Q3 2021 Invacare Corp Earnings Call
Great.
[music].
Hello, and thank you for joining today's call we will beginning beginning shortly thank you.
[music].
Sure.
[music].
Thank you.
[music].
Good morning, ladies and gentlemen, and thank you for standing by welcome to the Invacare third quarter 2021 conference call and webcast. After the management IV will be open to it.
The call to your questions investors or analysts interested in asking questions will need to dial in as questions cannot be submitted via the webcast.
That's part of the call all phone lines have been placed on mute. This conference is being recorded Thursday October 28, 2021, I will now turn the call over to Lois Lee of <unk>.
In the Cat director of Treasury, Investor Relations and corporate communications. Thank you.
Thank you joining me on today's call from Invacare are Matt Monaghan, Chairman, President and Chief Executive Officer, and Kathy Monahan, Senior Vice President and Chief Financial Officer Today, we will be reviewing our third quarter 2021 financial results and providing investors with an update on our full year.
Our outlook to help investors follow along you've created slides to accompany this webcast.
Those dialing in you can find a link to our webcast slide presentation at global Dot Invacare Dot Com Slash Investor Relations.
Information can be found in our SEC filings.
Before Matt begins I'd like to note that during today's call. We may make forward looking statements about the company that by their nature address matters that are uncertain.
Actual future results may differ materially from those expressed in our statements today due to various uncertainties and I refer you to the cautionary statements included on the second page of our webcast live I don't know third quarter earnings release.
An explanation of the items discussed on past calls that are considered non-GAAP financial information such as constant currency net sales constant currency SG&A free cash flow and adjusted.
Please see the notes in the appendix of the webcast slides and in the related reconciliations in the slides and in the earnings release posted on our website I will now turn the call over to Matt.
Thank you Laura and good morning, starting on slide three I'm pleased to announce that we achieved constant currency net sales growth of two 9% with increases in all key product categories. Despite continuing global supply chain challenges.
Revenue growth was led by solid performance in Europe, and Asia Pacific and North America realized growth in mobility, and seating and respiratory products compared with strong new order intake, we continued to experience higher than typical backlog levels across all product categories compared to pre pandemic levels, which is expected to drive sequential sales growth in the fourth quarter is always where we are.
Looking diligently to maximize our throughput and improve our service levels to better support our customers needs.
Turning to gross profit, we benefited from sales growth and favorable sales mix with higher gross profit on lower percentage of sales.
Gross margin was impacted by previously disclosed changes to input costs ahead of offsetting pricing Joe We view these challenges as transitory and during the quarter, we undertook actions to address them, which I'll discuss more on the next slide.
Important existing levels of demand and expected sales growth free cash flow usage increase is a result of greater investment in working capital, specifically inventory, which Kathy will discuss later overall sales.
Sales results were inline with expectations with solid revenue growth year over year in all major product categories.
Turning to slide four we can.
<unk> finished the year on a strong note, while we anticipate global supply chain challenges to persist in the near term. The disruptions are generally more predictable and the actions we've taken should mitigate some of the remaining uncertainty. In addition, our customers continue to demonstrate strong demand for our products, even though access to health care who's not fully rebounded from pre pandemic levels.
Mentioned previously, we're taking action to mitigate the supply chain challenges, which impacted sales and gross margin. For example, we've expanded our network of freight providers for more time in shipments we found ways to improve staffing levels to increase throughput and we have further increased inventory to mitigate supply chain uncertainty. In addition, we continue to adjust price and freight charges were applicable to offer.
The substantially higher material and logistics costs, we continued to experience.
Early in the fourth quarter, we're seeing positive signs that our actions should be effective.
As we work through these near term challenges. We're also marching forward with the next phase of our it modernization initiatives in North America I'm pleased to share that the program took a big step forward. Following the launch of our new ecommerce platform, which has features to enhance our customers' experience and to improve the ease of doing business with invacare in 2022, we expect to launch the next phase in North America.
<unk> will focus on driving operational efficiencies lowering costs and improving working capital management turning.
Turning to sales demand remained strong and we continue to see solid order rates in all regions and product categories. As we grow revenue. Our order backlog has also continued to increase in the third quarter product availability and our targeted inventory strategy were key factors in driving strong sales growth in both Europe and Asia Pacific specific material shortages limited.
Some of lifestyle product availability in North America balancing overall results all things taken together, we expect fourth quarter will improve in all key metrics with sequential constant currency net sales growth driving substantially higher profitability and free cash flow. We believe the progress we have made sets us up for a strong finish to the year and continued improvement in 2022.
I'll now turn the call over to Kathy who will provide a detailed financial summary.
Thanks, Matt.
Turning to slide six reported net sales increased five 8% in constant currency net sales increased two 9% in line with our.
And driven by growth in all key product categories sales growth was the result of continued strong order intake and the conversion of a portion of the excess backlog from the second quarter of 2021 gross profit increased $300000 and benefited from net sales growth and favorable sales mix. However, gross profit as a percentage of <unk>.
<unk> declined 140 basis points.
As previously discussed gross margin continued to be impacted by global supply chain related challenges and labor shortages, resulting in elevated manufacturing costs for the quarter.
We expect the many actions we have undertaken to mitigate these higher costs to become effective and benefit margins in the fourth quarter of 'twenty one.
Constant currency SG&A expense decreased primarily related to lower employee related costs.
Including stock compensation expense to drive profitability, we continue to align commercial expenses with net sales growth and monitor all discretionary spending.
Operating loss, excluding the goodwill impairment charge was $3 $8 million, an improvement of $900000 from the third quarter of 2020.
This improvement was driven by sales growth and lower restructuring costs.
In the third quarter of 'twenty, one the company recorded a one time noncash charge related to an impairment for goodwill of $28 $6 million. The company's reporting units for goodwill assessment, North America, HMA and the institutional products group merged into one reporting unit as a result of changes to the opera.
Rating structure of the North America business and the implementation of a new enterprise resource planning system at the end of the quarter. This change was considered a triggering event and required the company to perform an interim goodwill impairment test.
Just the EBITDA was $18 $1 million, an increase of $8 3 million, primarily attributable to $10 1 million of cares Act benefit and net sales growth, partially offset by higher supply chain costs. Excluding the cares act benefit adjusted EBITDA for the third quarter was $8 million.
Note that the cares act benefit was and is not considered in the Companys full year 2021 guidance for adjusted EBITDA free cash flow usage for the quarter reflects an investment in working capital, including $10 1 million of additional inventory as compared to the second quarter of 'twenty one as previously disclosed the company increased.
Inventory levels to mitigate supply chain disruptions and to prepare for expected sequential sales growth in the fourth quarter, we anticipate that inventory levels and accounts receivable will remain elevated at year end and convert to cash over the next few quarters.
Turning to slide seven reported net sales in all key product lines improved despite supply chain challenges, which continued to limit the conversion of orders to revenue.
Maybe to see strong demand in all product categories and in all regions, which resulted in excess order backlog that was higher than cyclical compared to pre pandemic levels and similar to the end of the second quarter. We are working diligently to reduce the excess backlog and returned our service levels back to more normal lead times.
On a consolidated basis constant currency net sales of lifestyle products grew five 2%.
By exceptionally strong sales of manual wheelchairs and hygiene products in Europe.
<unk> products also achieved constant currency net sales growth in North America and Asia Pacific. In addition, we continue to see elevated demand for respiratory products globally related to the planned stomach turning to slide eight Europe constant currency net sales increased four 5% driven by more than 17%.
Rent growth in lifestyle products as a result of heightened demand for products that were readily available demonstrating the importance of our targeted inventory strategy, while respiratory demand remains strong fulfilling that demand has been hindered by the availability of components to complete orders gross profit increased $3 $2 million.
Gross margin increased 20 basis points, driven by net sales growth and favorable product mix, partially offset by higher freight costs and supply chain disruption as Matt mentioned, we have taken actions to mitigate the impact of these additional costs and expect to see benefits starting in the fourth quarter operating income benefited from SG&A.
Leverage and increased by $2 million driven by higher gross profit from revenue growth turning to slide nine North America constant currency net sales decreased slightly a 7% increase in mobility and seating and an over 6% increase in respiratory products was more than offset by lower sales of lifestyle products.
Higher sales of mobility and seating products was driven by power wheelchairs and power add on products.
The lifestyle product category was impacted by supply chain issues limiting the availability of materials and components in particular for bad. In addition access to institutional and government customers remains limited compared to pre pandemic levels that said overall, we continue to see increase.
And all products and strong order intake.
Gross profit declined by $2 $8 million and gross margin declined 80 basis points due to unfavorable operating variances as a result of supply chain challenges, partially offset by favorable product mix.
Operating loss of $1 $5 million was impacted by reduced gross profit and higher SG&A expense. The latter of which came primarily as a result of spending supporting revenue growth.
As noted the goodwill impairment charge previously discussed is not included in the operating results for North America, turning to slide 10 constant currency net sales in the Asia Pacific region increased 17% driven by significantly higher sales of respiratory products and an over 15% increase in mobility and seating product sales rebounded.
In the Asia Pacific region, as a result of receiving products delayed from the second quarter, which had been impacted by global shipping issues operating loss improved by $2 $2 million, driven primarily by lower corporate SG&A expense, including reduced stock compensation expense. This was partially offset by lower profit.
Ability in the Asia Pacific region impacted by higher material and freight costs as well as higher SG&A expense.
Moving to slide 11 as of September 32021, the company had total debt of $318 million, excluding financing and operating lease obligations and $74 million of cash on the balance sheet lower cash balances are primarily related to higher levels of working capital, which we anticipate will reach.
Main elevated through the end of the year.
Part of the company's strategy to mitigate supply chain challenges and to prepare for expected sales growth. The company added $10 1 million of incremental inventory in the quarter, which is expected to convert to cash over the next few quarters in the third quarter of 2021. The company received forgiveness of its cares act that obligation of $10 one.
A principal and accrued interest turning to slide 12, we are reaffirming our full year guidance for 2021, consisting of constant currency net sales growth in the range of minus 1% to positive 2%.
Adjusted EBITDA in the range of $30 million to $37 million and free cash flow usage in the range of $10 million to $20 million.
As previously mentioned full year adjusted EBITDA guidance does not include the cares Act benefit recognized in the third quarter for the fourth quarter. The company anticipates, a sequential improvement in constant currency net sales growth driven by continued strong order intake and the conversion of a portion of its elevated backlog into revenue we expect.
The actions, we have taken to support sales growth and manage near term supply chain challenges will drive sales growth favorable sales mix and expand gross margin.
As a result, adjusted EBITDA and free cash flow are expected to improve materially I will now turn the call back over to Matt.
Turning to slide 13, we are pleased that our third quarter results reflect constant currency net sales growth. We anticipate the actions we have taken will enable us to finish the year on a strong note and feel confident that we will achieve our full year guidance. Looking further ahead I'm confident that the durable benefits from our recent actions.
Allow us to drive sustainable profitable growth in 2022 and beyond. Thank you for your continued support of Invacare and for taking time for this mornings call. We will now take questions.
Thank you if you would like to ask a question. Please press star followed by one can you kind of think he pack and if you change your mind. Please press star one if I may please thank you.
Our first question comes in from above and Lubbock of White.
Plane from C. J J S Securities.
Your line is open. Please go ahead.
Good morning, Thanks for taking my questions.
Morning Blake.
Wanted to start with North America mobility, and seating, obviously, some nice growth year over year, but still down versus kind of 2019 levels.
Wanted to get a sense, where do you think the market is versus 2019 and.
You guys have a whole new lineup and.
Out there since the last few years, so what does it take to.
Kind of win share and grow North American seating and mobility over prior levels looking ahead.
I think the market is still working its way back to normalcy to pre pandemic levels are quite there yet, but I think new products are driving a lot of interest in and sales and growth for us.
I think it's going to take us a little bit longer to get there than we had originally anticipated just based on health care access.
Weighted market is growing but.
<unk> very steady interest increased demand and we like the way the new products are being received in the market.
Got it okay, great and then obviously you discussed the gross margin was impacted in the quarter by supply chain.
Materials and labor.
And.
I guess I'm trying to get a sense of if you reported you know call it 27% gross margin this quarter.
Given the new product lineup that you have a better.
Better margin products et cetera, absent these headwinds where do you think the gross margin.
For this kind of.
Sales would be what does that kind of budget I'm trying to get a sense of where you are on your progression of gross margin growth absent obviously, all the noise that's out there.
Yeah, that'd be something Kathy we will have contributed to your answer here I think right now we're trying to be very surgical about adjustments to price and.
Surcharges that or whatever to offset very specific changes in material cost or labor or free.
Free so that we're competitive confer with our customer partners.
Theres always a little bit of lag.
We incur costs with them, we have to kind of apply those.
To any price changes that we need to have going forward and there's always a little bit of delay for that happening.
And that's where the margin is going to lag a little bit to the extent of prices or costs are changing it did.
At a rapid rate, but I know Cathy Peter the way to.
Estimate on the answer for Bob rout.
Yeah.
So when you take a look at the gross margin obviously in the quarter, we were down versus last year about 140 basis points on the majority of that the vast majority of that at a higher cost inputs on the materials side of the house and the freight costs.
The actions that we've taken including pricing actions and surcharges.
We did not see a benefit of that in the third quarter, just given the timing of notification to the.
The customers for that to come through so from that perspective, we haven't seen that benefit and then the actions that we've taken we believe will mitigate.
Cost as we go forward, but that'll be a benefit that we'll see in the fourth quarter that is baked into the guidance for the fourth quarter to see a ramp up in margins with that benefit of pricing actions that we haven't seen in the third quarter.
Got it okay, great and then last one for me I'll jump back in queue.
You talked about it a little bit here.
The price increases I think you've put in place in September 1st and there's been a lag to go through there how have they been received in and have your competitors.
No raise prices yet because obviously, they're facing the same headwinds that you are but you know.
The timing could be different so maybe talk about.
How the prices have been received and the competitive dynamic of pricing right now in the industries you Sir.
I think you really.
The price increase but I think when.
For customers in the marketplace around the world people look at it it's everywhere. It's in the markets that we serve in the markets that we serve so I think it's understandable, it's up to us to be judicious in how we're doing that.
Kind of differs by product end market and in some cases contracts, which fully permitted price adjustments under certain circumstances, but we think generally the entire marketplaces absorbing the consequences of labor costs, the availability of material and I think so far are pretty competitive.
Got it okay. Thanks very much.
Because you talked about.
Our next question comes in from Matt Mission of Keybanc. Max Your line is open. Please go ahead with your question. Thank you.
Hey, guys. This is Brett theres been on today from Matt Thanks, very much for taking the question.
Turning off just hoping you could provide a little bit more color on where youre seeing strength in the backlog.
From a geographic or product area standpoint, and then <unk>.
Eric driving your level of confidence that the strength can help drive the sequential sales improvement currently implied in the fourth.
Yes.
The other way I'm, not sure where we see any weakness in demand Brit.
Respiratory continues to be very strong for us I think as we've talked about previously the consequences of the pandemic is still driving a lot of long term demand for oxygen concentration lifestyles, we have new products in the major markets and demand although.
We still don't see long term care facilities back at pre pandemic levels of I can see your openness, we still see strong demand at lifestyle.
Challenge, we had this quarter was a little bit of difficulty during the quarter getting steel for some of our bed products. So that dampen lifestyles results from North America, but otherwise demand is good.
And then mobility TV continues to be strong everywhere.
Great new product lineup.
Continuing build back of the overall market demand.
I think it's good everywhere product and geography.
And I think I guess, the second part of your question about confidence driving sequential growth.
The level of backlog as it is.
The result of the math of how much new order.
What's the rate of new order entry and what's the rate of filling orders and output and it's great to see.
Strong increased demand reflected in the backlog, while we're still growing revenue, which means higher output.
More input even beyond fare levels about what we're getting so we're feeling pretty good about where the future looks.
Alright, Great and then I was just wondering if you could walk us through how youre thinking about some of the moving pieces around free cash flow into the fourth quarter and what you would need to see there to achieve full year guidance of $10 million to $20 million of usage.
Yeah.
You won't give it to COVID-19.
So for the fourth quarter, we've obviously anticipated.
Significant.
And EBITDA from Q3 to Q4.
The EBITDA driver is revenue growth our revenue growth.
Not only from first coming in the door, but also.
Against the background that we do have on hand, we have a significant amount of inventory on our balance sheet as of the end of September.
And so we do believe that that will convert to revenue and then the cash in the fourth quarter. So we would anticipate.
Actually in working capital coming into the fourth quarter. So it really is you know the dry the two drivers from a cash flow perspective, or the uptick in EBITDA driven by revenue.
We are anticipating margin improvement primarily.
Primarily due to the pricing actions that we've taken in the third quarter that will come through from an EBITDA perspective, and then really it's the working capital.
To be able to convert that inventory into revenue and then into cash.
We still anticipate that we will have higher levels of inventory on the balance sheet.
At the end of 'twenty, one versus 'twenty.
But there should be a significant amount, which will turn in the fourth quarter into Robyn.
Alright, I appreciate that detail battery box and then last one from me just looking bigger picture.
Some of these macro headwinds are hopefully beginning to subside and what type of visibility do you guys now have some of the potential longer term targets around EBITDA.
Whether it's a run rate or an annual number or a specific revenue growth targets and the timeline of when you might be able to provide those to investors. Thank you very much for taking the questions.
Sure Brett.
I think the secret to that it's gonna be when changes become more predictable, which I think is already starting to happen in 2021 has been in Europe.
Accelerating changes through the summertime before we'll see what happens to free heading into <unk>.
Late January early February Chinese new year is typically our country point for <unk>.
Ocean shipping.
But I think as soon as we see the rate of change of input costs, stabilizing and including labor availability will be able to project something longer term, we've gotten into a little bit of a tradition of talking more long range. When we come out with fourth quarter earnings. So we'll take a look at it at a time early 2022.
I appreciate the question.
Yeah.
The next question on the line comes from Mike Matson of Nathan Mike. Your line is open. Please go ahead. Thank you.
Hi, This is Joseph on for Mike I appreciate it.
Our questions.
The first one.
Good morning morning.
Around employee retention.
I guess, what steps have you guys taken to improve that rate and how confident are you that that turnover will decline in the future.
Yes, we have a great team of associates and I think you know this is the era of everybody's got to be the best employer that they can be because employees do have choices.
Great competitive rates good work environment benefits pathway forward to expand what people do in the company.
115.
Just compare the availability of components to be able to to ship and fulfill those orders.
Sure. Okay. That's helpful. That's that's all for me I appreciate it.
Alright, Thanks Joseph.
As a reminder, if he would like to ask a question. Please press stuff in it by one you kind of think keypad and then if you change your mind. Please press star funded by <unk>.
We currently have no further questions registered on the line so I'm back to the management team.
Okay. Thank you thanks, everybody for tuning in this morning, Cathy rosemeyer available pretty follow up questions, which recorded too mostly thanks very much have a good day.
Thank you very much for joining today you may now disconnect your lines.
[music] alright.