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Symmetry Medical, Inc. (SMA)

Q1 2013 Earnings Call

May 2, 2013 8:00 am ET

Executives

Carol Ruth – IR, The Ruth Group

Tom Sullivan - President & CEO

Fred Hite - SVP & CFO

Analysts

Matt Miksic - Piper Jaffray

Kayla Crum - William Blair

James Terwilliger - Benchmark

Jim Sidoti - Sidoti & Company

Presentation

Operator

Good morning and welcome to the Q1, 2013 Symmetry Medical Incorporated Earnings Conference Call. My name is John and I will be your operator on 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 will now turn the call over to Carol Ruth. You may begin. Carol Ruth.

Carol Ruth

Thank you, operator. 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 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. 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 innovation by our competitors, product liability, changes in management, changes in conditions affecting the economy, orthopedic device manufacturers, or the medical device industry in general and changes in government regulation of medical devices and third party reimbursement practices.

We refer you to the risks in the forward-looking statements section of the company’s most recent annual report on Form 10-K, filed with the Securities and Exchange Commission, as well as the company’s other filings with the SEC, which are available on the SEC’s website at www.sec.gov.

Before turning the call over to Tom Sullivan, President and Chief Executive Officer, I'd like to emphasize Symmetry Medical’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 first quarter 2013 conference call. I will begin today’s call with a quick review of the financial highlights for the first quarter and then provide an operational update.

Total revenue for the first quarter was $98.9 million, down 2% year-over-year and 7% sequentially. Reported revenue in our OEM Solutions business was up 4% year-over-year reflecting the stable orthopedic procedural growth reported by our customers and some initial benefit from increased capital spending on instruments and cases to support new product launches. Sequentially reported sales were down 2%.

In our Symmetry Surgical segment sales decreased 17% year-over-year as a result of transition-related sales disruptions with certain U.S. customers and international distributors related to the integration of the Codman surgical instruments business into Symmetry Surgical.

On a sequential basis, Symmetry Surgical sales were down 22% or 13% excluding a one-time purchase in the fourth quarter 2012. Excluding the impact of a Symmetry Surgical customer who transitioned to Symmetry Medical OEM Solutions in 2013, OEM Solutions revenue was up 2% year-over-year and down 4% sequentially. Symmetry Surgical sales were up 13% year-over-year and 6% sequentially.

Gross margin in the first quarter 2013 was 25.4% up from 25.0% in the first quarter of last year. The year-over-year increase was driven by our continued focus on improving operational efficiency in the OEM Solutions segment partially offset by lower percentage of revenue from our higher margin Symmetry Surgical segment and higher than expected short-term cost associated with growth opportunities in the OEM Solutions segment. On a sequential basis gross margin declined by 1.7 percentage points due to decline in Symmetry Surgical sales in the aforementioned cost.

Our as adjusted EPS was $0.06 down from $0.09 in the same period last year in addition to revenue weakness the medical device excise tax and higher than expected SG&A costs weakened EPS. Cash flow from operations for the quarter was $11.4 million and our leverage ratio ended at 3.3 times.

Despite the greater than expected weakness in the Symmetry Surgical segment, we remain confident in the long-term outlook for our direct to hospital business. We have already implemented corrective actions in the United States that have yielded promising initial results and believe our international business will move forward as our distributor partners become more established with our product lines. We expect to gradually reinvigorate this business over the course of the year.

In our OEM Solutions segment with a solid first quarter and are well positioned to benefit from new product launch activity, potential improvements in orthopedic procedure growth rate and our proactive initiatives to improve our operating efficiency. Accordingly, we are reiterating our full year 2013 revenue and EPS guidance.

I would now like to provide some additional details on the OEM Solutions and Symmetry Surgical segments beginning with OEM Solutions.

Reported sales in our OEM Solutions business were up 4% year-over-year reflecting solid results in implants, instruments and cases partially offset by a slight decrease in aerospace sales. On a sequential basis, implants and instruments were down 2% and 6% respectively following a strong fourth quarter in these categories. Cases were up 18% driven primarily by new product launch related volume. Aerospace was down 21% sequentially from a particularly strong fourth quarter 2012 results.

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