations section of Symmetry's website at Presentation slides to accompany management's remarks on today's conference call are also posted on the Investor Relations section of the Symmetry website. I encourage you to open that presentation now.

Today's conference call is also being broadcast live over the internet at and a replay of the conference call will be available on the company's website for 30 days.

Joining us on the call today 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 that conclude our financial results and the proposed transaction to spin off as a Symmetry Surgical business to shareholders immediately followed by the acquisition of Symmetry Medical, Inc., which contains OEM Solutions by Tecomet, 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, 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 expectations. 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 on Slide 2 and in the company's other filings with the SEC, which are available on the SEC's website at

And now, I'd like to turn the call over to Symmetry's President and CEO, Tom Sullivan.

Tom Sullivan

Thank you, Carol. Good morning, everyone, and thank you for joining us today. This morning, we issued two press releases. The first covers our second quarter financial results and the second announced the opportunity to create a new standalone Symmetry Surgical business and capture value for our shareholders should the sale of our OEM Solutions business to Tecomet, a Genstar Capital portfolio company. I encourage you to open the deck that Carol has already mentioned, as I will be speaking directly to the slides in that deck.

Slides 2, 3 and 4 we encourage you to read. They cover our disclaimer and forward-looking statements for today's PowerPoint presentation. In addition, moving three slides forward, this presentation will reference non-GAAP financial results described on Slide 5. On Slide 6, we've outlined today's presenters and the agenda for the call.

I'm Tom Sullivan, President and Chief Executive Officer of Symmetry Medical, and the designated CEO of the standalone Symmetry Surgical business. Also on today's call is Fred Hite, Symmetry Medical's Senior Vice President and Chief Financial Officer. Fred is also the designated CFO of the proposed standalone Symmetry Surgical. We'll begin today's call with a quick review of our second quarter 2014 financial results. Then we'll spend some time providing an overview of the closed transaction and a detailed review of the proposed standalone Symmetry Surgical business. Then at the end, we will open the call for your questions.

Now I'd like to turn the call over to Fred for a review of the second quarter financials. Fred?

Fred Hite

Thanks, Tom, and good morning, everyone. This morning we announced our second quarter 2014 financial results. As a reminder, on May 22, 2014, we sold our Clamonta Limited subsidiary business, and therefore it is now reported in discontinued operations.

On Slide 7, we've outlined our second quarter results versus the prior year. Total revenue was $101.3 million, up 2.3% compared to $99 million in the same period last year. Growth was driven by higher sales in the OEM Solutions segment, partially offset by a decrease in the Symmetry Surgical segment. Foreign currency exchange rates had a positive impact of approximately $1.5 million on the year-over-year revenue comparison.

Gross margin was 27.8% compared to 26.9% in the same period last year. The year-over-year improvement was the result of increased efficiencies in the OEM Solutions segment, partially offset by a lower revenue percentage from the company's higher-margin Symmetry Surgical segment. Second quarter gross margin also benefited from a one-time supplier payment for the early starting of the New Wave distribution rights along with the product re-haul favorability of approximately $100,000. The New Wave payment included approximately $450,000 worth of margin we would have normally seen in both the third quarter and the same amount again in the fourth quarter.

Operating loss was $2.6 million compared to an operating income of $7.1 million in the same period last year. The primary driver of the loss in the second quarter 2014 was a $10.5 million non-cash asset impairment charge. Excluding the asset impairment and other non-cash charges for stock compensation, amortization of intangible assets and transaction-related costs, facility closure and severance cost and the gain on insurance proceeds received from the fire in Sheffield as well as the product recall favorability, operating income for the second quarter 2014 was $11.9 million compared to $10.0 million in the same period last year. The increase is primary driven by higher gross margin and lower operating expenses.

On the bottomline, the net loss from continuing operations was $2.6 million or a negative $0.07 per share compared to $1.5 million or $0.04 per diluted share in the same period last year, as adjusted income from continuing operations for the second quarter 2014 was $6.4 million or $0.17 per diluted share compared to $0.10 per diluted share last year. I would like to refer you to our press release issued this morning for a reconciliation of the GAAP to as-adjusted amounts.

On Slide 9, we have compared our second quarter results on a sequential basis to the first quarter of the year. Second quarter revenue was up 4.5 percentage points from the first quarter. The sequential comparison includes approximately $200,000 of favorable foreign exchange impact on total revenue. On the bottomline, our as-adjusted EPS from continuing operations improved from $0.09 to $0.17 per share.

Slide 10 provides a high-level summary of our year-over-year and sequential results on a GAAP and an as-adjusted non-GAAP basis, the same table that is listed in the beginning of our second quarter 2014 financial press release.

Now I will provide a detailed review of the OEM Solutions segment results outlined on Slide 10. Second quarter sales grew 5.5% year-over-year and 6.1% sequentially. We experienced growth in all of our categories on a year-over-year and sequential basis. Instrument sales were up 6% year-over-year and 2.9% sequentially, continuing the positive trend that began in the first quarter following a softness we did experience in the second half of 2013. We continue to see a relatively stable capital spending environment from our OEM customers on instruments and cases with no new significant grab in firm purchase orders except for customers investment in larger product launches, which has been deliberate in nature.

On the case side, sales were up 1.1% year-over-year and 10.2% sequentially, reflecting a return to growth from the first quarter of 2014, primarily due to the timing of customer shipments. For the full year, despite this variable timing, we expect case sales to be at similar levels to 2013, with revenue from large new product launches remaining consistent. Based on OEM customer feedback and results through the first half of the year, we continue to anticipate stable OEM customer investments in capital instrument sets and cases and the possibility for growth if we see sustained procedure volume acceleration.

Our implant sales were up 4.5% year-over-year and 3.6% sequentially, more in line with the procedural growth rate as compared to the strong growth in the first quarter of the year, which was driven by customer inventory restocking. The second quarter implant results included less than $1 million in sales that were delayed from the first quarter of 2014 as a result of the minor fire that delayed production at the temporary asset shop at our Sheffield facility. During the quarter, we continued to move forward with the construction of the permanent asset shop that will be seamlessly integrated into the existing operations and expect this to be completed in the second half of 2014.

First quarter sales of our other or aerospace category were up 30.9% year-over-year and 35.7% sequentially, driven by strong customer demand at our Lansing, Michigan as well as Sheffield, UK facilities.

Turning now to Symmetry Surgical segment on Slide 12, we continue to believe this business represents an opportunity for growth, improved margins and cash flow. During the quarter, we made progress with our efforts to position the business for growth in the US and international markets, which we believe we will begin to see in the second half of the year. However, during the second quarter, we again faced headwinds in the US and international markets, and sales were down 8.7% year-over-year and 1.3% sequentially.

Excluding the New Wave surgical product line, which was acquired Covidien in the first quarter, for which we only realized a partial quarter sales during the second quarter, Symmetry Surgical revenue was down 4.9% year-over-year and was up 4.5% sequentially from the first quarter of 2014. While that was a weaker first quarter and easier comparables, nonetheless we encourage by this sequential improvement despite the ongoing sluggish hospital spending environment in the US and transition related issues with international distributors. This sequential improvement included growth in the US and international markets.

In addition, during the quarter, the FDA conducted a standard unannounced multi-day inspection of our Symmetry Surgical headquarters facility. And I'm very pleased to report that we had a positive review with no Form 43 observations.

Turning to summary capitalization on Slide 13, cash at the end of the quarter was $17 million, up from $15 million at the end of the first quarter 2014. As of June 28, 2014, our total debt was $172 million compared to $179 million at the end of the first quarter. And we continue to focus on paying down our debt and debt ratio was approximately 3.01 times our LTM adjusted EBITDA. Turning to second quarter 2014, we generated $9.1 million of free cash flow and used $3.7 million for capital expenditures, as outlined on Slide 14.

Slide 15 references the GAAP to non-GAAP reconciliation for the figures reported on today's conference call. Now I'd like to turn this call back over to Tom for a review of the transaction we announced this morning. Tom?

Tom Sullivan

Thank you, Fred, and thank you for all your efforts for the company. Turning now to Slide 17, in our world today, Symmetry competes in two distinct business segments, OEM Solutions and Symmetry Surgical, both of which have the opportunity to drive growth and improve results.

The OEM Solutions business is the industry leader in the orthopedic OEM supply market. We have global quality and regulatory systems, a track record of bringing innovative solutions to our customers through our total solutions business model, a worldwide footprint with local operations, centralized processes and the Symmetry business system.

Symmetry Surgical serves the general surgery market. It provides reusable surgical instruments and related products to hospitals and surgery centers through a direct sales force in the US and international distribution network serving over 100 countries. Importantly, while it is complementary to the OEM Solutions business, it is in no way competitive with our OEM Solutions customers.

In both segments of the business, we are positioned for potential expansion opportunities by further diversifying our product offerings. For the OEM Solutions business, this includes adding implant capabilities and moving into adjacencies in the medical device market. For the Symmetry Surgical business, we have the opportunity to add new instruments to our portfolio. These diversification efforts can be organic, developed through our R&D team that has demonstrated a robust capability to create innovative, intellectually property-backed products along with potential business development opportunities.

On Slide 18, you can see the two distinct channels that we serve. On the top of the slide, our OEM Solutions business, which has a strong customer base of leading orthopedic and medical device companies; on the bottom half of the slide, you can see Symmetry Surgical. This business provides a broad selection of proprietary general reusable surgical instruments for customers including surgery centers, academic medical centers and community hospitals. Our products are used in hospitals around the world. And while the OEM Solution and Symmetry Surgical segments are complementary in some ways, we believe we have identified an opportunity that will increase shareholder value by separating the two businesses.

On Slide 29, we have outlined a strategic rationale for separating the two businesses. Recent transactions imply a risk of consolidation in the OEM Solutions' competitive market, increasing the need for Symmetry Medical to explore acquisitions, both in orthopedic implants and adjacent medical device categories to maintain a leadership position. OEM Solutions' customer consolidation could result in customer conflict with Symmetry Surgical as a reusable general surgical instrument company.

There has been increasing interests in orthopedics and recent activity in the contract manufacturing sector. The OEM Solutions business would no longer be at a competitive disadvantage due to the fact that Symmetry Medical is the only public substantially orthopedic OEM supplier in an industry with high customer concentration. Symmetry Surgical would be able to pursue a broader surgical instrument market to optimize our sales channels and cost structure without the financial limitations associated with our current capital structure or potential conflicts with OEM customers.

And finally, the performance of the new independent public company will no longer be impacted by the volatility associated with capital spending by our OEM customers. We believe these are compelling reasons for our OEM Solutions and Symmetry Surgical, and I can report that our Board of Directors considered multiple pass to drive earnings growth through each segment. And they believe that this is the best opportunity. We believe there are also significant benefits from the transaction to our shareholders and our customers, which I will cover in a moment.

But first, let me provide an overview of the proposed transaction, as outlined on Slide 20. Symmetry Medical Incorporated will separate its Symmetry Surgical business into a new holding company and transfer pro rata the shares in that new holding company to Symmetry Medical shareholders. Simultaneously, Tecomet, a Genstar Capital portfolio company, will acquire Symmetry Medical Inc, containing OEM Solutions by excluding the Symmetry Surgical business for cash payable to the Symmetry Medical Inc.'s shareholders. Symmetry Medical's shareholders will receive $7.50 per SMA share plus their pro rata ownership in Symmetry Surgical.

We expect that shareholders will receive one share of Symmetry Surgical for every four shares of SMA. Symmetry Surgical will have a five-year supply agreement with Symmetry Tecomet combined business with prices frozen for the first two years and appropriate access to all retained intellectual property. The deal will be subject to Hart–Scott–Rodino Antitrust clearance in the United States and Symmetry Medical shareholder approval. We expect to file a preliminary proxy statement in August and Symmetry Medical Inc will vote on the merger at a shareholders meeting anticipated to be held in Q4 2014.

We see benefit to Symmetry Medical's shareholders as a result of this proposed transaction, which are listed on Slide 21. First, the sale of Symmetry Medical's OEM Solutions and the separation of Symmetry Surgical in a tax efficient manner will allow shareholders to participate in the upside potential of the standalone Symmetry Surgical business, while realizing a premium value for the OEM Solutions business. As an independent company, we expect that Symmetry Surgical will be able to pursue broader surgical instrument market without being limited by conflicts with OEM customers. This will open new growth opportunities and enable Symmetry Surgical to optimize its capabilities and resources.

As a standalone public company, we believe Symmetry Surgical will be an attractive investment opportunity as a focused surgical instrument company with a strong IP-backed product portfolio, direct US sales force and a worldwide distribution network covering 100-plus countries. The standalone company will also receive increased management focus on key initiatives to drive improved performance.

Per the spin-off, we expect Symmetry Surgical will continue to generate cash flow and will have a balance sheet with no debt. We expect this to put us in an excellent position to execute acquisitions to drive growth and to optimize our established sales channel and infrastructure. The standalone Symmetry Surgical will also have a five-year supply agreement with the OEM Solutions business for manufacturing of applicable products.

On Slides 22 and 23, we have outlined the expected benefits of the proposed transaction for our OEM Solutions and Symmetry Surgical customers, which I've alluded to already in the strategic rationale for the transaction. Beginning on Slide 22, the key benefits of merging of our business with Tecomet for our OEM Solutions customers include: the combined business will a $400 million-plus strategic supplier that serves more than 450 customers worldwide and an enhanced one-stop shopping offering in implants, instruments and cases. The combined business will also have more robust business continuity resources across orthopedic including hips, knees, extremities, spine and trauma along with other medical device categories and aerospace.

The combined business will have a broader range of specific capabilities including casting, forging, machining, tool cutting, etching, thermoforming, metal forming, injection molding, coating, finishing, product development, customs management, assembly and kitting, sterile packaging, and contract inspection. We will also have greater capabilities in implant manufacturing, which is the largest opportunity for increased outsourcing in the contract manufacturing space. And finally, the business will be managed by a team that is solely focused on the needs of the OEM customers.

Turning to Slide 23, here are the expected benefits of working with a standalone business for Symmetry Surgical's customers. First, the new standalone Symmetry Surgical will be a nimbler, customer-centric company with a sole focus on the surgical instrument market. We will combine the best attributes of our 300-year heritage with a three years young entrepreneurial company.

Second, this will give us the opportunity to bring to life our innovative ideas to improve the value proposition of our products from a clinical and economic perspective for our customers. Third, the business will continue to have a wide product offering ranging from physician preference items to value product lines, allowing us to meet the needs of all cites of care around the world. This product range is complemented by our strong sourcing network, which ensures the products our customers need will be available.

Fourth, as part of our expansion strategy, we will look to acquire and integrate new products and capabilities to enable our customers to have an even more comprehensive one-stop shop and partner for their ongoing surgical instrument needs. And lastly, the standalone business will continue to invest in and support our dedicated sales force in United States to ensure that customers' needs are met, while also growing our international distribution network focused on local market needs.

We have outlined the potential timeline for the transaction on Slide 24. We expect to file a preliminary proxy statement with the SEC for Symmetry Surgical in August. The next step would be to schedule a shareholders' meeting in file and will have a definitive proxy statement to shareholders. We anticipate that the shareholder meeting will take place in the fourth quarter. And assuming we receive shareholder approval, the transaction would be expected to close shortly thereafter.

I will now transition to an overview of the standalone Symmetry Surgical business beginning on Slide 26. Symmetry Surgical while being an only three years young business is still on a rich 300-year heritage created from the combination of SSI, Olsen Medical and the surgical instrument portfolio acquired from Codman & Shurtleff. We aspire to be the medical device company that is recognized for being customer-centric and for developing high-quality surgical instruments that respond to the needs of clinicians, ultimately making a difference in the lives of patients and the economics of surgical care. Our goal is to create $250 million revenue medical company through organic growth and acquisition with 50% gross margins and consistent cash flow.

Turning to Slide 27, Symmetry Surgical is headquartered at Nashville, Tennessee, with operations in Louisville, Kentucky; Tuttlingen, Germany; and Schaffhausen, Switzerland. Today, the company focuses on the global market for reusable general surgical instruments and related products. And going forward as a standalone company, this focus expands to the broader general surgery market. We expect to build on our foundation of a broad range of reusable surgical instruments intellectual property with over 140 issued or pending patents and 51 issued or pending trademarks. We expect to sell primarily to hospitals and surgery centers in the US through our direct sales force and over 100 international markets through our distribution partners. The company is expected to have less than 200 team mates or employees worldwide.

A snapshot of Symmetry Surgical's financial results is outlined on Slide 28. In 2013, we achieved revenue of $89 million and an adjusted EBITDA of $11.7 million. In the first half of 2014, we have been focused on positioning the business for growth in the US and the international markets and believe we are now poised to drive growth. Looking forward, we expect to execute significant cost cutting at both the corporate and business level prior to the spin-off to improve the overall profitability of the business as a standalone public company.

On Slide 29, we have highlighted the key actions we have taken to address Symmetry Surgical's revenue and income results over the past three years. 2012 was the first year of the business operated as a single entity. And during most of the year, the company with whom we did a large acquisition at the end of 2011 provided us with transition services in the US through the fourth quarter of 2012 and outside the US through the second quarter of 2013. Since the end of those transition services agreement, we have taken actions to complete the transition including establishing the Symmetry Surgical brand, engaging directly with our US customer base, harmonizing the US sales force, releasing a comprehensive Symmetry Surgical catalog and training worldwide, obtaining international regulatory approvals, establishing and transitioning international distributors, and responding to competitive threats throughout the process.

We now believe we have the infrastructure in place to restore organic growth beginning in the second half of 2014. And as a standalone company, the improved management focus and resources, we believe, will also benefit our results.

Symmetry Surgical currently competes in the estimated $1 billion global market for usable surgical instruments, as outlined on Slide 30. We believe the market is growing between 1% and 4% on a global basis. The key competitors in the market, which we believe represent the top three players include Asculap, a division of B. Braun; V. Mueller, a division of CareFusion; and the instrument division of Integra Life Sciences with the brands Jarit or Miltex. We believe that Symmetry Surgical is the fourth largest player in the market with an approximate 8% market share based on our internal estimates.

In addition to reusable surgical instruments, Symmetry Surgical also sells the complementary offering of disinfection and sterilization products. Looking more broadly at the market, there is a potential for organic new product development and acquisitions that could expand Symmetry Surgical's addressable market opportunity in the general surgery products with Frost & Sullivan had estimated could be an $18 billion category in 2013 if we did not self-limit those products because of conflicts with our OEM Solutions customer.

However, post-transaction on Slide 31, we have outlined various medical device marketplaces and surgical specialties where the standalone Symmetry Surgical could potentially expand with procedure-specific instruments. The business has previously chosen to exclude many of these markets that would be competitive with the OEM Solutions segment customers. We estimate the market opportunity for such products, including reusable, disposable, re-posable or products with reusable handles and disposable-tip surgical instruments and related products could be in excess of $10 billion.

This broader market includes minimally-invasive surgical instruments across multiple specialties. The key competitors in these markets are B. Braun, CareFusion and Integra Life Sciences along with the divisions or product lines of most major healthcare conglomerates. We believe Symmetry Surgical would be the only standalone publicly-traded surgical instrument company with the potential to address all of these markets.

Returning to our business today, Slide 32 lists the specialty areas addressed by the current portfolio of reusable general surgical instruments sold by Symmetry Surgical. We have an established infrastructure that includes a direct selling organization in the US, distributors covering 100-plus countries and an experienced global quality and regulatory team. Our US headquarters in Nashville, Tennessee also houses our US distribution center and our facility Louisville, Kentucky as a managing and packaging location. Outside of the US, our Tuttlingen, Germany facility provides global quality and procurement services, while our global supply team centered in Schaffhausen, Switzerland provides international customer service in a tax advantage location. We have a strong track record of innovation with 146 issued or pending patents along with 51 issued or pending trademarks for our brands.

Slide 33 lists the long-term aspirations that the entire Symmetry Surgical Organization is focused on achieving. We believe these aspirations provide a strong framework that aligns all of our employees and unites our activity towards our goal of becoming a $250 million surgical instrument company.

Our competitive aspirations include being a leading global medical device company recognized as customer-centric and brand-driven with a unique clinical and health economic focus on surgical instruments needed day-to-day in operating rooms, surgery centers and future sites of care that are not reimbursement specific. Being an attractive environment for our engaged team mates that makes us an employer of choice, being recognized as a company who provides flawless quality and global regulatory registration and compliance, earning long-term customer loyalty through engaging customer experiences, driving sustained profitable growth by launching new products, gaining share through our sales and professional education efforts and licensing new products and alliance products, and seamlessly integrating acquisitions. Also being a recognized acquirer and integrator with the talent and infrastructure to drive benefits quickly. Being a responsive STAT supply chain that maximizes customer service and achieves competitive cost and cash flow generation; and finally, nourishing enduring brand health through continuous internal and external innovation.

On Slide 34, we believe Symmetry Surgical represents a compelling investment opportunity with the strong foundation and opportunity for growth. The standalone business as a global medical device company with a unique clinic and health economic focus on surgical instruments needed day-to-day in operating rooms, surgery centers and future sites of care that are not reimbursement specific. We will be able to compete in any aspect of the estimated $10 billion surgical instrument marketplace with an established global infrastructure, including a direct sales force in the US and distributors covering more than 100 countries worldwide.

As a standalone business, the company and management will focus solely on the surgical instrument market and the customers we serve. We also have improved access to capital to pursue growth opportunities to further enhance our position. Our global infrastructure and 300-year heritage puts us in a good position to expand our product offering in the surgical instrument marketplace.

Now turning to Slide 35, the key takeaways from today's calls are: One, we are proposing a transaction in which Symmetry's OEM Solutions segment will be acquired by Tecomet and Symmetry Surgical will be separated into a new public company. Symmetry Medical's shareholders will receive $7.50 per share in cash plus a corresponding ownership position in the new Symmetry Surgical. The transaction is expected to close in Q4 of this year subject to approvals.

Second, the proposed transaction has strategic benefits for all parties. For shareholders, it provides a premium valuation for the OEM Solutions segment and the opportunity to participate in the upside potential of Symmetry Surgical in a corporate tax efficient separation. The new Symmetry Surgical is expected to be able to pursue a broader portfolio of surgical instruments, better leveraging its established infrastructure to build on our current business. The business should also benefit from a focused management team unencumbered by the distractions from larger, more complex OEM Solutions business decisions.

On the OEM Solutions side, we expect that customers will benefit from a company's broader capabilities across orthopedics, aerospace and other medical device markets. And finally, we expect the new public company, Symmetry Surgical Incorporated, to be well positioned in the estimated $10 billion market for surgical instruments with a distinct clinical and health economic focus from other companies in the space. We expect to be well positioned to be an acquirer and grow the business to build value for our shareholders.

We'd now like to open the call for your questions. And I'll turn it over to Brandon, our operator. Brandon?

Question-and-Answer Session


(Operator Instructions) From Piper Jaffray, we have Matt Miksic on the line.

Matt Miksic - Piper Jaffray

I wanted to first maybe just talk a little about the current trajectory of the business. I know you mentioned that you feel like you're positioned well to sort of improve the trends heading into the back of the year, and this is in surgical. You mentioned the strategic rationale, one of the items being an increased opportunity to expand the business free of the conflicts you have maybe with OEM Solutions. Do you feel that that relationship has actually been one of the factors that's held back the growth rate of SSI over the past couple of years? Any color as to that? And then maybe just a round number you could give us as to where you think it could go independently in terms of growth rates?

Tom Sullivan

When we look at the second quarter, the sequential growth both in the US and the international markets was encouraging. We're somewhat reserved on that, because the first quarter wasn't the strongest quarter, but it is still nice to see sequential growth in this environment. Year-over-year neutralized for the New Wave cessation of selling that product, the year-over-year decline was less than it had been. So we believe that we're starting to see some stabilization here and potential growth in the back half. In the outside the US marketplace, those distribution conversions had anniversaried at the end of the second quarter. So we believe we can now work more fully just to be focused on driving year-over-year growth in those businesses.

Regarding the second part of your question, with the loss of the New Wave product line, as we look at what additional things we want to put in the bag, we have continued to remain resolute that we were not going to compete with our OEM customers in any way. And that has limited some of our acquisition opportunities. And so we do believe that there will be greater opportunities for us to augment our sales bag and to really leverage the infrastructure that we have in place over our broader selling base if we are no longer in an environment where we're very sensitized to not competing with any division of any of our OEM customers. And that's getting more complex as we've seen more consolidation occurring in the OEM marketplace. There's historic orthopedic customer that we have never even been remotely competing with that now with their acquisition of other medical device companies could put us in an environment where we maybe in fact competing against one of their divisions.

So while we have no intentions of ever going into anything that is directly competitive to our core orthopedic customers, we do believe that there is a broader surgical instrument marketplace out there that we think we could bring value to and would also bring value to our organization to drive growth. And that's one of the strategic rationale for the transaction.

Matt Miksic - Piper Jaffray

And then, the second part of the question here we'd love to get at is really about leverage. And you just touched on being able to add some additional products to your bag in the SSI side and leverage the infrastructure you have in place. And this was a business going back to, I guess, the first year that you ran at, 2012 was, if I remember correctly, kind of like a mid-teens operating margin business if I'm not mistaken. And then it with the decline obviously is now kind of a single-digit operating margin business or low-teens EBITDA. Can you give us a sense of how much growth or how much investment in either OpEx or infrastructure you would need to make as you get back up, say, $15 million, $20 million, $25 million higher? Were those mid-teens operating margins kind of an early transition anomaly, or is that a range that you think you could get back into with the right amount of topline?

Tom Sullivan

Our focus, Matt, will be on driving growth to utilize the infrastructure. We have a robust infrastructure in place in the US and abroad. And I don't believe we'll have to add any fixed cost in any way to take advantage of the increased sales opportunity. So we'd like to see revenue growth drop through the P&L at a rate faster than obviously revenue. We'd really to like ourselves controlling SG&A at roughly half the rate of sales, so that you could see an additional drop through associated with that. You're right that financials a year ago before 2013 were more positive. We'd like to get the revenue back up to that line first and foremost through a combination of taking share, launching new products and licensing an acquisition as well as our own internal innovations.

And we believe that as a standalone company, we'll be better positioned to do that more broadly. Also as a standalone company, on day one, we expected to be debt-free, and that will give the company a significant opportunity to go and pursue things that fold into this. It could be very material to the earnings at that time.


From William Blair, we have Matthew O'Brien on the line.

Matthew O'Brien - William Blair

I was just hoping, Tom or Fred, you could talk quickly about the timeframe to closure here is pretty short just in terms of the diligence that went on between the two organizations. I know keeping that fairly large supplier, as are you guys, but it seems like from an SEC perspective that there was a high level of comfort in the closure post-transaction.

Tom Sullivan

The buyer has gone through significant due diligence on the organization over the past several months. So we're confident that they have full vetted the transaction. We are subject to Hart-Scott-Rodino clearance and collaboratively we will be pursuing that. Our belief, if you look at the marketplace in which we compete and the size of that marketplace and the capabilities of the customers that that will be a positive review. But obviously that's up to that regulatory body. So we'll be going forward with that. So that is the only closing condition that is in fact in the transaction.

Matthew O'Brien - William Blair

And then turning to the standalone surgical business going forward, Tom, I think you referenced some of your comfort in the back half reacceleration, and I think you started mentioning international. Could you be just a little more specific about some of the investment that you have made and what gives you that comfort in the back half reacceleration?

Tom Sullivan

What I was specifically referring to outside the US is that we completed the transition of international distributors in the second quarter of last year. And just like we saw in the US, that first year of transition is challenging in each local marketplace as they break the customers in those marketplace's connectivity with the legacy company who sold those products. That process anniversaried in second quarter of this year. And we're now looking forward to those distributors starting to drive growth again in their local marketplaces in the same way that we're looking to see that out of the US. So we have the infrastructure in place now. We have continued to register additional products from our legacy portfolios in those international markets and we're excited about the potential for those products as well as the new ones that we're launching around the world.

Matthew O'Brien - William Blair

So I think, if memory serves, you had gone through a period where you were losing customers because of the transition issues. Are you saying now that you are at the point where you are not losing customers anymore or you're gaining customers? Is that how we should view that comment?

Tom Sullivan

In the United States, obviously our revenue is not growing yet, but we're no longer seeing the transition associated disruptions that we saw over the course of the first year. And in fact, the business is successfully winning market share in certain markets of the United States, and we are winning tender opportunities with customers. What we have to do is translate that more broadly across the United States to drive overall growth.

Outside the US, at a specific market level, I can't really comment. But our hope is that now that the distributor network around the world has a year in place in virtually every country that we'll start to see them driving market share growth opportunities, as we're seeing in segments of the US.

Matthew O'Brien - William Blair

And then, last one for me, and this one might be a little bit challenging to answer, because I know things will pop up here and there from an acquisition perspective. But should we think with the standalone surgical business going forward and the refinements you're making to the organization from a cost perspective that you're most likely going to be setting up the standalone business over the next maybe two to four quarters and then at that point maybe get into the acquisition hunting mode versus doing anything more near-term?

Tom Sullivan

Our focus over the next four months or so will be to close the transaction first and foremost. And with that, we have to separate the two businesses and we have to move a number of functions from the corporate level down to the Symmetry Surgical level as a public company. So that will be our initial focus until the transaction is closed. Once the transaction is closed, we will expect on day one to be looking for acquisitions that will again add to our portfolio and bring our customers value. We don't really have anything in mind at this point in time that's active. But our hope would be that after the transaction is closed, we'd be positioned to start adding revenue back into that portfolio as quickly as possible.


From Sidoti & Company, we have Jim Sidoti on line.

Jim Sidoti - Sidoti & Company

You mentioned that you'll have a five-year supply agreement in place with Tecomet after the transition. What will you be supplying them? Will those be the orthopedic instruments or will those be other instruments? Can you give us some sense of what you will be supplying them and how much revenue you think that will generate?

Tom Sullivan

So the predominant orientation of that supply agreement, Jim, is Symmetry Medical/Tecomet Symmetry Medical, they manufacture a variety of sterilization cases and trays that Sym Surg sells directly to hospitals today as well as a pretty robust line of our arthroscopy instruments. So Symmetry Medical will continue to be a supplier of those products and potentially others through Symmetry Surgical going forward. That's the main direction of the supply agreement. Symmetry Surgical does however provide some sourcing and quality services for the OEM business from our Tuttlingen and Schaffhausen, Switzerland locations. And we would expect that to continue, but we don't consider that to be a material part of the P&L.

Jim Sidoti - Sidoti & Company

And the revenue from the trays and cases is already in the Symmetry Surgical when you break it out now?

Tom Sullivan

Yes, it's reflected in the end-market sales of Symmetry Surgical today.

Jim Sidoti - Sidoti & Company

And then you mentioned that your goal is to get to $250 million of instrument sales. Can you give us a goal on where you think the margins will be?

Tom Sullivan

We don't want to pursue categories that have more regulatory demanding products in them. So we don't vision going after necessarily PMA type products or products that require a clinical study to support them. We really believe there's opportunities out there in sort of what we call mid-margin products at roughly 50% gross margin level that can bring our customers clinical and economic benefit. Particularly when you look through the lens of reusable ore re-posable, this idea of a reusable handle and disposable tips like we brought to life on our Sharp Kerrison Rongeur that we've recently launched.

Jim Sidoti - Sidoti & Company

And how about from an operating margin, do you think you will be in the mid-teens?

Fred Hite

We haven't done any projections around that yet, Jim. The best I could do is refer you to 2013 results that are on slide 28 of the deck. Obviously there'll be additional details in the proxy when they come out.

Jim Sidoti - Sidoti & Company

And as far as the facilities in Nashville go, are those strictly Symmetry Surgical facilities or you're going to have to break off some of the OEM business from any of the facilities that you have now?

Tom Sullivan

The Nashville facility and Louisville, Kentucky, Schaffhausen, Switzerland and Tuttlingen, Germany are all dedicated Symmetry Surgical sites. The remaining sites in Symmetry with the exception of finance and accounting office in Fort Wayne are all dedicated OEM sites. So that separation is very easy. And the finance and accounting center in Fort Wayne will be transitioning over the next year to the Symmetry Surgical business.


And we have no further questions at this time. I will now turn it back to Tom Sullivan for closing remarks.

Tom Sullivan

Thank you, Brandon. In closing, I'd like to thank all my Symmetry team mates around the world for our results during the second quarter. Your efforts and focus on the customers are the driver of our success. The proposed transaction we've discussed today has significant benefits for Symmetry Medical's OEM Solutions customers and Symmetry Surgical's customers. The merger with Tecomet will create an OEM business that can provide better service based on broader and more comprehensive capabilities. As a standalone company, Symmetry Surgical will be uniquely attentive to the needs of its customers across the breadth of the surgical instrument market with a distinct clinical and health economic focus without the distraction of implant or other more regulatory demanding product lines. We look forward to working toward this outcome in the months ahead.

Thank you and have a great day.


Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.

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