Q4 2021 Invacare Corp Earnings Call
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Monaghan, Chairman, President and Chief Executive Officer, and Kathy Monahan, Senior Vice President and Chief Financial Officer.
Today, we will be reviewing our fourth quarter and full year 2021 financial results and providing investors with an update on our business.
To help investors follow along we have created slides to accompany this webcast.
For those dialing in you can find a link to our webcast slide presentation that we will refer to during today's call at global that Invacare Dot Com Slash Investor desk relations further 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 slides and in our fourth quarter.
The earnings release.
For an explanation of those items considered to be non-GAAP financial information will be discussed on today's call such as constant currency net sales constant currency SG&A free cash flow adjusted EBITDA and adjusted net loss. Please see the notes in the appendix of our webcast slides and in the related reconciliations in the earnings release posted on our website.
I will now turn the call over to Matt Monaghan.
Thank you Laura and good morning.
Beginning on slide three I would like to thank our associates, who continue to work diligently to navigate the challenges caused by the pandemic where continued dedication to our mission.
Third.
I'm proud of how the team finished the year building on a strong note that achieving constant currency net sales growth in the fourth quarter compared to prior year.
Driving this improvement was mobility and seating products, which delivered a double digit increase in reported net sales in the quarter with particular strength in Europe .
Shared with strong new order intake excess backlogs remains higher than was typical before COVID-19 .
In addition, we realized sequential improvement in gross margin and adjusted EBITDA, primarily from favorable product mix and the benefit of price adjustments to offset rising costs.
Coupled with lower SG&A expenses sequential profitability and free cash flow improved materially.
Overall, the fourth quarter improvement reflects strong demand and the result of effective actions.
Said physicians in the care for long term success, we must continue to improve operating performance optimize our portfolio for the current operating environment and continue to improve working capital and the balance sheet.
On slide four we note some of the initiatives to help us pivot to a more profitable and competitive business model.
To that end, we've already taken steps such as the combination of our Europe and Asia Pacific businesses under one leader expected to create scale based cost savings and synergies starting in 2022.
This year, we expect sustained customer demand and persistent now familiar supply chain challenges.
As a result, we expect to make business improvements, including.
Optimizing our product line for efficiency and current supply chain environment shifts.
Shifting where and how we manufacture assemble and distribute products, especially considering freight and logistics trends that have emerged to COVID-19 .
Aligning staff levels in house staff are organized to be streamlined and responses and.
And improving working capital to enhance free cash flow and strengthen the balance sheet as a result of actions aligned to current supply chain conditions.
While first quarter 2022 is expected to be our low point. This year. Following the typical seasonal pattern of lower sequential performance. We anticipate these actions will drive sequential quarterly improvements for the final three quarters of the year with the majority of benefits expected to occur in the second half of the year.
As a result, we anticipate improved full year adjusted EBITDA with North America expected to return to profitability.
We anticipate sequential quarterly revenue growth after the first quarter of 2022 and expect as part of the product portfolio with you to see positive mix shifts and better velocity as a result of selections that fit our operating model.
Importantly, anticipated restructuring actions will drive improvements in gross margin adjusted EBITDA and free cash flow over the full year to create long term shareholder value.
After two years of external changes that are greatly impacted our business. We have a clearer view of new patterns likely to remain after COVID-19 . These.
These include changes in employment and labor availability transportation routes cost and duration higher material cost and scarcity and longer supply times. The 2022, we plan to make fundamental changes for stability customer engagement and improved financial performance that will make us more competitive and be a better partner for our customers.
I'll now turn the call over to Kathy who will provide a detailed financial summary.
Thanks, Matt turning to slide six we finished 2021 with strong performance as both reported and constant currency net sales in the fourth quarter increased by 1%.
Profit was unfavorable to the prior year as the benefit of pricing actions implemented during the quarter lag the impact of higher material and freight costs.
However, gross margin improved sequentially driven by the benefit of pricing actions and favorable product mix, partially offset by higher input costs.
Importantly, operating income improved by $8 6 million and adjusted EBITDA increased by $3 6 million.
Driven by lower SG&A expense due to employment costs, including stock compensation.
Free cash flow improved by $3 $6 million driven by lower working capital with continued elevated inventory levels higher than typical.
Turning to slide seven and Europe fourth quarter reported and constant currency net sales increased seven 1% compared to the prior year.
Sequentially revenue growth of eight 7% was driven by increases in all key product categories. As a result of the easing of health care restrictions and the benefit of pricing actions to offset higher input costs.
Operating income more than doubled improving by $9 3 million compared to the prior year as a result of gross profit improvement and reduced SG&A expense.
Turning to slide eight in North America fourth quarter reported and constant currency net sales both declined by approximately 7%.
Constant currency net sales growth of four 3% in mobility and seating products was more than offset by declines in lifestyle products.
As a result of the inefficiencies and the controlled deployment of our latest ERP expansion in North America in the quarter revenues were temporarily impacted.
The system was fully operational by quarter end with further efficiencies expected.
As the system matures and supports more customers, we expect to recognize benefits that will continue improving customer engagement and financial performance.
Gross profit margin decreased as higher input costs supply chain disruptions as part shortages led to unfavorable operating variances.
In addition, we incurred higher operating costs to support the early activation of the latest ERP software.
We realized a small benefit from pricing actions taken during the quarter, even though leighton orders were fulfilled at previously quoted rates.
Turning to slide nine Asia Pacific fourth quarter reported and constant currency net sales decreased with growth in respiratory products more than offset by declines in mobility and seating products.
Largely due to freight delays for inbound finished goods.
Operating loss for all other which includes the Asia Pacific business and unallocated corporate costs increased compared to the prior year.
This was due to lower profitability in the Asia Pacific business attributable to lower revenue.
Fully offset by lower SG&A expense related to employment and corporate stock compensation.
Moving to slide 10 as of December 31, 2021, the company had approximately $316 million of total debt and $84 million of cash on its balance sheet. In 2021, we took steps to improve our financial flexibility with the issuance of new convertible notes, which allowed us to retire nearly all of our 2022.
Vertical notes and extended debt maturity to 2026.
As always we continue to look for ways to improve our financial results and to manage the balance sheet.
In 2022, we expect to reduce working capital from the recent higher balances caused by Covid.
Our reaction and our global supply chain disruptions.
We are planning to have transformative restructuring investments, which we expect to fund throughout the year and we may further optimize our balance sheet to support business growth.
Turning to slide 11, and 2022, the company has taken strategic actions, which by the end of the year will position invacare for durable long term success.
These actions include organizational and supply chain changes and a narrowing of the product portfolio for those items, which no longer meet customer or business needs driving improved profitability.
As a result, the company anticipates full year 2022, adjusted EBITDA and free cash flow to improve compared to the prior year.
And the first quarter 2022, adjusted EBITDA to be negative with sequential quarterly improvements for the balance of the year as the expected profit improvement actions take effect.
For clarity the adjusted EBITDA guidance is based on 2021 actual performance, excluding the cares Act benefit.
In 2022, SG&A expense is expected to be higher in the first half of the year based on the timing of the restructuring actions.
Foreign exchange is also anticipated to be a headwind due to changes in foreign exchange rates compared to 2021.
Finally free cash flow is expected to be variable in the quarters, but in line with historic seasonality, especially in the first half as the company funds customer rebates earned from 2021.
However, the company expects a sequential improvement in free cash flow for the final three quarters of the year aligned with the expected improvement in adjusted EBITDA I will now turn the call back over to Matt.
Thanks Kathy.
Turning to slide 12, where figuratively standing on high ground able to look back at the impacts to our business over the last two years and now look ahead to make reasonable assumptions about the foreseeable future. The world is certainly still dynamic and business conditions will continue to change we have enough perspective, though to take some big steps that will make us more successful.
By the end of 2022.
Our markets continue to be healthy we appreciate all of the change our customers and end users have dealt with too.
Thanks to all our associates and the broader community that supported the cure.
We're looking forward to a bright future.
We'll now take questions Judy.
Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad.
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We take our first question from Bob <unk> from CJS Securities. Please go ahead.
Good morning, Thanks for taking my questions.
Hello, Bob.
Hi, I wanted to start you just discussed optimizing and narrowing the product portfolio, maybe you could expand a little upon that maybe what segments and how much revenue might you walk away from I'm, assuming this means higher gross margins.
Italy, but maybe lower gross profit initially and could enable lower SG&A down the road so.
Help me understand if that's right, but kind of what segments. How much revenue is this affecting and how should we how should we look at it from.
A modeling standpoint going forward.
Maybe Katherine I can both answer that.
A high level perspective, it's not whole segments, it's really looking at the vast variety.
That is offered in all of our segments practically around the world and just looking at the challenges that provide that come from having that vast array of options and futures in the supply chain environment. The easy hypothetical example, if you have 23 colors of any step everything.
Maybe 'twenty, two or 12 or something else is easier when you multiply that by sizes and all sorts of features and all custom and semi custom products. That's one of the things that's caused our working capital to believe so much especially on inventory.
And not be able to deal with the challenges of the current supply chain environment is effectively if you'd like to so thats a big thing.
Actually makes us a better service provider to customers lower working capital increases the velocity of things moving through our facilities with effectively no change to.
What customers are able to to get from us.
Maybe hypothetically going from 23 colors to 'twenty color somebody loses out on.
Some fringe variety, but essentially it's picking up.
<unk>.
Offering the breadth of the offering.
Yes, I would add to that from a modeling.
From a modeling perspective as well.
<unk> will decline because of the actions that we would take with product elimination of discontinuation, the offset to that would be the pricing.
<unk> that we have put in place and so while revenue could be flat, maybe down slightly there will be puts and takes.
On both pricing as well as the discontinuation.
Okay got it and then.
Can you discuss.
Incremental and additional transformative.
Structuring could you talk about the overall scope and size and what geographies will just be eliminating from manufacturing facilities or how should we think about the.
Cost reductions and where will they be coming.
Yeah again, maybe a two part answer.
Kathy too if you imagine the map that we operate in our network of sales offices manufacturing facilities service centers and distribution locations that map was created pre COVID-19 pre current constraints of supply.
Current routes of of trade, which are not at all what they were two years ago or even longer ago. So the fundamental principles. This year are looking at how does inventory moved most easily it's different ports of entry different nodes of distribution network, where we accumulate inventory. So we're close to customers and can be really affect.
<unk> and avoiding.
The passage that are either unpredictable or too expensive or not always available.
And as Kathy mentioned in the prepared.
Remarks. These examples to talk about Asia Pacific, where when Youre going to certain smaller countries that we serve there just points of the calendar lately where <unk>.
<unk> is not easily available and we've got a revised how we operate our physical infrastructure, but it's reality and go forward and when we do that and look at narrowing the product portfolio, so that that variety.
So smoothly and the current conditions when the recipe is successful.
And so that we're in a cafe.
Finalized finalize actions related to restructuring.
As we solidify those obviously there will be costs that the company will incur.
As we go through 2022, but we're expecting the benefits.
Start being very visible in the second half of the year.
Well I think.
The other way to answer that Bob is that they are in the plan, we see those internally as making 2022 was affected reported today with our outlook.
Okay, Great and then last one for me I'll jump back in queue.
Could you give us an update on the competitive environment, obviously a lot of the.
Kind of headwinds.
Vast majority of that issue.
They're not unique to invacare right, there's the supply chain of raw materials and everything else.
How are volumes trending.
And.
How is the industry overall doing how is your share trending I guess would be the question. How is the industry overall kind of handling the same impact some headwinds.
Well nobody likes inflation, but I guess, what's common is it more or less effects, everyone relatively equally now maybe.
One company in any industry is manufacturing in a location that better or worse relative to freight or labor availability or cost in another then there can be some arbitrage there, but I would say generally the March.
That we serve health care access is recovering maybe long term care facilities aren't fully back to pre Covid census, but just general access everywhere and.
I think.
Customers and suppliers, who we compete with to exchange value in this industry are relatively working well together I think everyone's more or less in the same situation.
And to deal with a very dynamic environment and probably the most dynamic than we have right now is just cost and availability of components and freight and Thats whats really for everyone.
Got it okay, great I'll jump back in queue. Thank you.
Thanks, Bob.
We take our next question from Matthew <unk> from Keybanc. Please go ahead.
Hey, good morning, guys and thank you for taking the questions.
I just wanted to start off with <unk> sales.
Sequentially down, but how should we think about them compared to kind of <unk> 21 last year.
Because there's a big delta between where those were last year in the first quarter and where you ended.
The fourth quarter.
Okay.
Yes, Amit.
Normally the first quarter is our lowest quarter from a revenue perspective.
Would anticipate the same seasonality that we would normally see in a year. So that's the first quarter will be the lowest.
We would have obviously benefits from pricing actions.
That's been taken that as Matt mentioned earlier on this call. We also will see.
Drop because of product elimination of product discontinuation.
That will impact Q1, probably more towards Q2, but there will be some impact on that as well, but Q1 <unk>.
Actually be our lowest quarter for revenues and we expect that same seasonality in 2022.
Because it sounds like if you take with the moving pieces somewhere similar to where the first quarter of 'twenty. One was last year is.
Is that is that a fair characterization.
If that could be a reasonable assumption.
Okay.
And then can you talk a little more about the ERP implementation.
The fourth quarter and kind of where are you now with it.
Yes, the ERP implementation in the next wave of it really brought online availability of customers to order and have orders fulfilled for non custom configured configured products.
Starting in October and it's just as any company would do starting up there is to kind of normal throttling of orders and output. So you can check all the technicalities make sure invoicing is variety than shipments arrived and things like that and that took two or three weeks to make sure that we were ramping up the velocity.
Appropriately the kind of a.
Late October normal November and a little bit higher December output, but December outputs wasn't enough to offset the first couple of weeks of throttle output.
October as we were going live so that was really impact all the functionality is online now and throughput is working so we we expect efficiencies to grow from here already have more customers using the system than the previous system. So we're encouraged by that and I think a lot of new functionality is helping customers interact with us.
More easily.
Right.
What the bright spot.
In the fourth quarter for me was the profitability in Europe can you just help me understand.
What drove that and how much of that is typical seasonality versus some of the actions that you've kind of implemented to improve that.
Kathy could you just do that.
Sure.
Yes, it definitely had nice profitability in the fourth quarter a portion of that are sustained SG&A cost savings that had been implemented previously and we've seen the benefit of that.
In our financial results, we also had nice growth.
<unk> growth, both sequentially as well as year over year market seem to open.
More in relation when you compare it to 2020, so because of the additional volume as well there were.
Manufacturing efficiencies within the operation side of the house, which definitely impacted and improved their margins versus historically, where we were at earlier in the year as well.
I continue to be challenged by supply chain issues, just like the rest of the businesses as well, but definitely a nice improvement in the fourth quarter and really driven by the revenue growth as well as expanding our margin, but that nice cost savings that have been implemented previously that we can now take tonnage maybe ask Janet.
Okay.
And then any update on the FDA warning letter.
And did that have any impact on.
The quarter on guidance.
Typical update very clear observations that need to get the kind of corrective action internally, we're very clear on what those actions are we've submitted our normal monthly updates to FDA and we take all those very seriously. We think we do need to do that to correct those and I would say normal course of those corrections.
Yes.
Northern impact beyond just the focus on making those changes.
Okay, and then just lastly, the accounts payable balance.
I look back.
There has been some some some.
Variability as you move from <unk>.
And that historically, but is there anything is there anything you want to call out around accounts payable are and how you're managing that given the given the supply chain and how you expect that to reverse out.
Into next year.
Maybe both answer that.
We transitioned into the Covid period, and transportation costs have gone for example, crossing an ocean in four or five weeks to 17 weeks by the time of containers gotten out of a port.
It's easy to imagine that working capital stretches out inventory payables.
And.
Not so much on the receivable side, but clearly terms of needed to lengthen out that's followed the physical flow of inventory in the total base to convert inventory into cash on the back end. So I think thats kind of a normal cycle as we improve velocity narrower selection of products that helps us.
Inventory moves through the system more swiftly in 2022, you would expect those things to improve I don't know Kathy we should add to that.
No I think thats spot on it really is the relation of the transit times.
And the receipt of inventory is significantly lengthened I'm, just matching up those payment terms with those delays.
But we would anticipate the AP balance is going to continue to come down as we come into.
2022.
And you guys still think you can even improve free cash flow year over year with the accounts payable coming down.
Yes, we do.
So.
Yeah go ahead Cathy.
And I was just going to say, we have a significant investment in inventory on our balance sheet that needs to turn to cash but still.
Still with the improvement in free cash flow.
Excellent. Thank you for taking the questions.
Thanks, Matt.
As a reminder to ask a question that is star followed by one on your telephone keypad now.
We currently have no further questions. So I'll hand, it back to our speaker teams.
Yes, Thank you Katie and thanks to everyone for taking time for the call. This morning.
Good day happy to follow up by your contracting loosely.
Thank you for joining this now concludes today's call. Please disconnect your lines.
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