Q3 2019 Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome City Invacare third quarter 2018 conference call in my past after the management overview.
In the call to question investors and analysts interested in asking your question wanting to dialing.
Since cannot be submitted via the webcast for the first part of the call all phone lines have been placed on you.
In France is being recorded today Thursday November seven 2018, and I would now like to turn the call over to Leslie Invacares Directory director of Treasury and Investor Relations.
These are they going to join me on today's call from Invacare met Monahan, Chairman, President and Chief Executive Officer, Kathy Monahan, Senior Vice President and Chief Financial Officer.
Today, we will be reviewing our third quarter 2019 financial results in providing investors with an update on our transformation.
And does this all along we have created slides to accompany this webcast.
Well those family and you can find a link or webcast slide presentation and interior dotcom last investor relations.
For the information can be found in the FCC filing.
The format begins I'd like to note that during today's call. We may make forward looking statements about the company that by their nature just matters that are uncertain.
Actual future results may differ materially from those expressed in arc statements today due to various uncertainty and I refer you to the cautionary statements included in the second page of our webcast slides in or third quarter earnings release.
Corn explanations item on today's call that are considered to be non-GAAP financial information such as constant currency net sales.
Absent currency yesterday free cash flow adjusted EBITDA and adjusted net loss, we see the nose independents or webcast slides and their related reconciliations in the earnings release posted on our website.
I'll now turn the call over that money.
Thank you listen to board.
In the third quarter, we continue to made significant progress in our transformation plan.
Our operating and financial results this quarter keep us on track to meet our annual 2019, and our long term 2020.
Slide four you'll see we achieved significant improvements in key financial performance metrics over the prior year.
The company delivered consolidated operating income of $2.4 million in the quarter and improvement of $7.7 million compared to last year driven by $9.6 million.
America.
Consolidated adjusted EBITDA increased significantly to $9.6 million, an improvement of $3.5 billion or close to 800 person.
And your profitability was driven by reduced that's unique expenses and higher gross profit despite unfavorable foreign exchange the impact is here.
Constant currency net sales, excluding respiratory were up sequentially as expected and essentially flat over prior year as we prioritize Martin.
We ended respiratory lower sales, we again delivered higher margin.
Importantly revenue and profit for powered mobility products globally as we continue to focus on providing value added products at the right Mark.
In North America mobility, and seating revenue grew 4.3% sequentially and modestly compared to the prior year as growth in probability was offset by lower sales of cookie meal products as we discussed last quarter.
Our strategy to pursue higher quality sales into focus on operational improvements led to stronger profitability and essentially flat revenue.
Well pleased with the improved margin this quarter, we acknowledge we need to also grow sales.
Over the next year, we expect our plan process improvements and new products will make our portfolio, even more competitive and our go to market actions will increase commercial effectiveness and grow revenue.
Loris DNA expenses benefited from process improvements and cost reductions to simplify how we do business improve customers experience and strengthen our competitive.
Turning to slide five company generated positive free cash flow of $12.3 billion, an improvement of nearly $15 million compared to last year and a $12 million sequential improvement. This significant increase was due to higher operating profit and reduced working capital.
As a result of our strong free cash flow, we repurchased $16 million of convertible notes during the third quarter at a discount to par reducing the outstanding balance of the 2021 tranche by nearly 11%.
This will result in annual cash interest expense savings of $800000 and the elimination of approximately 1 million shares of potential dilution on conversion.
We believe de levering the balance sheet. This way was it could use of cash and increase shareholder value.
As we look forward the expected continued improvement in operating results in free cash flow will give us additional opportunities to strengthen our capital structure.
So the key initiatives to accelerate our transformation plan are outlined on slide six.
We continue to lead at many product categories with award winning clinical solutions and a very full product pipeline, which is expected to drive incremental sales and stronger profitability.
This quarter, we again watch industry first in manual mobility with technology that allows us to produce manual wheelchairs with significantly higher performance without increased weight.
In addition, we introduced a remarkably well performing the ending positioning system on our center wheel drive power wheelchair, which gives patients the clinical and social benefits of vertical position.
We also launched the world's first wireless leaf remote control portable oxygen concentrator, making it the only true hands free device that users can where we're leaving the stationary physician and chief setting checked status and battery charge with their smartphone.
And our development teams are working on a full lineup of new products across all categories for 2020.
Another pillar of transformation is improving operations to expand margins and accelerate profitability.
Particularly we are starting to realize the benefits of continued improvements from two plant consolidations into an existing facility in France, and we expect additional efficiencies to be achieved.
Meanwhile, although tariffs remains a slight headwind we saw net improvement compared to prior year and we continue to take actions to mitigate remaining impact.
Also a key enabler of our transformation is our recently announced partnership with Brlas Soc solution, which will give us the platform to modernize our business with flexible I T system.
Working with Birla Soc, we expect to drive operational efficiencies improve our customers experienced and generate substantial cost.
Building on system improvements, we've made over the past five years in Europe , we plan to roll out. The next wave of system improvements regionally with North America scheduled to go live in mid 2020, followed by Asia Pacific and finally linking back to Europe in 2021, our strategy to adapt our process to how core software works will vastly simplified the it.
Sensation and enable us to move swiftly.
In summary, our third quarter results reflect the many improvements we've made in the business to drive profitable growth and our continued success in our transformation gives us confidence we remain on track to achieve our annual guidance and long term objective.
Turning to slide seven.
After reaching our 2021 through goal remains unchanged, we have a diversified plan that encompasses different regions product line and offers many opportunities to transform the business. We continue to drive all business segments and product line based on their potential to achieve a leading market position and to support our profitability goals.
This quarter, we made significant progress against many of our objectives, including stronger free cash flow and improved profitability in North America, which near breakeven in the quarter.
Turning to our long term objective, we remain confident in our ability to achieve 85 million to $105 million of run rates adjusted EBITDA by the end of 2020.
I'll now turn the color to Kathy Linehan to discuss the performance segment and additional financial results for the third quarter.
Thanks, Matt turning to slide nine reported net sales decreased 3.6% in constant currency net sales decreased 0.9%, excluding respiratory products constant currency net sales were essentially flat.
Consolidated gross profit increased 190 basis points to 28.7%, primarily driven by improved product mix and cost reductions related to material freight and R&D, partially offset by the negative impact of foreign exchange.
Absent currency SGN, a improved by $5.3 million or 7.6% driven by previous cost reduction actions.
Operating profit returned to positive territory and improved by $7.7 million to $2.4 million, primarily due to reduced after an expensive and increase gross profit offset by higher restructuring costs and unfavorable foreign exchange.
GAAP loss per share was 24 cents as compared to 36 cents last year and adjusted net loss per share was 15 cents as compared to 40.
The company generated positive free cash flow of $12.3 million, a significant improvement of nearly $15 million due primarily to higher profitability and reduced working capital.
Adjusted EBITDA was $9.6 million, an improvement of eight and a half million dollars driven by higher operating income.
Finally convertible debt decreased $16 million as we repurchased 10.7% of the convertible notes maturing in 2021 at a discount to par.
Turning to slide 10 during the third quarter reported net sales in Europe decreased 4.8%, primarily due to unfavorable foreign exchange.
Constant currency net sales decreased 0.6% as higher mobility and seating product sales were more than offset by decreased sales of lifestyle in respiratory products.
Operating income decreased $400000 due primarily to unfavorable foreign exchange.
The negative impact from foreign currency translation was $800000.
Moving to Slide 11, North America reported net sales decreased 1.9% in constant currency net sales decreased 1.8%.
Gross profit increased 410 basis points, driven by improved product mix and favorable material costs. Despite the impact of tariff as we continue to focus on higher margin products within the portfolio.
Sales of mobility and seating products increased 4.3% sequentially and grew slightly compared to the prior year with growth in powered mobility offset by lower sales of custom annual product.
We achieved improvements in gross profit in each of the main categories, including respiratory despite respiratory products sales declines of 8.3% or $1.1 million.
Importantly, operating loss improved by $9.6 million or 85%, primarily due to reduced after you know expenses.
Gross profit and a focus on higher quality more favorable mix of sales.
Returning that segment to profitability is key to our transformation and we continue to make great strides.
Turning to slide 12 reported net sales and all other which is entirely composed of the Asia Pacific region decreased 0.8% in constant currency net sales increased 3.8% driven by higher sales of lifestyle product.
Operating loss increased $700000 driven by an increase of $1.5 million in non Asia Pacific expenses related to employment costs, including higher stock compensation and onetime professional service costs.
However, the Asia Pacific business operating profit improved $800000 driven by sales growth gross profit expansion and reduce that's you know expenses.
Moving to slide 13.
Free cash flow generation was positive 12.3 million a significant improvement of nearly $15 million compared to last year, and a 12 million sequential improvement primarily due to improved profit and reduced working capital.
Total debt of $284 million excludes operating lease obligations of approximately $20 million capitalize on the balance sheet as or as a result of the adoption of the new lease accounting standard which became effective January one 2018.
During the quarter the company repurchased 60 million of convertible notes that mature in 2021 at a discount to par.
The company's revolving credit facility remains undrawn.
The company believes that continued generation of adjusted EBITDA, driven by operational performance cash balances on hand, and expected free cash flow will support the company's ongoing transformation plans and enabler to address future debt maturities.
As you can see on slide 15, we continue to make progress towards meeting our annual guidance.
As previously discussed our second half is historically stronger and this quarter was no exception.
During the quarter, we delivered significant improvements in gross profit lower SGN, a expenses, which resulted in the generation of operating income higher adjusted EBITDA and positive free cash flow.
Based on our visibility into the transformation and the encouraging trends, we're seeing in the fourth quarter were confident in our ability to achieve our 2019 annual guidance.
Through this quarter, we have accumulated at 14.7 million of adjusted EBITDA, which puts us on track to meet our annual guidance of achieving at least $20 million.
In addition, we reaffirm our annual guidance or free cash flow usage at or below $25 million I will now turn the call back over to Matt.
Thanks Debbie.
Turning to slide 16, our path to long term adjusted EBITDA remains unchanged through the first nine months of 29 team in Europe , we realized higher profitability from sales growth and the benefit of cost reductions, which have been partially offset by unfavorable foreign exchange of $2.3 million.
North America operating profit improved $17.7 million, driven by revenue growth and lifestyle products higher gross profit across all three product categories cost reductions, including material and operating costs as well as significant improvements in test units spending.
These operational and process improvements expanded gross profit by 220 basis points and leveraged SGN driving favorable results in the region with North America nearing breakeven operating income in the quarter.
We've made substantial progress in our transformation and we continue to strengthen our foundation with a solid plan in place to deliver significant improvements throughout the remainder of this year end beyond we're pleased to the improved performance and remain confident in our ability to meet our long term objective of 85 million to $105 million of run rate adjusted EBITDA by the end of 2020.
We appreciate your continued support of our shareholders and our associates through this process.
Thanks for taking the time this morning to participate on our call. We have time to take question.
Yeah.
And if he would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure that your mute function is turned off to linger signal to reach our equipment again that is star one ask a question and we'll take our first question from from Bob Labick CJS Securities.
He's got good morning.
Thank you good morning, Congratulations high.
Very nice quarter, obviously strong EBITDA on free cash flow a key you know proof point in the journey right now more to come but congratulations.
But.
Oh, so want to start obviously, you've guided to the at least 20 million EBITDA on and.
Just because we're in this transformation and getting closer to the end could you talk a little bit about some of the key.
Revenue drivers and deltas and some of the.
Cost takeouts over the next 12 months and specifically kind of how we should be thinking through seasonally softer first half just to give us a sense of your timing of what's going to help pick up that north American revenue because as you said costs have come out very well, but you're looking to get that revenue growth to talk a little bit about that and then when we.
Might see the next chunks of costs come out.
Yeah. Thanks for the question Bob over the next five quarters, we have let's say two layers of kind of cost reduction activities in nearly every day, we're looking for ways to improve cost around our enterprise to those happens often in the small fashion one of the next big bolus of costs to come out will be as we implement our.
He system in the various regions will which will do a lot to integrate business processes of these very disparate business units, we've operated which have resulted from many years of acquisition without integration.
So I think if in North America at the end of the first half.
Midway through second quarter, we're going live in North America, we have the normal cutover processes and.
Extraordinary care that goes on as you do some of those things than we would assume we started to see the benefits of that streamlining in third and fourth quarter in North America.
On that basis.
Asia Pacific along the way, although Thats more minor and then Europe at the beginning of 2021 when they go live with the next round of their process improvement.
In the meantime, we have brand new products coming out in all categories. I mentioned three today on the call. There are categories of products coming out in each category that are quite novel over the next year and I think they come out in relatively uniform fashion nearly every 60 days.
So we'll have some small cost coming up uniformly we'll have some big chunky costs coming out with implementation and other consolidation efforts and then we'll see sales growth that's more than seasonal next year with more new products.
It will it will generally be up and amplification from now through the end of 2020, as we expect to meet that and year end objective, but not just because.
Things are pushed to the end of our schedule, we really need cost reductions in new product.
Launches to converge here in the first half of 2020 to make that happen and those products are either nearly complete in design are already under regulatory review, we feel very confident about our product pipeline.
Okay, Great Super appreciate that color and <unk>, and then take a kind of half step back could you expand upon the Berlin soft arrangement.
You know agreement there you talk about your some of the risks of outsourcing the ERP implementation versus doing it in house and what you're doing to minimize those and how you came up with a plan to.
Soup to work with Brookdale.
Yeah. So Bob you know Birla Sop, we've entered into an agreement and it has two parts one would be the implementation of the ERP and the second would be the outsourcing of our IP infrastructure and so we did a lot of work to look at various different partners.
To be able to enable that cost savings and we felt very comfortable with.
The work that we did with for a soft around their capabilities in regards to the I'd say p. implementation, but also on the ITC outsourcing side of the house.
So very comfortable with that we have a CIO who joined the company in earlier this year in March two has implemented several different implementations of an ERP.
Very confidently with no issues. So we're very confident that that can happen here as well, but the key is that you don't change.
The software you aligned with the software and you change your processes to aligned to that software and that's the mantra that we will have as we implement.
The ERP throughout the entire company I think the other thing that meet Burley Sapthree partner for us. There's so much of I see where were ambivalent about the specific software that being used and we can leverage the expertise or other clients that have provider to do Subaru soft isn't just a normal implementation team they're going to provide.
But really our entire suite of IP solutions as a service to us where we get the benefit of what Theyre doing theres essentially nothing that we do as an enterprise that requires proprietary software. So we're looking at there.
Kills it being up a world class provider of the best solutions and getting to us cost effectively.
Okay, Great. That's really helpful. Thanks, and then last one from me I'll jump back in queue. Obviously, you bought back some of the debt at a discount which was great.
My question is are you ready.
Discuss plans for the 2021 maturities yet or is that more of a Q4 thing until we hear <unk> I know you have plans, but just so we hear about those more is that topic for a discussion now are we gonna have to wait till Q4.
I think we'll talk if you had a Q4 it and then we'll update our outlook for 2020 and I'm sure that'll be a discussion point that will cover in detail.
Okay fair enough great. Thank you very much from correct congratulations on a very strong quarter.
Thanks, Bob.
Next we'll hear from Matthew Mishan with that with Keybanc. Please go ahead.
Hey, guys. This is Brad on for Matt just two questions from me first as we think about the mobility and seating categories. Specifically can you provide some thoughts on your ability to accelerate growth in this area on particularly in the Americas into 2020.
Sure Brett Good question, we have a lot of confidence in our portfolio and the things that we're doing to be easier to do business with and lower costs. So that we can be as competitive as possible in that category. These are complex devices that are configured to a particular individual who's going to use the product and so theres a fair.
Amount of detail that goes into ordering we believe we've got steps in place that will occur over the next two quarters to make our ordering process much easier for our customers. So that are there their customers. The end users of these products will have a much easier quicker time of getting into our products, which should converge around the same timing that we're bringing cost out and we have many.
New products in the pipeline.
Some of those products were one of the key ones that I mentioned right now as a vertical standing system, which is nearly unique on a center wheel drive powered wheelchair, which gives the benefit of Verticalization and also the compact design and good performances Center will drive which is a pretty novel in the marketplace. So we're looking forward to that we have other products in the pipeline that we expect to come out in first and second call.
Order to drive that also.
And then one of your major competitors has been going through some disruption lately has this presented and the opportunity for market share gains in any area. So the business and if not could it be an opportunity over the next several quarters.
Oh, Yeah, we always like to be out in the marketplace selling on the strength of our products, sometimes those conversations are a little easier when the product availability isn't universally the seem as it's always been but generally we look at long term growth potential of our product portfolio and the ever growing skills of our commercial teams.
The growing revenue over the next year, we've got a lot of good things not only from product from our team members are doing in the marketplace to make that growth happen more quickly.
You saw in the quarter.
Third quarter on seeding and mobility with margin improvement was a real great ship from second quarter, where the sales team did a remarkable job of getting out some new products at that point, which were a little simpler at lower cost in margin. So we changed that in third quarter and wealth sales didnt grow the margin equivalent was you know on or after Christmas.
And something like three times that so we're really pleased with the shift that the sales team has made in relatively short period, and we think that will result in increasing sales growth and profitability over the next five quarters.
Alright, Thank you very much appreciate it.
Thanks.
Next we'll hear from Mike Mattson with him uncomfortable.
Please go ahead.
Good morning, Thanks for taking my questions.
Just wanted to start with the.
The chart on slide 15 on the right tied pretty impressive progress there at the EBITDA cash flow year to year to date I guess, what I'm wondering is I know you're not raising your targets for the year, but looking at that chart. I'm wondering is there any reason that fit EBITDA, our cash flow would be down sequentially from Q3 in the fourth quarter.
AH Yes, you know actually you know we have not changed our guidance for the full year, but if you take a look at the seasonality of the business normally you would see on historically that EBITDA stronger in the third quarter than it is in the fourth quarter. There are also some expenses from a seasonality.
Perspective that you would see in the fourth quarter and not necessarily in the third quarter.
And then from a cash perspective Q3 cash was very strong Ah, but we would anticipate while we're very comfortable we will not use more than 25 million cash flow in Q4 could be less than Q3, because of just timing of sales and the receivables on the balance sheet investments that we will make I'm on the capex side of the house either related to the ERP.
We are demo equipment. So there can be seasonality when you look at Q3 versus Q4, but I think importantly, Mike we there's still a ton of moving parts is a transformation.
And you know what long ago, we didn't give any guidance at all so what we want to get in the habit of doing is giving annual guidance and continuing to maintain that as long as we have confidence in that even if we see a.
Potentially upside or favorability, we want to six where you will guidance. So that we can drive forward with that consistency and be managing the different moving parts within the business behind that as Kathy mentioned in her prepared comments, we look forward in the fourth Q with reasonable strength, we have a lot of confidence for finishing out the year as weve expected.
Okay. That's helpful.
And then just another question on Birla soft so I guess it was supposed to be 240 million I think over 10 years. So can you give us any insight into how that's going to ramp over time as it is it pretty can we just kind of straight line. It and then any comments around the mix there between.
Capex and Opex in that 240 million dollar number.
Yeah, you really cant straight line, the contractors going to be higher cost in the first part of that kind of track because if you think about it they're going to deliver not only I T. As a service, but a new ERP system for the entire company. So costs are much higher in the first part of their contract and then they ramp down towards the end of the contract.
In relation to Capex versus Opex, a portion of it will be software as a service so that would be an opex.
There are licenses that you have to buy which would be capex.
So there is a combination really between the two probably the majority of it is a software as a service that would fit into our Opex plant.
Kathy I think.
Maybe for a little extra commentary I think the lots of companies go out and potentially spin huge dollars on IP implementations and there can be a huge bolus of expense one period, that's very different than a later period, maybe help make understand the relative balance of expenditures in the near term compared to what we normally spend on IP, yeah. If you take away, but we don't.
Disclosed that specific detail as our total I T costs, but if you take a look at the cost that we will paperless off.
In regards to this particular contracted actually it's still a savings versus our baseline spending so while 240 million over 10 years seems like a lot of money.
Currently spend a lot of money on a global basis related to the Guy Ti costs. So at no point, Mike should it be much different than our historical trending in the savings that we get from this new implementation will start to creating once the implementations fully up and running which will take us a couple of years.
I don't want.
Listeners to think it's one of these extravagant projects that cost of fortune in the near term and then takes a long time implement we've got a very smart program that amazingly keeps implementation costs within our normal budget on an annual basis. It every period of time.
Okay. Thanks, and then North American respiratory was was down about 8% watches.
Down, but it's down less than we've seen for awhile. So you do you feel like you're you're starting to be out of what's there with regard to these how large double digit declines.
Yeah, you know there.
Two things going on in respiratory I would say generally there is.
There's a price very price sensitive part of the market grew transactional and then there is a part of the market. That's really based on total cost of ownership or a devices demonstrate typically quite high reliability and continuing to get better and we like playing.
A little above the commodity transaction pricing, which is why despite being down 8% again over prior year in prior year was down.
Margin continues to go up which I think demonstrate customers appreciation for the durability of the devices that were putting out and we continue to put technology in our devices to make it more useful for end users and much better for fleet operators our customers.
For the likes of those units so.
I don't know that our sales really reflect what's going on in the marketplace, but among competitors I think we're finding what the value of our brand and our product is in margin is that kind of segregate. So.
Okay great.
Thank you quickly.
And we'll take our final question from Chris Cooley with Stephens.
Go ahead.
Thank you can you hear me okay.
Good morning.
Hi, Thanks, good morning to congratulations on the continued progress maybe just one quick one for me.
And following up there on the respiratory font clearly theres good good progress being made in terms of reducing operating costs are driving cash flow throughout the business, but on the respiratory side help us better understand all the deceleration how much about once shall we say self inflicted does your focus more profitable sales versus in the market and then.
How do we think about that going into 20.
Potential changes there the Buckley oxygen.
Distributor slate and the bundling that we're now seeing you do between Homefill as well as.
Excuse me Homefill as well as opposed to Yossi.
Thanks.
Yes.
Because two in orders so respiratory progress I guess I'd say self inflicted in defense. If there was no external change in the quarter that drove sales down.
There is always.
Torrent of opportunity in the respiratory marketplace to sell units at very low cost and around the world. There are various suppliers, who have different levels of quality and maybe willing to transact at cost lower than we think our products deserve for the value that they provide and as we continue to add technology into our.
Products. So that they are very reliable use it can be deployed in our customers leads for very long time, leading to very low total cost of ownership. We continued to be rewarded with a reasonable prices is better margins and I don't know that we're taking a lot more cost out of the business. We're just seeing margin accretion based on the value of the product.
Yeah the mix.
Definitely more towards the 10 liter and the wholesale product, which are much higher margin products. Then the five liter, which is highly commoditized and we made a decision not to chase volume, we would prefer to have better profit line.
And then not your second question I think was maybe hinting at.
Upcoming a competitive bidding and rounds with how those things are being package, if I understand that right.
Correct.
Yes, I know.
It was for cash and want to add to the comments what I think generally we think customers have the tools available to meet the right kind of did responses with the portfolio of products and how that interacts with the pricing that there were awarded and we believe that there are some relatively near term.
Minimum disruption, we don't see anything in the long term, but people are talking about within the near term that seem relatively decent product. If prices are reimbursement goes down any amount will be rewarded by Oems our reliability because reliability is improved total cost of ownership in it less reimbursement anybody would have to.
Really rely on fewer trips fewer unscheduled trips you are things that are not reimbursed for service, where we think our brand will be very well regarded.
Also helps for Homefill and non delivery modalities of us.
Especially where a lot of miles are required to drive to and from customer locations, especially rural areas yielded to drop off a homefill device, which allows many hours of ambulatory oxygen with half. The we have a battery power device and complete silence is really attractive and for people who want a very.
Competitive battery power device, we've got yet another industry first is something thats truly hands free where someone can wear it on their back because they don't have to touched the buttons that can use their smartphone and go about the living with practically complete independent and if they want to set it down in a room someplace and walk around to do things. They can change the setting of it remotely.
With their smartphone and have independence within a.
25 foot radius in their home, which is really quite a novel feature for US. So we think we've got good solutions in ambulatory in modalities of care despite potential reimbursement changes and we have good at increasing reliability. The supports our brand at the price and margins that were please.
Thank you.
Thanks. Thanks.
And that will conclude todays <unk> session and at this time I would like to turn the call back to Mr. Matt.
Or any additional or closing remarks.
Thank you, Steve and I'd like to thank everybody for their time in essentially on todays call would fall following our story over the many periods it's been developing.
Happy Lewis and I are available for follow up questions you can contact Lois to coordinate that thank you have good day.
And this concludes today's conference. Thank you for your participation and you may now disconnect.