Q2 2021 Invacare Corp Earnings Call
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Okay.
Good morning, ladies and gentlemen, and thank you for standing by welcome to the Invacare second quarter 2021 conference call and webcast.
After the management overview, we will open the call to questions investors and analysts interested in asking questions will need to dial in at the.
The questions cannot be submitted via the webcast for the first part of the call all phone lines have been placed on mute. This conference is being recorded Thursday August 15.2021.
I'll now turn the call over to Lois Lee Invacare as director of Treasury Investor Relations and corporate communications. Thank you joining me on today's call from Invacare of mapping out of hand, Chairman, President and Chief Executive Officer, and Kathy Monahan, Senior Vice President and Chief Financial Officer.
Today, we will be reviewing our second quarter 2021 financial results from providing investors with the update on our full year outlook.
The investors follow along the created slides to accompany this webcast.
So those dialing in you can find the link to our webcast slide presentation and in the care of Dot Com Slash Investor Relations.
The information can be found in our SEC filings.
Before net begins I'd like to note. The during today's call. We may make forward looking statements about the company the by the nature address matters that are uncertain.
In addition to strong sales in second quarter demand continues to support elevated order backlog.
We ended the second quarter with $15 million of higher backlog the normal similar to the level of at the end of the first quarter.
The continued higher backlog is expected to convert to sales over the next 2 quarters as we work to fulfill higher demand in the enrolling supply chain disruptions.
On the cost side, we saw good improvement in gross margin from favorable sales mix and the benefit of prior actions to optimize the business.
These were more than offset by supply chain related disruptions as our factories endured more changeovers and shifting production plans to deal with intermittent parts shortages and shipment delays, which accounted for 80% of the margin decline.
Higher material freight and logistics costs offset by favorable sales mix accounted for the other 20%.
Our operations team is very focused on improving efficiency and cost we view the impact on gross margin. It's temporary and are taking actions to rectify. The importantly, we expect gross margin to rebound through the remainder of the year.
Turning to free cash flow to support sales growth during the quarter usage increased due to higher accounts receivable balances and elevated inventory levels, which Kathy will expand on later, we expect working capital to normalize by the end of the year, if cash is collected and inventories converted the sales.
Overall second quarter results were largely in line with expectations with strong revenue growth both year over year and sequentially in all major product line and in Europe, and North America.
We're pleased with the progress, we're making year to date and look forward to even stronger results in the second half.
During the slide 4 as the business environment and access to health care continued to improve we remain well positioned to achieve our full year guidance as.
As a reminder, while the economy in many areas of the World continues to reopen there are still pockets in both North America, and Europe, where access to our key customers and channels is still somewhat limited.
As we experienced this quarter, we anticipate sales growth will continue in the back half of the year.
Interest in recently launched products is helping us engage with customers to provide end users with even more capable devices.
Really in the third quarter, we launched a new rear wheel drive power wheelchair in North America, the Aviva storm, RF, which complements our full portfolio of best in class seating across the all drive platforms. Our family of power Wheelchairs allows end users to have the best in seating and complex control solutions and the best driving front career center wheel drive share.
For the environment.
In addition, in respiratory or <unk> and X gene stationary oxygen concentrator is now commercially available in the United States with plans to roll out globally in the coming months.
As we focus on sales growth and meeting increased customer demand, we look forward to engaging our customers with new tools and our expanding platform, especially with more modern customer self service features.
At the same time, we're very focused on improving operating efficiency by reducing friction and removing cost from our business systems.
While we expect global supply chain challenges will persist in the near term, we're taking proactive measures to offset those such as investing in additional inventory booking and planning freight further into the future to ensure timely receipt and delivery.
And more precisely planning manufacturing schedules to better match anticipated arrival of components.
As these mitigation efforts become more effective we expect gross margin to expand significantly from second quarter results, which coupled with sales growth should enhance profitability.
All things taken together, we remain confident in our ability to achieve our full year guidance as we continued to see strong demand across all product categories.
Our excess order backlog into sales take actions to expand gross margin and leverage SG&A.
All of these positive indicators support our conviction that invacare is pivoting to a period of long term growth.
I'll now turn the call over to Kathy who will provide a detailed financial summary.
Thanks, Matt.
Turning to slide 6 reported net sales increased 15, 1% with growth in all product categories and in all regions.
Constant currency net sales increased 7.8% driven by double digit growth in both of mobility and seating and respiratory products.
We are pleased to have achieved strong sales growth driven by new orders received during the quarter and from mobility and seating. We are also seeing increased revenues from new products.
The.
Gross profit increased $4.2 million need of higher revenues and the benefit of favorable sales mix.
As Matt mentioned gross margin was significantly impacted by supply chain related plant disruption.
And to a lesser extent higher freight and material costs.
The company has taken and continues to implement various actions to reduce the impact on the business.
Including reduced work hours in certain locations to align to the anticipated timing of the receipt of components.
And the investing in increased inventory much of which was received in the latter part of the second quarter.
SG&A expense returned to more normalized levels and was higher than the prior year as the second quarter 2020 benefited from reduced commercial expenses and discretionary spending given the significant impact of the pandemic on the business.
This share SG&A expense includes increased spending for sales marketing and commission programs, the support and drive revenue growth.
As sales strengthened the free cash flow was also impacted with higher levels of accounts receivable that we expect to be collected during the second half of the year.
In addition, as previously disclosed the company increased inventory levels to mitigate supply chain disruption and to prepare for the expected sequential sales growth in the latter half of the year.
We anticipate this investment of inventory will convert to cash in the second half of 2021 and enable us to achieve our free cash flow guidance.
Okay.
Turning to slide 7 reported net sales in all product lines and for the year over year, Despite supply chain challenges, which limited the conversion of orders the shipment and resulted in excess of order backlog of $15 million primarily in Europe.
Mobility and seating products achieved constant currency net sales growth of 15% with strong growth in both Europe, and North America benefiting from the increase the adoption of new products introduced over the past 18 months.
Constant currency net sales increased 2.9% for lifestyle products, even compare it to a particularly strong Q2.2020 that benefited from pandemic related the sale.
Gross this quarter was led by higher sales of manual wheelchairs hygiene products as well as lift.
Finally growth in respiratory products was driven by continued strong demand in North America related to the pandemic.
Okay.
Turning to slide 8.
In Europe constant currency net sales increased 7% driven by an 18% growth in mobility and seating and over 6% increase on lifestyle products.
Partially offset by lower sales of respiratory products.
Gross profit increased $5.7 million due to strong revenue growth.
And favorable sales mix offset by supply chain related plant disruptions and higher freight costs.
The team and flat gross margin.
Driven by higher net sales operating income increased by $2.8 million.
Overall, we are encouraged by the improving health care access in key European markets, which helped drive our significant rebound in sales and profitability.
Turning to slide 9 North America achieved constant currency net sales growth of 10, 1% driven by increased revenues in all product categories.
Ability on sitting products generated constant currency net sales growth of 12, 6% and respiratory products grew by 24%.
We achieved exceptionally strong growth in the quarter from mobility and seating products benefiting from the increased adoption of new products.
Gross profit declined $900000 as favorable sales mix was more than offset by previously mentioned supply chain challenge it.
Driving a 160 basis points decline in gross margin.
Operating income decreased $3.2 million due to reduced gross profit and higher SG&A expenses to support revenue growth.
Turning to slide 10 constant currency net sales in the Asia Pac region decreased 7.7% due to the lower sales in lifestyle and mobility and seating products, partially offset by growth in respiratory products.
While the Asia Pacific region continues to see strong demand net sales growth was impacted by global shipping issues, which the delayed the receipt of products.
Operating loss increased by $1.8 million, primarily due to lower profitability in the Asia Pacific region impacted by lower net sales unfavorable gross margin and higher SG&A expenses.
Moving to slide 11 as of June 32021, the company had total debt of $322 million, excluding financing and operating lease obligation.
And $78 million of cash on the balance sheet.
As a result of revenue growth the company had higher accounts receivable, which led to an increase of 7.4 days and sales outstanding as compared to the end of the first quarter of 2021 impacted by the timing of collections from revenue recognized in the quarter.
In addition, the company had higher inventory levels, the mitigate supply chain challenges.
As you prepare for the expected sales growth in the second half of the year.
As discussed we anticipate both metrics to normalize by the end of the year and drive positive free cash flow for the full year of 2021.
Turning to slide 12 based on our visibility into the third quarter. We are reaffirming our full year guidance for 2021, consisting of constant currency net sales growth in the range of 47%.
Adjusted EBITDA of $45 million and free cash flow of $5 million.
Constant currency net sales are anticipated to increase sequentially in the third and fourth quarters of 2021.
Our outlook is supported by positive sales trends, such as strengthening order demand mobility and seating product sales, which historically peak in the summer months.
The conversion of excess backlog into sales.
Increased adoption of new products.
And the continuing reopening of key markets and channels.
In addition, gross margin is expected to improve driven by revenue growth.
Favorable sales mix and actions to resolve supply chain challenges at our plant.
Over the next few quarters, we are taking steps to mitigate this impact wherever possible.
As a result improvements in adjusted EBITDA and free cash flow should accelerate for the second half of 2021.
I will now turn the call back over to Matt.
Thanks Kathy.
Turning to slide 13, I want the first thank all of our associates, who put an extraordinary efforts to support our customers as we all recover from the impacts of the pandemic.
As we enter the second half of the year I'm incredibly excited about the positive trends in our favor, which bode well for a strong finish for the year.
We anticipate the continued easing of health care restrictions combined with strong demand favorable sales mix and the fulfillment of excess backlog will drive robust revenue growth and profitability.
As seen in previous years Invacare has a long history of generating the substantial majority of its adjusted EBITDA in the second half of the year and this year is expected to be similar.
Taken together, we have continued confidence in our ability to meet our 2021 goals and to remain focused on executing our long term growth strategy.
Thank you for your continued support of Invacare and for taking time for this morning's call will now take questions.
Okay.
Thank you very much Sir ladies and gentlemen, if you would like to ask a question over the phone at this time. Please signaling by pressing star 1 on your telephone keypad. If you are using a speakerphone. Please make sure you're on mute function is turned off just alone as a student of reach of equipment. So once again the star 1 to ask a question and we'll pause for a brief moment.
Just to give everyone an opportunity to sit on them for questions.
Well now move to our first question over the phone which comes from Bob Leduc from C. J S. Securities. Please go ahead.
Good morning.
Hello, Bob.
Hi.
So it's a very nice quarter and obviously, we are encouraged by the continued outlook and I just wanted to start with North America, and mobility and seating there was a strong sequential pickup in sales to $31 million in the quarter and I was just wanted to ask how much of that is the snapback from the weaker Q1 or is the.
$31 million quarterly run rate of new level that you can grow off of of how should we think about.
You know that the big big swing from quarter to quarter.
Yes, I think we're looking at the general recovery of the market and continued overall organic growth of the business based on new products I think we grow from here and mobility and seating Bob.
All of a fantastic yeah, and I guess I'd ask the same question as it relates to respiratory and I think you mentioned.
That your new product has now launched was that in the the sales in the quarter or is that you know.
Benefit going forward, how should we think about the new respiratory product and the sales level of recipe right. Yeah. That's that's.
The benefit going forward. It is available for sale, but it's just getting started now so no effect of that in second quarter.
At some point, we will see a muting of respiratory sales of pandemic demand.
With us at some point that'll be expected to happen.
The lifestyle should continue to go forward and grow we still have opportunities to grow in lifestyles I was really pleased with lifestyle's gross in the quarter I think we all work with the.
The strong second quarter last year, and we still grew on top of that this year and there's still more opening of long term care facilities and other forms of growth. We expect so I think good outlook for really all of our segments.
Okay Super and then.
You know obviously, there's the expected lift in the second half of EBITDA as you discussed in the.
I think Kathy just said sequential sales growth, which as you know certainly seasonal of normal and on the European side, and I guess it sounds like there could be even on a sequential growth in North America as well. So maybe you can.
Talk us through how much of the incremental EBITDA grew.
Growth in the back half is.
From sales growth and how much was from the incremental cost reductions or help us just think through those kind of levers.
Yeah, we've had good product and customer mix coming into second quarter, which we think will continue sales growth will have a lot of leverage going forward. So that will improve gross margins other things we're doing to.
Convert materials and labor into the saleable products should improve gross margin by reducing variances and these.
The inefficiencies in our factories from the daily shifting of production plans based on supply chain changes every day, you know what parts of been received on time or a little delayed should be further mitigated as we get into the year of the team is getting increasingly good of planning for that or dealing with that.
And I think those of the 2 things really sales growth with good margin, which gives us leverage and continued cost savings.
Kent.
I'll tell you what the split is which is probably a little different by product are pointing to region. The generally both of those will be strong contributors.
Got it okay, great and last 1 of them for it really it really is the the.
The sales growth that we would see in Q3 Q4 that we're anticipating.
And then obviously the improvements from the supply chain efficiencies should help us on the second half of the year as well.
Right, Okay Super and then last 1 from me and I'll get back in queue, but.
Many companies for most companies are suffering from labor constraints of just wondering how that has impacted you in you know in the first half in and how you see that playing out if there's any you know relief you know.
Better labor markets ahead, or how youre looking at that and how that plays into your outlook.
Yes, it's definitely the.
Net of challenge for Us in all of our major plant locations for various reasons, we have seen some improvement at the end of second quarter beginning of third quarter I think some some unemployment benefits maybe have changed I think is the labor market gets past the summer months and people get into the fall we expect so.
The change, but honestly, it's a good chance for employers like Invacare to show that they are great long term employers and the it's not the job shop gig market for us and we look forward the offering people with great long term engage the career opportunity at all levels. So we think we will have.
Lessening impact of labor overtime.
Super Alright, thanks very much.
Could you talk about.
You too.
Thank you very much when I move on to our next question over the phone which comes from Mike Matson from Needham and co. Please go ahead.
Yeah.
Hi, guys. This is Joseph on for Mike.
I guess first off.
You guys can maybe comment on you know the free cash flow guidance.
How confident are you in it and you do you expect any working capital.
The increases to reverse in the second half.
Although maybe it's the workload.
The answer Kathy can chime in here, we definitely do it with the consume quite of bit of cash in terms of inventories second quarter real positive results in terms of sales, obviously, which which increased accounts receivable $20 million, which you'll expect to turn to cash in the third quarter on a little bit more incremental inventory to help us of their supply chain.
The math works out I think pretty.
Pretty clearly we've got to generate a lot of cash, which we expect to do.
Despite the growth of a lot of good working capital actions underway the Cathy.
And give the more detailed answer.
Yeah, I think that you know we mentioned at the end of the second quarter, we had.
The increased accounts receivable from sales growth in Q2 of roughly $20 million based on our average dsos that should turn to cash in the Q3.
On as well we have invested in inventory, we spoken about that on previous calls.
Historically, we do invest in inventory in the first half of the year, but we also invested in additional inventory given the supply chain challenges.
We win we would anticipate a reduction of inventory probably more so in the fourth quarter of the of rather than the third quarter of the ear, but clearly cash flow should benefit from improvements in the E. R balances as well as the inventory balances of as we progress for the the remainder of the here.
Okay. Okay, Great you guys had.
I already mentioned the you know the increase.
And inventory.
Does it necessarily mean, you're out of the woods with regard to the supply chain issues and I guess, there's the risk that it like new component shortages could lend the capacity in the second half.
And then maybe touching on.
Some recent.
News, we've heard from from from other companies reporting concerning the semiconductor shortage and and their ability to.
Ah you know a pushout of products is this going to affect the year guys as the supply.
At all thanks.
Sure. So I think we expect inventory of sorry supply chain to improve only in the sense that it stabilizes in the and this continues to be disruptive. So it was difficult for US is if disruptions are less predictive, but we're getting pretty good at predicting where the disruptions on our supply chain team and lots of people supporting our on.
Operations are doing a fantastic job dealing with the reality that we predict will persist through probably April or may next year, but that's okay, because with the incremental inventory to take us through the heavy sales growth period that we have typically now in the second and third quarter of the warm weather months, where we especially of a lot of mobility and seating products.
And getting ready for the end of the year that's the.
That's a great program. So I think that'll be okay, do we see new shortages in the second half, we see new shortages every day, but we end up resolving them within a few days and then there's the next kind of thing that happens and it's a new.
The way of working.
As far as semiconductor shortages, we have like everyone challenges with active and passive electronic components, but nothing of the order that you read about and.
None of the automobile industry or something which has a heavy impact for long durations on big product families for us. It's just another component that we deal with the in the short term.
Shouldn't be any big impacts relative to semiconductors.
Okay, Great. That's Super helpful. And then maybe if I could just squeezing in 1 more.
Concerning long term organic revenue growth.
At this point.
You guys feel confident that you can sustain low to mid single digit growth in net in 'twenty, 2 and beyond that.
Well, we really haven't gotten into long term guidance, but I'd say the market certainly supports that kind of gross we have great products that allow us to engage with the sales team with sales teams and customers a lot of interest with customers, we're doing things to do.
Friction out of our of interactions with customers with new IP systems and customer self service. So we definitely think we can support at or above market growth rates with revenue on the long term, but don't take that of specific guidance, yet we'll be out with specific guidance.
I think around the end of the year.
Sure. Thanks, you guys much appreciate it.
Okay. Thanks Joseph.
Just as a reminder, ladies and gentlemen that it is star 1 if you do wish to ask a question on today's call. We'll now move on to our next question on the phone which comes from Matthew machines from Keybanc. Please go ahead. Your line is open.
Hey, guys. This is Brad that's been on today from Matt. Thanks, So much for taking the question I just wanted to follow up on their own margins.
That's gone.
Let's say guidance on margins you mentioned the 80% on the gross margin side was attributable to the supply chain disruptions. So just wanted to get a little bit of a sense of what's assumed in your guidance around the continued impact into the second half how much some of the interactions can offset the factors and then just as a follow up what's the what's a reasonable grow.
Margin range to assume for the second half that could enable you to achieve the full year EBITDA guidance.
Yes.
I don't know if we'll.
Kathy will give specific guidance on gross margin, but we can work towards that youre on the sensor.
The Big thing, we've got to work on of the factories the scene with even just a little bit more visibility of what the day to day receipts of products and components are going to be.
So that our operations can start the day with the staffing for the planned production for the day.
There was a great article on the Wall Street Journal, maybe a month ago that talked about of the company of the different industry, that's doing probably what a lot of industrial companies arent instead of starting the day with the plan that you've had for a long time you start a day with an operations plan based on the parts of that have been received of our available that day, it's really kind of the backwards way of producing which lots of companies from lots of industries or.
Are doing to make success half of these days so for us, it's getting just a little bit more visibility, having a little bit more inventories like we purchased so that we can get back to more normal orderly production planning and production execution day to day, that's gonna be the big driver to reduce the operating variances that are where the big impact on on gross margin this quarter.
What we'll see at the maybe it was previously answered you know the.
The balance of the year with strong sales growth is going to give us good leverage in operations plus backing off on these variances with better planning and continued good mix with new products from customer engagements with the.
The right products are in the right margin mix going through our factories is really going to be the recipe for the balance of the year. We continue to expect a component and commodity prices to be kind of in the neighborhood, where they where they are now. So we don't expect a lot of change there we see those being stabilized and I think that leads us to the end of the year plan that builds up the guidance.
I don't know if you want to add to that.
Yeah, the reference to the 80% really isn't in relation to the.
The increased costs that we saw that we do believe are temporary in nature and just managing the efficiency of our operations given timing of on inventory.
On the supply chain would arrive at our various locations and so we were very focused on reducing that negative impact from the second half of the year and we should see an improvement over where we were on in the second quarter, but to me. That's the point you know obviously with revenue growth will come leverage of our cost structure.
And as well gross in the mobility and see the inside of the house, we should see a favorable sales mix on the second half of the year as well.
Alright, I appreciate that and then 1 more from me could you just provide a little bit more color on how much of the expected revenue growth. This year is being driven by the new product launches and.
Following up are there any specific products you'd call out as meaningful contributors to decent growth and and then they kind of outlook.
Yeah.
Tough to say, we do have a good.
Proportion of revenue that is with new products, we don't call that out specifically, it's so different by country and market based on what products are launched in the countries and how reimbursement is very different by markets, which highlights certain products over others I will say, we're looking forward to the respiratory products, helping buoy respiratory sales as the pandemic demand wanes over time.
That'll happen at some point, we're not seeing too much of that yet we have a very deep.
Product line in mobility and seating with power add on there that are doing really well new power wheelchairs, and recently launched power wheelchairs that have great. Great features manual wheelchairs, our mobility and seating segment.
<unk> seen great customer engagement globally, all of those products are rolling out globally on the lifestyles product, we have a huge catalog of new products too numerous to mention in their specific by markets, but we think generally our lifestyles products should continue to have good growth. So when you look at it really every product category is gonna be sustained by new product of.
Element on launches.
In the last 18 months and we have the sustained pipeline on that same 2% of sales going into R&D of incredibly productive R&D team globally to keep that going.
I appreciate it thank you.
Okay. Thank you.
Yeah.
Just the confirmed or no further questions queued over the phone at this time, so I would like to turn the call back over to our speakers of hosts for any additional or closing remarks.
Yes, Thank you Simon and thanks to everyone, who tuned in this morning for our call and Q&A, Kathy Lois and I are available for any follow up questions, which are lowest would be happy to coordinate.
Thanks and have a good day.
Thank you very much sort of speakers, ladies and gentlemen. This does conclude today's call. Thank you very much for your participation you may now disconnect.
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